Unanswered questions about CPF changes

By Leong Sze Hian

This is in reference to media reports that the CPF Special, Retirement and Medisave accounts’ rates will be modified next year.

The question that may be in every Singaporean’s mind is whether the peg to “an appropriate long term bond rate” may result in a higher or lower average rate, compared to the 4 per cent fixed rate now?

Channelnewsasia reported Manpower Minister Ng Eng Hen as saying:

“… the new rates will be lower initially than the current rate of 4 percent but it should do better than 4 percent over time.” (link)

What is the basis for the statement that “the new rates will be lower initially than the current 4 per cent but it should do better than 4 per cent over time”?

Bonds fluctuate and are dependent on various factors like interest rates, default risks, etc,and have no correlation to the future “should do better” than the present.

The only answer to this question is nobody knows.

Since “the new rates will be lower initially than the current rate of 4 percent but it should do better than 4 percent over time”, why not wait until the new rate is better before un-pegging it?

Why give 1 per cent more on the first $60,000 in CPF, and then announce two days later, that the 4 per cent rate will no longer be guaranteed?

Most Singaporeans may not benefit

Since most Singaporeans use the bulk of their CPF for housing in the early years of their working lives, many may only enjoy the extra 1 per cent on very small CPF balances. In contrast, as the Special, Medisave and Retirement accounts cannot be used for housing, most Singaporeans may have much larger balances, which may end up earning less than 4 per cent.

I would like to ask how much of the average of about $45,000 in CPF members’ accounts are in the three accounts affected, compared to the balances that are able to earn the extra 1 per cent?

Has any study been done to estimate the net effect on CPF members?

Will some or most Singaporeans be better or worse off?

Contradiction

As to “the one per cent additional bonus interest for the CPF will be put into the Special account and not the Ordinary account” (as) “this additional bonus will enhance the CPF’s existing risk-free framework”, (CNA) I find this to be somewhat contradictory, because isn’t removing the 4 per cent fixed rate increasing the risks of “the CPF’s existing risk-free framework” much more than the small sums from the bonus interest?

Pooling of risks?

With regards to every CPF member having to set aside a compulsory amount from their Minimum Sum, as a pooling of risks, so that those who are alive after age 85 will be able to receive a monthly annuity for life of between $250 to $300, I believe Singapore may have achieved another world first and history first.

We are the first and only nation to compulsorily have all citizens contribute towards providing for the annuity payouts of those who live longer.

Those who die before age 85 may receive little or no benefits from the compulsory annuity scheme, as is being proposed now.

In any case, I think it may be quite difficult for anyone to live on just $250 to $300, from age 85 and beyond.

As the compulsory annuity will only apply to those below 50 years old now, the first annuity payout at age 85 will be in 2042. Assuming 1.5 per cent inflation, the $250 to $300 monthly annuity, is equivalent to $149 to $178 today.

Wasn’t raising the GST supposed to help the poor?

As we have more than $250 billion in Temasek and the Government Investment Corporation, why are Singaporeans being required to pay for those who live beyond age 85?

As the reason given to raise GST was to help the poor, isn’t the additional estimated annual $1.5 billion revenue enough to provide for Singaporeans who are over age 85 and destitute?

Since the economy is expected to grow at 4 to 6 per cent in future years, to what extent will the increasing GST revenue be able to provide for the increasing over 85 destitutes’ aging population?

One of the key focus of the the Prime Minister’s National Day Rally speech, was reducing the income gap.

As one gets older, earnings tend to decline?

According to the Ministry of Manpower, for workers aged 55 and above, 18,600 earn gross monthly income of under $500, 64,000 earn less than $1,000, and 46,400 earn below $1,500. This means that 42 per cent of elderly workers earn less than $1,000.

The statistics indicate that the older one gets, the larger is the proportion who earn less. For example, those earning less than $500 and $1,000, jumped from 8,600 and 36,600 to 18,600 and 64,000, respectively, from age 50-54 to age 55 and above.

This means that those who crossed from age 50-54 to age 55 and above, who earned less than $500 and $1,000, increased by 116 and 75 per cent respectively.

Why is it that it would appear that as one gets older, earnings tend to decline?

How long has this trend been persistent?

Two policies affecting older workers

The proportion of older workers who are in menial jobs is quite high. 54,300 age 55 and above workers are cleaners, labourers and related workers, and 35,600 are plant and machine operators and assemblers. About 49 per cent of workers aged 65 and older are cleaners, labourers and production line operators.

For these lower-income elderly Singaporeans, two policy changes may affect them more adversely, than the general population.

The first, is the gradual phase-out of the 50 per cent CPF Minimum Sum (MS) withdrawal starting 1 January 2008. From 2013, those with less than the then prevailing MS of $120,000 at age 55, can only withdraw $5,000.

The second, is the compulsory purchase of a deferred to age 85 life annuity, with the premiums deducted from the MS. This will reduce the monthly MS payout from age 65 to 85.

I would like to suggest that the above policies be reviewed, perhaps along the lines of Workfare, that is to help to increase the ultimate total disposable income of older lower-income Singaporean workers.

The reduction in CPF cash-flows due to these two changes, may further strain their meagre income sources, after age 55.

Minimum Sum

The above CPF cash-flow issue is perhaps exasperated by the CPF Board’s statistics that “The percentage of active members who met the required MS when they turned 55 declined from 57.1% in 1996 to 36.4% in 2006… The proportion of members aged 55 years and above displayed a four-fold jump from 5.5% in 1985 to 22.9% in 2005”.

The MS which started in 1987 has increased by 232 per cent from $30,000 to $99,600 now. This is an annual compound rate of increase of 6.2 per cent.

To what extent has the 6.2 per cent rate of increase, relative to inflation of only 2 per cent, contributed to the CPF cash-flow woes and corresponding total disposable income of lower-income Singaporeans when they cross age 55?

Also, to what extent will the one per cent increase in CPF interest rate, one-off CPF bonus for those affected, and higher workfare for older workers, offset the reduced CPF cash-flow sources described above, in the light of the increasing trend of more elderly Singaporeans in menial jobs earning less wages?

Sze Hian is the President of the Society of Financial Service Professionals. His personal website is here.