CPF REFORMS AND OTHER MEASURES FOR A SECURE RETIREMENT

CPF REFORMS AND OTHER MEASURES FOR A SECURE RETIREMENT:

(Statement by the Minister for Manpower): 3.05 pm

Dr Ng Eng Hen: Mr Speaker, Sir, during the National Day Rally (NDR), the Prime Minister focused on our ageing population and the widening income gap. Singaporeans are living much longer than before. To ensure that we have enough retirement savings, we have to work

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longer and make changes to our CPF system.

Facing our challenges squarely

Since then, there has been much public discussion on this important national issue. Rightly so, because having enough savings to last our lifespan affects us all. Many of us have dependants who are elderly. All of us want financial security when we grow old. So I think it is a good thing that Singaporeans are talking about this important issue openly.

Many wrote to CPF Board and MOM directly. I know that NTUC and other MPs had lively dialogue sessions with their constituents. REACH received emails and SMSes. The press - and you must have read some of them - published well-written letters from Singaporeans who were financially savvy and understood what the proposed changes were trying to achieve. And some of them gave good suggestions. Let me thank the public for their inputs, some of which have been very helpful. We will adopt workable ideas to accommodate the different needs of Singaporeans, wherever possible.

Some Singaporeans did however find the proposed changes to be complicated. A recent Straits Times ' poll also showed that a significant proportion did not fully understand the CPF system. I have taken this feedback to heart and, over the next few months, we will communicate simplified messages to the masses to better explain the new CPF system.

While reactions to the changes have varied, Singaporeans, by and large, understand and accept the need to address the challenges of our ageing population now. They can see themselves and those around them ageing. This reality is clearly visible and hard to escape.

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Take, for example, my constituency at Toa Payoh Central. It is an old estate and has many elderly residents. During each house-to-house visit, I invariably meet a few residents in their 80s and 90s - it is no longer a novelty. I am though looking forward to meeting someone above 100. So one day, I said to my residents, "Why not maybe for the next Lunar New Year dinner that we have, to put up a notice that we will give prizes to those who are over-100 and still active." They came back and said, "I think you have to prepare for not one, but a few prizes." Because they know that even in Toa Payoh, there are a few over 100 centenarians. Foreigners, who come here, especially from younger ASEAN countries, note quickly that we are a greying population. These impressions of Singapore being a fast ageing society were confirmed by a recent UN study. So if you have noticed, looking around and all of us are growing old, it is true. This UN study projected that by 2050, Singapore could become the fourth oldest population in the world. If you look at the slides, we are climbing very high, from 116th position in 1950, projected to be fourth, above Europe, Asia and the world in 2050.

Singaporeans must come to terms with our longevity, both individually and as a nation. And the quicker we do this, the better. Because whether we are ready or not, the inevitable consequences from increasing needs as more grow old within our society will be upon us soon. We must therefore tackle this challenge now, as we have done with other national issues which can affect our nation's well-being and future. Whether it is SARS, economic recession or terrorism, our approach is to think long-term and act quickly before a problem becomes unmanageable.

This collective and enlightened approach explains much of Singapore's success today. It has helped us avoid

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many pitfalls that afflict other countries that are unwilling or unable to confront similar challenges decisively.

We must tackle the challenges of our ageing population with the same spirit of resolve and perseverance. In this Statement, I will fill in the details in the National Day Rally speech to present the complete picture of how we can improve the retirement security of Singaporeans.

Amidst many views, different opinions and competing needs, we must remain focused and remind ourselves of the ultimate purpose for these changes. The ultimate goal is to put in place a better and sustainable CPF system that will help Singaporeans save enough for their full life spans. This surely must be the most important task at hand. This surely must be something that we need to do that will help generations of Singaporeans that will follow to better prepare for retirement.

Singaporeans - living very long

We should begin by asking: how much longer are Singaporeans living? How many more years do we need to save for? We are already among the longest-living globally. Another UN study puts Singapore with a life expectancy at 80 years, close to the top of the table.

Guess who is at the top? It is Japan at 83 years. The global average is about 67 years. So we are about 13 years ahead of the global average.

That we are living longer than most other populations is yet another indication that we have arrived as a First World country. We are living longer as a result of good healthcare, nutrition and a clean and good living environment, and this is a good thing. This is something that we should celebrate. Longevity is a blessing, something that everyone hopes for. It is all in our culture. That is why we wish each other a long life. My wife is a

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peranakan and during every Chinese New Year - it is a ritual - the children will have to go to the parents, the girls will have to kneel and offer tea and then say, " selamat tahun baru - umor panjang panjang " (Happy New Year, long life). The men will just have to bow and say the same thing. The children learn it very quickly even though they do not speak Malay, because if they do not say it right, they do not get an ang pow. And the prospective son-in-law must also say it correctly. Otherwise, he would not get the biggest prize of all!

We wish our elders long lives and celebrate their birthdays. We want to see our children graduate, get married and play with our grandchildren, and, better still, see our grandchildren graduate and get married. And, indeed, that was what happened last night. I was at a dinner. One of our former MPs was gracious enough to invite me and I was honoured to attend. His daughter was getting married. So, at the yam seng stage, the whole clan trots up to the stage. This former MP brought along his grandmother. She stood there with the grandchildren - three lovely daughters, one son. The grandmother must have been happy to see the son has a successful career in business, now seeing her granddaughter become a doctor marrying the grand son-in-law who is also a doctor, and all their friends creating a "ruckus" and celebrating. It is a good life to live long and to see all of this.

Some of us certainly want to be around to see the future Singapore as a modern thriving cosmopolitan city. And I will tell you that for those in their 50s now among us, some will even be around to see with their own eyes what the World and Singapore will be like in 2050. Yes, this will be humanly possible, because one in seven now will live beyond 95 years.

But if we are to look forward to and enjoy our golden years, we must prepare

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early, to ensure that we have enough savings for our old age, so that we can cope with infirmity or illness, that we will not be left stranded because the children are unable or unwilling to take care of their parents. We do not want this to happen. We do not want children not to take care of their parents. But you and I know that when they see us at our meet-the-people sessions, it does happen. These changes to the CPF system will help us achieve better retirement security for Singaporeans, and it can be done. It will mean adjustments for each of us, but we are in a far better position than many countries which have waited too long and the problem grown too large. Otherwise, instead of growing old being a cause for joy, it can be the opposite.

When Singaporeans were told that the average life expectancy at birth had increased from 61 years in 1957 to 80 years now, many were surprised. Some, I know, still do not believe that Singaporeans will live so long. They must have had their fair share of reasons. But if we ask them why they do not think that they will live so long, we get a potpourri of urban myths, and we can trade myths and collect them and write a book or something. Some of the theories are very fascinating.

But one that I heard recently from my resident deserves a prize, at least, for being the most innovative. This group of disbelievers concedes that the present life expectancy of 80 years is correct. I think they saw the slides that the Prime Minister showed during the National Day Rally on Radin Mas. It cannot be a fake. It must be true that there are a lot of old people living around. They say, "This is because the elderly that we have now were born in China, India or wherever they came from. They were farm-folk. True Singaporeans, born and bred in modern Singapore, won't live as long!" I am not sure if we should include this definition, because if we did, just imagine

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our burial places - one section, true Singaporeans, and another, not so true Singaporeans. The price for membership for the true Singaporeans will be very high, literally cost you your life.

All of the urban myths are not founded on facts. It is precisely because so many individuals do not anticipate how much longer they will live, that we have to act now and ensure that all Singaporeans make provision for their old age. Left to themselves, we know what many would do - too many would leave things to chance, prepare inadequately or, worse, not at all. It is neither fair nor sustainable to expect others and society to assume the full burden of meeting our needs. Government must always help those who are poor but it would be too heavy a burden for society if each of us has not prepared for our own retirement needs. By 2030, 23 years from now, we will have nearly 900,000 residents above 65 years, one in five Singaporeans then. So, imagine 8 1/2 Toa Payoh Towns. If we go house-to-house, in every home, there will be residents, the youngest of whom will be 65 years.

We must not construct a national plan for our retirement needs based on how long each individual thinks he might live or on anecdotal incidents or wild theories, because it would be seriously flawed. We must build our retirement framework on solid facts, not subjective opinions. We must rely on actuarial data that the insurance companies use and reliable information from the Department of Statistics (DOS) that is updated constantly to give the true picture of how long Singaporeans are living as a whole.

According to DOS, of those aged 62 in 2006, one in two will live beyond 85; one in seven to age 95; and one in 20 to age 100. Sir, in this House, half the Chamber will live to 85. We may be sitting on the right or wrong side of the House, half will live to 85. One in seven,

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it means that the Frontbench may contain as many people who are 95, and there will be a few, if the House has 100 Members, one in 20, that means there will be five of us who will live to 100.

Of those numbers that I have cited, more of them will be women, because women do live longer than men. But, generally, of those who stop work at age 62, it means that more than half will have to provide for more than 20 years of retirement. Because if one in two will live beyond 85 and they stop work at 62, more than half will have to provide for more than 20 years of retirement.

Twenty or more years of retirement is a long time. Even if one works for forty years, he has to plan early to make sure he has saved enough. This is why making provision for unanticipated longevity is a priority for us now.

Make provision for your own retirement needs

There is another important reason why each of us must set aside enough for our own retirement needs: there will be too few younger people to depend on. Today, many old people look to their children for support. This is good and right and why we recently made it easier to top up the CPF accounts of family members. We must continue to hold firmly to the value of filial piety where children support their parents. Children must support their parents emotionally and financially. As Bertha Henson of the Straits Times recently wrote - if parents are not receiving income from their children, they should just ask.

But fewer babies now and in the past decades will mean smaller families and more single households in the future. If there is a clear graphic representation of how increasing longevity and fewer

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babies have affected Singapore, I can think of none clearer than our demographic profile that Members see on the screen right now. In the 1970s, it was the Eiffel Tower. Now, it is the middle bulge. In 2030, it will be heavy at the top.

Economists usually use statistics called a support ratio. It is that green bar supporting the ones on the top - those aged 15 to 64 supporting those who are on the orange bar. Members will note that those in the green ones are aged 15 to 64 but, in our circumstances, the economically active ones really begin from 25, but to standardise, we say we start from 15. But recognise that those 15 to 64 will also have to support those who are on top as well as children.

Let us look at the support ratio. In 1960, 23 people aged 15 to 64 supported one person aged 65 and above. Now, it is eight; by 2020 it will be five, and by 2030 only four. As I said, you have to support those above 65 and younger Singaporeans as well. This is nearly a six-fold reduction compared to 1960. We will not be able to depend on so few economically-active persons to shoulder the full burden of supporting the elderly, themselves and their children. Each of us must set aside enough for our own retirement needs. Then, the income from our children can be extra.

Let me now touch on the three fundamental changes that the Prime Minister outlined that will help better prepare us individually and as a nation for our ageing population - working longer, improving CPF returns and making savings last for one's life expectancy.

I) WORKING LONGER

First, working longer. The re-employment legislation will kick in by 2012 to 65, then 67 years. Mr Gan Kim Yong's Tripartite Committee will work through the practical aspects. They will

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produce guidelines for employers and employees, and this will be ready within two years. The guidelines will serve as a reference manual to provide clarity on terms and conditions for re-employment and platforms for dispute resolution. Under these guidelines, the majority will be offered re-employment. But it may not be in the same job or with the same pay. Even with legislation, the best assurance for a worker to remain employable is to stay healthy and economically productive.

The Government will step up its efforts and assistance programmes. We have the ADVANTAGE! Scheme to make work easier for older Singaporeans. Some Members may have seen this advertisement. Through the efforts of NTUC and WDA, many companies have already adopted re-employment practices voluntarily. What they say is, "We know that the law is coming in. It doesn't make sense to wait till then, because our HR practices will have to scramble. Better to do it now before the law comes into effect." So they are well prepared by then. As Mr Lim Swee Say says, "Let's get moving." We can find jobs for older workers. Our economy created 180,000 jobs last year. In the first six months of this year, a further 114,000 jobs were created. Our economy can surely absorb 20,000 older workers. Minister of State Gan Kim Yong will say more about our on-going efforts to achieve higher employment rates for older workers.

More Workfare for older workers

Another slide to help older workers work longer is Workfare. Currently, the maximum Workfare income supplement is $100 a month, or $1,200 a year. We will increase the Workfare Income Supplement for older workers. For those aged 55 to 60,

the maximum payout will be increased by 50% to $150 a month ($1,800 a year). For those above 60, we will increase the maximum payment by 100% to $200 a month (or $2,400 a year). This means

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that for a worker earning $1,000 a month, the Government, through Workfare, will top up 20% of his wages. It is significant. The self-employed above 55 years will similarly get higher Workfare Income Supplement.

The changes will be implemented immediately. This means for those above 55 years, they will receive higher Workfare Income Supplement payments in January 2008 when the scheme starts and for work already done in the first half of this year. More than 50% of older workers are expected to get WIS. Higher WIS will cost $80 million more and will bring the total cost of WIS to over $400 million per year. If more older workers join the workforce, as I believe that they will, it will cost even more for WIS.

II) INCREASE CPF RETURNS

Next, increasing CPF returns. Let me, first, describe the changes, and then explain how they will benefit members. There will be two structural changes made to the CPF interest rates system - an extra interest of 1% and re-pegging of the rate on the Special, Medisave and Retirement Accounts (what we call the SMRA).

Extra interest tier

An extra 1% of interest will be paid on the first $60,000 of a member's combined balances, with up to $20,000 from the Ordinary Account (OA). This means that either $20,000 can come from the OA and $40,000 from the SMRA or all $60,000 can come from the SMRA (if he has nothing in his OA, for instance), or something in between. Those amounts will receive an extra 1%. The extra interest from the Ordinary Account will go into the member's Special Account or Retirement Account to improve his retirement savings, but the 2.5% of the Ordinary Account will go back to the Ordinary Account.

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New CPFIS restrictions

All OA monies can still be used for existing housing, CPF insurance, and education schemes. But in view of the extra interest being paid, the first $20,000 in both the Ordinary Account and Special Account will no longer be allowed for use in the CPF Investment Scheme (CPFIS). These restrictions on CPFIS will apply from 1st April 2008 because we need some time for product providers and CPF Board to make the changes. Money already invested in CPFIS will not be affected. Even after these restrictions, $42 billion of CPF monies will still be available for use in CPFIS. So, I do not think there will be any adverse impact on the markets.

OA rate unchanged

The Ordinary Account contains short-term money, like a savings account which members can withdraw on demand to invest in housing or other assets. They are in there for a shorter duration. And this is the reason why the OA interest rate is lower than that for SMR accounts which contain "long-term" money. The OA rate formula remains unchanged and will still have a guaranteed floor at 2.5%. There is also no change to the HDB concessionary loan interest rate.

SMRA - long-term market rate

Money placed in the SMRA for the long term ought to enjoy a higher rate of return than the Ordinary Account. We had previously announced in 2002 that we would re-peg the SMRA rate to an appropriate long-term bond yield. We will now do so together with the other CPF changes. How do we choose the new peg? The new peg for SMRA should be financially sound. It should be based on market returns for the same risk and duration that the SMRA monies stay in

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their accounts. It should be simple to understand and widely quoted. There should also be no currency risk. These are some of the parameters that we set out.

The ideal peg would be a 30-year Singapore Government Security (SGS), because this is about the average time the members' SMRA monies stay in those accounts. "Long bonds" of such duration are issued by countries like Japan, the United States and Europe. Singapore's longest duration bonds are the 15-year and the 20-year SGS, but these are not actively traded and therefore not suitable as a peg. The 10-year SGS (10Y SGS) is, however, actively traded.

We have therefore decided to set the SMRA rate as the yield of the 10-year SGS plus 1%. Why plus 1%? Because this will adequately provide for the difference that we would expect between the interest on the 10-year SGS yields, which we are using as a peg, and the 30-year Singapore Government Securities, if it did exist.

The SMRA rate will be set quarterly, as before. A month before the next quarter, we will compute the new SMRA rate from the average daily yields of the 10-year SGS benchmark of the previous year. In other words, we take the daily yields of the preceding year of the 10-year SGS benchmark and derive a number. The average 10-year SGS yield computed on this basis would now be 3.0%. But because we said the SMRA rate would be 10-year SGS plus 1%, the SMRA rate will be 4.0%. For members' information, had the new SMRA formula been in place since the first issue of the 10-year SGS - in other words if we had this formula in 1998 when the first issue of the 10-year SGS was in place - the SMRA rate would have averaged 4.5%. It is more important to look at the long-term rate rather than just the daily fluctuations because this is a long-term account, and

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this is the duration that members' monies stay in. So, that will be the effective rate.

Our new interest rates system will start on 1st January 2008. To help members adjust to the floating SMRA rate, we will keep the 4% floor for the SMRA rate for the first two years. This 4% floor will also apply to the extra interest tier, in the very unlikely event that the 10-year SGS rate falls below 2%. After two years, the 2.5% floor rate will apply for all accounts as prescribed under the CPF Act. In other words, 4% floor will be there for two years, after which the 2.5% floor as prescribed under the Act.

Gains from higher CPF

This can be very technical. So, let me now explain how members will benefit from the new interest rate structure. I will try to make it easy because there are many figures to absorb. The OA formula remains unchanged but the first $20,000 in the OA will receive the extra 1% interest and will therefore receive at least 3.5%. Now, 3.5% compared to 2.5% is a 40% increase. The new SMRA rate calculated now based on 10-year SGS yield plus 1% would be 4%. Part or all of the SMRA balances will also receive an extra 1%, depending on how much a member has in the OA balances. For example, if he has $20,000 in his OA, the first $40,000 in the SMRA will receive 5%. If a member has less or no OA monies, up to the first $60,000 in the SMRA will receive 5%. This higher CPF interest will increase members' CPF savings substantially. Compared to the current system, a member with $60,000 in his combined accounts will get $7,200 more in 10 years and $17,900 more in 20 years in his CPF savings. This is more. So, if you look at his total balance, the total balance will go up. But compared to the current system, this is the amount that he will get more in 10 or 20 years. It is substantial.

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Members might be asking, well, that is for the individual members. But for the current CPF members, what proportion will benefit from this? First, under the new system, all CPF members will receive higher interest payments. All, and I mean all; no one will receive less. In fact, 70% of all CPF members will receive the extra 1% on all their CPF monies they have, because they have less than $60,000. So, 70% of all our CPF members will receive that 1% on all their CPF monies. In the handouts to be distributed to MPs and the press, I have listed more examples so that you can understand this. I have listed members with different balances, how much they will get. We will give you time to try to absorb this, and I know that it is technical. But with the new interest rate structure, Government will pay at least $700 million more interest per year, and $700 million more per year is equal to about the Government's annual grant to HDB, which is about $750 million a year.

_Reasons for new interest rate system
_

People have asked why and how we have chosen this new interest rate system. Some of you will remember that in 2002, the Economic Review Committee had recommended that CPF monies be managed in private pension plans so that we can achieve higher returns. We studied this proposal thoroughly. We held extensive discussions within Government and with industry experts. We looked at the problem from many angles but always came to the unavoidable conclusion - to get higher returns, members must expose their CPF money to more market risks. That is what the experts say - cannot compensate for market risks.

We tried to devise many schemes to shield members from volatility yet delivering higher returns - stabilisation funds, trying to round it, very technical, sat through all those meetings. But we decided it was neither possible nor right. Because it would mean subsidising losses

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using other members' or taxpayers' money. We decided that, for now, it would be unwise to go the full investment route because the majority of members do not have large balances, and it would be too risky for older members. The recent financial market turmoil serves as a timely reminder of the risks that exist. Hence, we should retain the risk-free framework but with a more appropriate SMRA peg.

Some have asked if this system is fair. Are rates of return set too low or too high? Why is the extra interest only 1%, not more? Why not apply the extra interest on an amount greater than $60,000? The CPF system is not meant to be subsidised. It is a system based on savings. It is not a tax system. If it is subsidised, it must mean that we tax one group to give another group more. Subsidies should be given in other ways and even then only to those who deserve it most. We have put in place a long-term framework which provides a fair rate of return on CPF monies that compares well with any offer from private pension plans. Most importantly, our CPF system minimises the financial risk to members. The new system has to be justified to the President, that the Government can afford it, and that it will not draw on past reserves. Minister Tharman, Second Minister for Finance, will say more on this.

The new interest rate system is more than fair since it is still essentially risk-free. The extra interest is structured so that it will benefit all, but those with small and middle-size balances will benefit more. The SMR rate will float with bond yields. This allows members to gain when interest rates go up, but ensures that what the member has accumulated in his accounts is totally protected and guaranteed. Even if the interest rates come down, the member will not lose any of his savings - in fact, he will always

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earn at least 2.5% per year on his savings and the extra 1% for the first $60,000.

We have decided on this as the new long-term CPF interest rate structure. This is the framework that we are adopting long term. We have used previous long-term market trends to guide us in formulating this new structure. But, of course, no one can predict how the financial markets will behave in the future. As the caveat says, past performances do not predict future earnings. And in particular, no one can predict how the interest rates will behave in the future. So, we will therefore review the formula for CPF interest rates after five years, to finetune it if necessary. But, we will keep this general structure that fulfils the objective of paying a good and fair interest to all CPF members for their retirement needs, while benefiting lower and lower-middle income CPF members more.

For those with more than $60,000, who want to be exposed to greater risks for possible higher returns, we can consider options to help them invest their CPF monies in the future. But, I think, it is better to settle the present major changes, put in place a sensible framework, a fair and generous framework, so as to give certainty and higher returns to those with less savings.

(III) MAKING SAVINGS LAST LIFE EXPECTANCY

Later draw-down for longer payouts

Let me now talk on the third aspect - making savings last life expectancy. Even with higher CPF interest and Workfare, many members will run out of savings if we start the draw-down age (DDA) at 62, the current draw-down age. Why? Simply because, 60% of members will live longer than 82 years. By then, most would not be able to work. So I think it is better to work longer when you are

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younger and able, and to draw down later.

We will raise the draw-down age to 65 and eventually to 67, in line with the re-employment law. But we will increase the draw-down age progressively, after the re-employment laws take place. In fact, the draw-down age will reach 65 only in 2018, and this is six years after the legislation would have been in place. From the current 62 years, the draw-down age will be first pushed up to 63 in 2012, to 64 in 2015 and then to 65 in 2018. So the re-employment law comes into effect in 2012. The draw-down age at 65 comes into effect in 2018, six years later. I think this provides enough time for everyone to adjust to the new conditions.

Those aged 57 or younger today will be affected by the later DDA. If you want to know whether you are affected if you are 57 and younger, the new draw-down age will apply to you. For those aged 50 to 57, who have a shorter runway to adjust, we will help them with one-off bonuses. These bonuses will be paid into their Retirement Accounts to help them increase their retirement savings. It would not be in cash. It would be into their CPF accounts. There are two types of bonuses - the Deferment Bonuses and the Voluntary Deferment Bonuses.

D-Bonus

Let me talk about D-Bonus. All those aged 50 to 57 this year will receive D-Bonuses, because they will start their DDA later. The D-Bonus will be in the form of a bonus interest, based on the members' balances in their Retirement Accounts, but it will be capped at $30,000. This means that 86% of all members, nearly 90%, will get the bonus interest on the full amount in their Retirement Accounts.

Older members will receive larger D-Bonuses. Those aged 54 to 57 will

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receive 5% on their Retirement Account sums. What it means is that if you have $30,000 now and you are aged 57, you will receive 5%, which is $1,500, substantial. Those aged 52 to 53 will receive 4% on Retirement Account balances, which means up to a maximum of $1,200, and those aged 50 and 51 will receive 3% on their Retirement Account balances, up to a maximum of $900. I hope you are doing your own calculations to see how much you will receive.

For those above 55, they will receive their D-Bonuses on 1st May 2008. For the rest, they will receive it when they turn 55. The Deferment Bonuses alone will cost the Government up to $650 million.

V-Bonus

Let me talk about the Voluntary Deferment Bonuses (V-Bonuses).

We want to encourage members to voluntarily defer their drawdown, even if they are allowed to start drawing down from their Retirement Accounts their Minimum Sums before 65 because the later you draw down, because that whole sum is capped and receives interest, the longer the payout. It is not just one for one. It does not mean that if it is delayed for one year, you will get one year of payout. In fact, if you delay for one year, you get three years more payouts. That is the way the Mathematics work. So we want to encourage this. A Voluntary Deferment Bonus, or V-Bonus, will be given for each year of voluntary deferment up to the age of 65. So members aged 54 to 63 this year who have not started drawing down are eligible. The V-Bonus would be set at 2% on the members' RA balances, capped at $30,000. And therefore a member will get $600 for each year deferred, in other words, if he defers for three years, he receives up to $1,800. The Voluntary Deferment Bonuses alone will cost the Government up to $570 million.

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I have put down in the table what the total bonuses are. It ranges from $600 to $2,700. If members will agree, that can substantially improve and that can translate to many years of payouts. The D- and V-Bonuses will also be given to those who have bought or will buy annuities, since they have provided for their full life expectancy.

Total gains

What is the impact of all these changes on Singaporeans? This is the most important question. Singaporeans will ask: how can I benefit? Will it make a difference? Working longer, more Workfare, higher CPF interest and Deferment Bonuses will improve retirement savings substantially for all Singaporeans. Let me now put together all the gains that I have talked about from the changes - the higher CPF, Workfare, the Deferment Bonuses - and give you an example that you can see the substantial magnitude and how it will improve the CPF retirement savings of a typical worker by a large amount.

I will use a 57-year-old worker, a low-wage worker, who indeed these changes are aimed at, although all CPF members will gain. Let us call him Mr Tan, and I have chosen 57, not someone younger in the 40s, because these changes also will help those in their 50s. Mr Tan earns $1,200 a month, such a member would have typically $21,000 in his Retirement Account now. Under the current rules, if he works till 62, stops work at 62, he would have about $36,000 in his Retirement Account. $36,000 is not a large sum and may not last his retirement period.

But with the changes - the higher Workfare, the higher CPF and the Deferment Bonuses - if he is re-employed even at a lower pay of, say, $1,000, and

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he works one year more and draws down one year later at 63, how much would he have accumulated under all our changes? $11,000 more, just for one year of work and one year of draw down. In other words, he gains 30% more on his Retirement Account savings, which means three more years of payout, at $330 a month, compared to $270 a month, with just one year more of work and deferment.

But if this same worker, Mr Tan, decides that he will work till age 65 and also draws down his CPF at age 65, how much will he have? He will have $60,000 in his CPF savings. $24,000 more as compared to age 62 under the old system. That is a 60% increase on his principal sum which is a terrific rate of return for any investment. So, someone who is aged 57 can increase his CPF savings substantially from these changes.

These changes proposed will significantly improve the retirement sums of older workers, even for those who are in their 50s now. And the gains for younger members will be even more. So, MPs should advise their constituents to continue to work and delay their draw down for as long as they can, while topping up their Retirement Accounts. Because if they do so, they can benefit fully from all these changes and it will make a big difference to their retirement savings.

Total cost to Government

Many have asked what is Government's role in improving the retirement adequacy for Singaporeans. How is Government helping in these reforms? How is Government helping all Singaporeans? Government is committed to helping Singaporeans, and the total cost of the entire package of CPF reforms and measures for secure retirement is substantial. The Workfare Income Supplement (WIS), in total, will cost over $400

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million each year. The higher CPF interest will cost $700 million more in the first year, and more in subsequent years as balances grow. Higher Workfare and CPF interests are long-term commitments. It is not a one-off exercise, in other words, this is recurrent cost and the Government will have to spend more each year. In fact, we have to spend more than $1.1 billion every year. And this is equivalent to members receiving half a Progress Package every year, or one Progress Package every two years. The one-off package of D- and V-Bonuses will cost more than $1.2 billion. I think it is right and fair that each person makes provision for his own retirement needs, but we are not asking Singaporeans to do this alone. Because Government will be expending considerable resources every year to help Singaporeans to work longer and improve their retirement savings. Our commitment to Singaporeans is substantial. It would be more than $1.1 billion every year to help them achieve this.

(IV) LIVING LONGER THAN EXPECTED

Longevity Insurance

Let me now talk on longevity insurance. I know there has been much discussion on this aspect. And I am glad that there has been much discussion because this is something new and people need to get used to it. Some of you will remember when the Prime Minister talked in the National Day Rally, he mentioned a particular constituent that he had in Teck Ghee whom he met at Radin Mas. This was a lady who had some back problems, went for a spinal operation and now she is recovering. And she asked a pertinent question to our Prime Minister. She said, "Savings are running out. What do I do?" We have to ask ourselves, "What do we do if the 900,000 Singaporeans, among them a large portion, have their savings run out?" So, in addition to the changes that I have talked about, we need to improve the CPF system so that members

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will not run out of their CPF savings in their extreme old age. Some say that they will not be so fortunate to live so long. And there are indeed those with serious illnesses who are certified by doctors to have severely shortened life spans. And the CPF rules now already allow these members with limited life spans to take out their CPF money early. But most of us cannot predict when our time will be up. We have to go by actuarial data that tell us that many Singaporeans will live beyond 85, to 90 and even to 100 or older. Any one of us could be in that group. And the CPF scheme should therefore ensure that members make provision to support themselves so that their CPF savings will not run out prematurely. And the way to do this is through longevity insurance. If we did it ourselves, it must mean that we must put aside for many more years. If you start from 65, you do not know whether you are going to live to 95. So you have to put aside your savings for 30 years or longer. Because if you reach 95 and you are still alive, your savings would have run out.

So longevity insurance is the cheapest way to ensure that the member does not run out of savings prematurely. He will receive an income for as long as he lives. Many of us buy insurance to provide for our dependants, in case of premature death. It is money spent and gone if nothing untoward happens. And we pay for this insurance willingly just in case something happens and to provide peace of mind.

But buying insurance for ourselves in case we live longer than expected is new to Singaporeans. So let me briefly explain how it works. When you buy a longevity insurance, which is a deferred annuity, in other words, you take on the stream of income later, a deferred annuity, you will receive a monthly income from a pre-determined age, at the "tail-end", and for as long as you live. To simplify the issue,

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it is assumed that the start age of the deferred annuity is 85 (although it could start at any age). For this scheme, members pay a premium to buy a longevity insurance at age 55. So the premiums from all participating members form a common pool. The pool of money is invested and grows year by year, and pays an income to all those who are alive after age 85, for as long as they live. They are sharing the risks. Because the risks are shared, some will get more than what they put into the scheme, if they live longer. Correspondingly, those who do not live as long will get less than the premium they paid. If you want your dependants to get some money back when you pass on prematurely, then it is possible for the upfront premiums to go to them. It is possible for some of the money to go back to them but you have to pay higher upfront premiums. There are many variations possible, just like insurance policies. Basically, it is an insurance product.

A National Longevity Insurance Scheme

It is right to require CPF members to make financial provision for the eventuality that they live longer than expected. By then, they certainly will not be able to work and may not have any family members to depend on. And this is the basic goal in devising a national longevity insurance scheme. We will therefore require CPF members to take up some form of annuity, or longevity insurance scheme, using a small part of their Retirement Account. But most of the CPF balance in their Retirement Account will still be available to be drawn down from the draw-down age.

Our main objective is to put in place a national scheme that provides basic longevity protection for CPF members, starting with those who are aged 50 years and below now. Some members of the

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public have written to the press to support this idea and suggested that it should be modelled after the MediShield concept. This is indeed our thinking. Like MediShield, the CPF Board can administer the basic tier of longevity insurance. For members who want more than basic protection, they can buy additional insurance, or what we call riders, which can be provided by commercial insurance providers.

The National Longevity Insurance Scheme, as a risk-pooling scheme, will be fair to all. This means that premiums will be adjusted according to risks. Women generally live longer than men, other things being equal. This explains why commercial insurance providers already charge higher premiums for women buying longevity insurance. It is practised worldwide. Actual premiums will be correctly calculated by professional actuaries. So there should be no reason to fear that this scheme is loaded against anyone or any group. It is meant to be fair to all. It is risk-sharing.

Some have asked about costs. The extra interest that members will get in the new CPF system will be more than enough to pay for this longevity insurance. I have already given the example that a member with $60,000 in his CPF savings will get $7,200 more in 10 years, and nearly $18,000 more in 20 years. This will be more than enough to pay for the longevity insurance.

The National Longevity Insurance Scheme will strengthen our CPF system as it takes care of extreme longevity. However, we also recognise that CPF members will have different needs. We have received many suggestions from members of the public on various options that are more suited to their own needs. Some younger members want to participate in annuity schemes because it is cheaper to come in early. The earlier you buy, the cheaper, and they want to come

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in. Some who are older also want to be included, because they have no dependants and their savings are for themselves. So it does not make sense to put aside for someone else and say, "Can you convert it to an annuity? Can I join your scheme?" There is a third group. These are those who have dependants who can take care of them, or have other savings apart from CPF. They want the balance in their Retirement Accounts to go to their dependants when they pass away. They are prepared to stretch out their Retirement Accounts to last longer. Instead of 20 years, they ask, "Can I stretch it out to 30 years instead of 20?" They are prepared to draw less every month. But they say, "I am prepared to stretch this out, draw less and reduce my need for longevity insurance." I think we should accommodate all these groups if we can.

We should be flexible in accommodating the different circumstances of CPF members and offer different ways to provide for their full life expectancy. He can do this by buying a longevity insurance or by stretching out his Retirement Account money over a longer period and reduce his dependence on longevity insurance. So long as he has provided for his old age, and will not run out of savings prematurely, we should all be satisfied.

How can we design a National Longevity Insurance Scheme to ensure that CPF members are adequately provided for financially, for the rest of their life, and do not run out of CPF savings? How can we accommodate these various needs and circumstances of members? I propose to form a committee to study this problem, and to take in public and professional views. The committee will then recommend the best way to provide basic, affordable and flexible longevity protection for all CPF members. The recommended plans should provide various options for members to protect

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themselves. It should also allow members to opt-in to this scheme early, when it is less expensive to do so.

I have asked Professor Lim Pin to chair this committee, and he will be supported by other able and knowledgeable persons, including those from academia who understand this financial problem and the financial modelling. I have also included people from the grassroots because they understand their needs, and some from non-governmental organisations from the social groups. Unions will be represented. Let us hear their views. What are the needs? How do we explain it? How do we put this into place? Professor Lim, as you know, is the Chairman of the National Wages Council and Bioethics Committee. So he is experienced in handling complex issues. When I asked him if he would chair this Committee, he joked that he was old enough. Professor Lim Pin is not old but gold (good and old) - experienced and still actively contributing and working. He understands the needs of the elderly and is the right man for the job. But I have asked that the report be ready within six months. I have given them enough time.

Conclusion

In my opening remarks, I asked that we keep in focus the ultimate goal of these changes: why are we doing all this? It is to put in place a better and sustainable CPF system. Our CPF system is unique. A strong and fully-funded CPF system has been a major pillar and will continue to be a major pillar of our nation's economic prosperity and social progress. Through CPF savings - just think about it, what our CPF system does - nearly 90% of Singaporeans are able to own their homes - one of the highest home-ownership rates in the world. Because of the three Ms - Medisave, MediShield and Medifund - no Singaporean is denied good basic medical care. Homes and CPF savings

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together provide retirement security for the majority in their old age, even for low income households. These are major accomplishments for any country, and something that we can be proud of.

The changes we are making will strengthen the CPF system further. Longevity insurance is the missing critical piece that we are now putting into place. It answers the question which this resident asked: "What happens when my CPF savings run out?" It plugs a gap in our CPF system and will give security for the many Singaporeans who are expected to live very long.

The CPF system has helped Singaporeans achieve social and economic security and equity because it is based on individual savings, not taxes. This is a critical principle underlying our CPF system and it explains its strength. It is fair to all because each person saves for his own needs, including for his own future needs in old age. We must be careful, stringent, to adhere to this principle.

But even with these comprehensive changes, not all problems will be solved. The disabled and poor or those who meet unexpected mishaps or misfortunes will continue to need assistance. But if able Singaporeans have made provision for their own needs, then Government can provide more resources to help those who deserve it most.

We have never shied away from problems that can affect our nation's future, no matter how big or difficult. Singapore is one of the very few countries tackling this problem head-on, with eyes wide-open and the public engaged. The problem of retirement adequacy is a looming challenge for many countries. Most countries know that they are ill-prepared for their ageing populations. But

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not all have been able to act to avoid the impending crisis.

Some countries have debated a long time, but have not moved. Reform commissions, one after another, such as those in France, Ireland and the United States, spell out the changes that need to be made. The Irish commission failed to agree on a conclusion. Even China admits that it needs to move faster as the problem is growing. In Italy, pension reform has been a major stumbling block for successive governments even after 20 years of deliberations.

Another group of countries postpone the solution to the next generation. In the case of the United Kingdom, their state pension age is already at 65 for men, and between 60 and 65 for women. So they have actually moved faster than us. The UK now intends to move the new pension age to 68 for both men and women. I think it is laudable, but they want to reach there only by 2046, nearly 40 years in the future!

Singapore cannot afford to wait another 40 years to tackle this problem. We should not pass these problems of an ageing population to the next generation, because it will only get worse. Far better to make adjustments now, while we are able and have time on our side. If we wait and are ill-prepared, then the consequences for Singaporeans when they are old and dependent will indeed be more painful.

We should work together now, move decisively, and turn these reforms to our advantage. With higher CPF interest, all CPF members will be better off, especially the lower and middle income groups. Everyone will have more savings for retirement. Working longer, later draw-down, deferment bonuses and longevity protection will ensure that as many as possible will have savings for as long as they live.

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These changes will strengthen our CPF system. It will improve retirement security and help Singaporeans face the future with greater confidence.

Mr Speaker: Order. I propose to take the break now. I suspend the Sitting and will take the Chair again at 4.25 pm.

Sitting accordingly suspended at

4.05 pm until 4.25 pm.

Sitting resumed at 4.25 pm

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