Adequacy of CPF Savings for Retirement Needs

Ms Mary Liew asked the Deputy Prime Minister and Minister for Manpower whether there has been a study to assess the adequacy of CPF savings in meeting the retirement needs of the current cohorts of young workers, particularly those in the lower and middle income groups, and whether the current CPF savings rate of 36% and its returns are adequate.

The Senior Parliamentary Secretary to the Minister for Manpower (Mr Hawazi Daipi) (for the Deputy Prime Minister and Minister for Manpower): Sir, how well the CPF system provides for Singaporeans' retirement is an important issue that was extensively addressed in MOM's Committee of Supply debate in March this year. The CPF aims to help Singaporeans save up enough to meet a basic level of needs in retirement. For the lower middle income group, the Minimum Sum (MS) is sufficient to meet the typical expenditure needs of retiree households. For middle income households too, although their spending in retirement is usually higher, the CPF will still form an important part of their retirement savings.

Amongst those starting work today, it is projected that about 70% to 80% should be able to attain the current level set for the MS in cash, adjusted for inflation, by the time they retire. This is after withdrawal of CPF savings to buy a home, which they can continue to own and live in their retirement.

For the minority amongst the younger generation of Singaporeans who are unable to meet the Minimum Sum in cash when they retire, their CPF balances would have been boosted through the Workfare Income Supplement (WIS), and the CPF would still have helped them own a home. They therefore have the option to monetise the value of their homes to supplement their retirement income, if they find their CPF savings and other resources insufficient.

Our CPF system, at its current contribution rates and returns, is therefore broadly appropriate for most of the younger generation of Singaporeans. However, we have to expect that in each cohort, there will be a small segment which will not be able to save up enough for retirement. For this group, we need to help them through other means beyond the CPF.

Ms Mary Liew: I would like to thank the Senior Parliamentary Secretary for the answer and I would like to ask him whether there has been a study done to continuously assess the adequacy of CPF. That is one question. The other question that I have is, I would like to ask for an update on what the Government is doing to help CPF members to build up their retirement savings, and also in view of the high inflation rate, can more be done by the Government to ensure that the future values of our CPF savings, besides the Minimum Sum, would be protected and will not be diminished over time.

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Mr Hawazi Daipi: Sir, I thank Ms Liew for her questions and I think they are important questions. The first question, I believe I had answered. The CPF Board looks at the Minimum Sum very carefully and to ensure that every worker has the means to have adequate savings for their retirement. And I said that between 70% and 80% of young workers would have sufficient savings for their retirement, when they retire at the age of 65.

On what the Government has been doing to help CPF members build up their retirement savings, Sir, I beg your indulgence, I thought that this is an important question and I would like to share with Ms Liew about what the Government has been doing over the years.

Firstly, the most effective way of building one's CPF savings is through work. And that is why we encourage workers to work. The Government is therefore focused on creating jobs and helping workers to earn better. And therefore, separate measures have been implemented to help workers to stay in employment. First, the re-employment legislation which took effect this year will help workers work beyond the statutory retirement age.

Second, the Advantage Fund was introduced in 2005 to incentivise companies to redesign jobs for older workers. Third, the Special Employment Credit introduced last year, will be enhanced to further bolster the employability of older workers. So, one segment, the older workers will continue working, hopefully in good health, and they will continue to develop their retirement adequacy.

The increase in contribution rates for older workers to be effected on 1 September this year will also help members to accumulate retirement savings faster as they work; so will the extra 1% interest (EI) that the Government pays on the first $60,000 of CPF savings, including the $20,000 in the Ordinary Account (OA). The impact of the extra interest is significant. To illustrate with extra interest, $60,000 in the Special Medisave and Retirement accounts (SMRA), will earn the member an additional $7,200 over 10 years and $17,900 over 20 years. Let me repeat – $7,200 over 10 years and $17,900 over 20 years. For the CPF members with lower income, the Government also helps with the WIS, the majority of which is paid into his CPF.

The dual effect of EI, the extra 1% interest, and WIS has a significant impact on Retirement Adequacy. For example, a notional 35-year-old worker earning $1,000 a month can expect an additional 21% in his CPF Retirement Account by age 65 as a result of the extra 1% interest paid. Furthermore, the WIS paid into CPF increases his RA balances by further 9%. The Government makes top-ups to the CPF accounts from time to time. Since 2006, the Government has made more than $1.6 billion in CPF top-ups to older Singaporeans under various Budgets. In Budget 2012, the Government also announced the one-off Medisave top-up and a permanent GST Voucher.

To ensure prudent use of CPF savings, there are on-going efforts to educate members on how they should use CPF for housing and be prudent in their investment choices. Furthermore, the amount of lump sum that can be withdrawn at the age of 55 without setting aside the Minimum Sum is being gradually reduced so as to retain more savings in CPF.

We have stories about how workers who were able to withdraw 50% of their Medisave balance had used their money very creatively – going to Batam and I was told that even Johore. So, that portion that they can withdraw at the age of 55 would be reduced over time so that more workers will have more savings for retirement.

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The Minimum Sum top-up scheme has also been liberalised to help members save more for retirement. Since 2008, members below age 55 can make cash top-ups to their Special Account and claim tax relief of up to $7,000. Family members can also receive cash top-ups into their CPF for which their givers can claim up to $7,000 of additional tax relief. The introduction of CPF LIFE also helps to improve members' retirement adequacy by ensuring that their savings last a lifetime.