Budget 2012: An Analysis (Part 1)

~by: Leong Sze Hian~


23 times more surplus?

From the originally estimated Overall Budget Balance of $0.1 billion, we now expect a larger Overall Budget Surplus for FY2011 of about $2.3 billion. This is about 23 times more than what was originally projected. With this huge budget surplus what are we doing for ordinary Singaporeans, particularly the lower-income and elderly?

Less disposable income for older workers and self-employed?

Well, for starters, CPF contribution rates for those aged between 50 and 55, will be raised by 6 percentage points – 4 percentage points from the employer and 2 percentage points from the employee.

What this may mean is that some lower-income older workers may be even more cash-strapped, as their disposable cash income gets reduced by 2%.

“We will allocate more of the increased contribution rates to the Special Account (SA), with a smaller portion going to the Ordinary (OA) and Medisave (MA) accounts."

Which means that most of the increase in contributions may only be used if you fall ill, or reach the age 65 and beyond.

The Medisave contribution rates of self-employed persons aged 50 and above will also be raised from 9 to 9.5%. This will mean that a self-employed person will now have 0.5 per cent less disposable income.

Encourage lock-up more CPF?

A Silver Housing Bonus of $20,000 will be introduced whereby, the"Government will provide $15,000 in cash and $5,000 to the CPF accounts. To benefit from the scheme, the homeowners will use the proceeds from the sale of their previous home to top up their CPF savings up to the prevailing Minimum Sum. All amounts above the Minimum Sum can be withdrawn in cash", and the Government expects many to be able to do so.

The Finance Minister in unveiling Budget 2012, goes on to say, "Suppose we have a retiree couple who each had $10,000 set aside in their Retirement Accounts when they turned 55. They decide to move from a 3-room flat to a Studio Apartment. That gives them net proceeds of $250,000. The proceeds will go into their CPF LIFE. But because they will now exceed the Minimum Sum, they take out $8,000 in cash. Together with the $15,000 cash from the Silver Housing Bonus, they get $23,000 in total. Most important, they also get a much bigger income for life from CPF LIFE – an additional $1,200 per month."

What may have been overlooked  is that if you have to downgrade, it probably means that you may be quite cash-strapped. So, to get the $20,000 Silver Housing Bonus, you may in a sense be asked to sacrifice most if not all of your HDB flat sale cash proceeds and delay your CPF payout until age 65 as a monthly life annuity.

But, what if you need money before you reach 65? What if you need a lump sum for an emergency?

Since the CPF Life monthly annuity is fixed without indexing for inflation, what happens when the monthly annuity is not enough for you to survive because of inflation in the future?

And, how many couples will have the prevailing CPF Minimum Sum of $131,000 ($262,000 for a couple in the example), which increases every year?

We may also need to note the uncertainty of CPF Life annuity payouts, which is subject to the average yield of 10-year government bonds and the life expectancy assumptions.

MediShield premium increase

MediShield cover will be enhanced and extended from age 85 to 90. Since this will require an increase in premiums across the board, there will be a one-off Medisave top-up to all Singaporeans currently on MediShield.

But how long will this one-off Medisave top-up last to pay for the increased premiums? Will the increased premiums mean that there will be lesser disposable income for some Singaporeans?

Since it is a Medisave top-up, it may be consumed by rising medical costs, and not just for the purpose of paying the increased premiums.

GST increase – pay cash but get Medisave and U-Save back?

A new GST voucher will be given to help particularly lower-income and elderly Singaporeans, comprising three components – cash, Medisave top-up and U-Save.

So, you pay for your GST increase in cash, but you get the bulk of it back not in cash, but as Medisave top-ups which you can only use for medical purposes, and U-Save which helps you to pay for what has historically been generally increasing utility bills.

Key Budget 2012 initiatives HERE.

Budget 2012 in brief HERE.



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