THE CPF scheme would run into problems if it sought to provide for the full retirement needs of everyone, rich or poor, the man in charge of running it has said.
By Cai Haoxiang
As it now stands, the Central Provident Fund scheme 'fully meets the retirement needs of the people who are below middle income', the fund's chief executive, Mr Yee Ping Yi, said in an interview with The Straits Times.
That means the bottom 40 per cent of wage earners.
'If you want to design something to literally meet all the needs of all workers of all income groups, you'll need a much higher Minimum Sum, higher income ceiling, then probably fewer people at age 55 can withdraw anything.'
CPF Board chief executive Yee Ping Yi
On CPF returns, inflation, CPF Life
Can CPF returns beat inflation to help members save for retirement?
CPF interest rates have done relatively well. From 2001 to 2010, the nominal return on CPF cash balances for Special, Medisave and Retirement Account balances was 4.1 per cent, while the average inflation rate was only 1.6 per cent.
A large proportion of CPF savings of Singaporeans is also invested in housing, which is a hedge against inflation. A typical 55-year old earner would have experienced a total rate of return of 4 to 6 per cent in real terms every year on average, taking into account CPF savings spent on his house. He can also monetise his house to enhance his retirement income, such as renting out a room.
CPF Life seems to offer lower payouts than the Minimum Sum Scheme (MSS), especially for females who are expected to live longer. How useful is CPF Life, then?
When the MSS was introduced 25 years ago, not many people were expected to live past 85.
Today, Singapore has overtaken many developed countries in terms of longevity, including the UK, where males and females who turn 55 in 2013 are expected to live to 86 and 89 respectively, which means that about half of them live even longer. So Singaporeans turning 55 in 2013 can generally expect to outlive their Minimum Sum payouts.
It is important to compare how much the member receives over his or her lifetime when comparing payouts of the MSS, which last about 20 years, with CPF Life, where payouts are for life. As with any annuity product, members who live longer will benefit more from CPF Life, and those with shorter lives will only get a little less than under the MSS.
A female member with a balance of $90,000 who outlives two-thirds of the other females of her cohort will receive at least 30 per cent more in total under the Standard Plan, compared to what she would receive under the MSS.
A female member who just outlives one-third of her cohort would receive about 7 per cent less under the Standard Plan, compared with the MSS.
It also 'substantially meets' the needs of middle-income earners, which means its retirement coverage extends to about 60 per cent of wage earners.
If the CPF tried to meet all the retirement needs of those further up the income ladder, it would risk over-collection and leave workers less for their other needs.
Such a change would also mean a higher CPF Minimum Sum - now at $131,000 - which would result in more people not being able to withdraw any of their CPF savings at age 55.
Mr Yee said: 'If you want to design something to literally meet all the needs of all workers of all income groups, you'll need a much higher Minimum Sum, higher income ceiling, then probably fewer people at age 55 can withdraw anything.'
The Minimum Sum is what CPF members must set aside in their CPF accounts by age 55.
A male with the current minimum sum of $131,000 at age 55 will get a payout of $1,100 a month for life from age 65, under the CPF Life annuity scheme.
This fully meets the household spending needs of a lower middle-income retiree couple.
The CPF income ceiling is $5,000, and three in four workers earn below this sum.
During the recent Budget debate, Ang Mo Kio GRC MP Seng Han Thong and Nominated MP Mary Liew were among those who asked if Singaporeans would have enough in their CPF accounts for their retirement needs.
Deputy Prime Minister Tharman Shanmugaratnam cited figures to show that the CPF system meets the basic retirement needs of low to lower-middle income Singaporeans.
Subsequently, labour economist Hui Weng Tat said that in a recent study, he found that young graduates would only have enough in their CPF accounts to provide for a third of their retirement needs.
Mr Yee stressed that between 70 and 80per cent of those starting work today are projected to meet their Minimum Sum in cash when they turn 55, after using CPF to buy a home.
As for older Singaporeans, they can monetise the housing assets they used their CPF to pay for, through various government schemes.
On the use of CPF for property purchases, which some writers to The Straits Times Forum have said reduces CPF retirement savings, Mr Yee said property has, in fact, served CPF members well as a hedge against inflation.
The bottom line is that Singaporeans must start planning and saving for their retirement, Mr Yee said.
The CPF will help in two ways.
First, when members approach CPF for help with service requests like buying a home, CPF staff will also advise them on their longer-term needs, where appropriate.
Second, CPF conducts over 100 talks and events a year, reaching out to more than 30,000 members.
It has also tried to raise awareness about retirement planning through media advertisements, and launched a campaign called 'Are You Ready?'