SINGAPORE — The increase in the contribution ceiling for Central Provident Fund (CPF) was announced in Singapore’s Budget 2023 as a measure to help middle-income employees save more for their retirement.
The current annual CPF contribution ceiling is $37,740, and the current monthly contribution ceiling is $6,000, with the maximum contribution coming from both the employee and employer.
The increase in the monthly CPF contribution ceiling will be progressively raised from $6,000 to $8,000 by 2026. This will allow employees who earn more than $6,000 per month to contribute more to their CPF accounts and receive a higher employer contribution.
However, it is worth noting that the change will not affect workers who earn less than $6,000, as their contribution depends on their actual salaries.
A commentary in The Straits Times on Sunday (19 Feb) attempts to highlight the benefits of the CPF contribution ceiling increase.
The article notes that the change is unlikely to affect high-income earners because the maximum annual income that is subject to CPF deductions remains unchanged at $102,000. The increase in the CPF contribution ceiling will result in more monthly CPF contributions from employers, which will give workers more funds to service their home loans and a bigger retirement kitty.
Moreover, it said, the move to increase the income ceiling for CPF will benefit all higher-paid employees in the long run by providing more certainty for retirement planning. Older workers will receive increases to their overall monthly CPF contributions from 2024.
However, the ST article seems to miss the potential impact of the increase on the cost of living in Singapore for many.
For example, an employee earning $8,000 monthly may see his take-home pay reduced by $400 a month, while the employer will have to pay an additional $340 a month.
This increase in labour costs may lead some employers to pass on the additional costs to consumers, which could result in a double whammy for employees who are already struggling with increased costs, inflation, and GST hikes.
This situation may be particularly challenging for those who are already dealing with cash flow issues, such as rising mortgage rates and payments, reduced income as a worker or business person, and other financial pressures.
In some cases, this increase in the CPF contribution ceiling could be seen as yet another “nail in the coffin” for those who are already facing financial challenges.
While the CPF contribution ceiling increase has several benefits, policymakers must consider the potential impact on the cost of living and take measures to mitigate its impact on those who are already struggling financially.
As a final point, it is worth noting that the increase in the CPF contribution ceiling could have a significant impact on the overall CPF inflows and outflows.
According to estimates, there is currently an excess of around $30 billion of CPF inflows to outflows, which takes into account contributions versus withdrawals and returns derived versus interest paid to members.
With the CPF contribution ceiling set to increase, this excess may increase at an even higher rate, from both the government’s and the people’s perspectives.