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Unanswered questions about CPF changes

Posted by theonlinecitizen on August 24, 2007

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.

 

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14 Responses to “Unanswered questions about CPF changes”

  1. The_Censor said

    I’m amazed Ng Eng Hen said what he said about bond yields. Even great economists and bond strategists don’t dare make that kind of statement. And he is using that assumption to tinker with our retirement money. And for what? So that some really old people can have S$250-300 dollars a month. Based on the real rate of inflation, not the laughable 1% we are told it is, that will just about buy you a few potatoes in 20 years time.

  2. Andrew Loh said

    I agree with you, Censor.

    I am quite worried – and unconvinced – that they would make such drastic changes based on speculation about the future. I am not even sure if the old will have that $250 – $300 dollars by that time.

    As it is, our CPI has increased – as reported by the news agencies. It is the fastest rise in the Consumer Price Index in 12 years, according to Associated Press reports.

    I don’t know but I feel like they are hoodwinking us. Were we not told that they needed to raise the GST to help the poor? That raising the GST was for the “future ageing population”?

    What happened to that?

    Regards,
    Andrew Loh

  3. Ned Stark said

    While I may not be too familiar with the technical terms having thrown away my econs knowledge donkey years ago, i must say i am rather amused by the fact that one must live till 85 to be able to get payouts. Perhaps this is supposed to be something in the future when the life expectancy increases to 85 years. I feel that the age is pitched too high as it does not seem so easy to live till that age; unless of course you can afford medicine which can prolong life; and that will lead to another problem namely one of equity, where the rich who can afford these medicines will have a greater chance to benefit from such a scheme.

  4. at82 said

    <>

    Actually, the annuities works the same way as a state pension scheme would work…

    However the main difference is that I feel that we would be better served if this scheme is funded via general taxation (actually if we just use the 700m earmarked for higher interest rate to fund the state pension scheme we wont even need to increase taxation) and not CPF.

    Afterall how many people are going to live beyond 85? Even if they do, for how long?

  5. Ned Stark said

    Following on your point AT 82;

    since we are moving to an indirect taxed based system why do we need to use the CPF? Could the CPF be supplemented by the extra revenue gained from the taxes?

  6. scratcher Do said

    What the gahmen people are saying about CPF, annuities and old folks are obviously pure hogwash. We know it well and they are obviously clear-minded. They have to keep as much of the citizens’ money for as long as they can. The rich are educated and vocal, just like them, so they don’t mind not getting the pittance of $300. The gahmen needs much, much money for many international projects. These projects are classified. Cannot be revealed because profits, if any, won’t benefit the mass. So they decided to be transparent over the need to freeze cpf in the name of the aging people.
    PS. Will this gahmen be around in 10 years time? I don’t think so and looking at their hurriness to squeeze money, I speculate they are planning to not hang around in 5.

  7. at82 said

    Why do we have to use CPF to buy annuities is a qn only gahmen can ans.

    But the CPF can definitely be supplemented by general taxation. In fact CPF top-up is a form of supplementing CPF with revenues gain from taxes.

    Anyway I really fail the grasp the reason for my CPF into such a complex scheme… Pegging to CPF interest rate to bond rate might not generate higher interest although theoretically it could.

    It all depends on the bonds that the CPF board buys. Can you imagine what will happen if CPF board buy something that is similar to CDOs in the future?

    In my opinion, the govt shd just use the 700m to start a state pension for s’poreans above 85.

    If the govt is interested in providing even more welfare to its ppl. CPF could set up a to let S’porean deposit a portion of their CPF into a CPF managed investment acc i(something like a investment fund where you might lose $… but have the potential to generate higher returns) f they are willing to bear more risk , while increasing the interest rate for all other accounts by at least 0.5%.

    Of course, this might mean that the interest rate of govt loans for buying flats might have to increase to above 2.6%, if they are they are funded solely by CPF.

  8. sarek_home said

    since we are moving to an indirect taxed based system why do we need to use the CPF?

    Some of the possible explanations:

    Not everyone pay income tax. Need to keep income tax figure low.
    Another consumption tax after 2% GST hike will not go well.

    CPF is a larger contribution base. CPF members are not able to freely use the money and they may be less upset compared with taking more money from their disposable income. Also more tax / levy on disposable income will impact on consumer spending.

  9. cdlah said

    Suggest all you want but the bottomline is that the gahmen needs to keep the pool of CPF money with them longer for whatever reasons (though I suspect it has a lot to do with their investments not reaping [more than enough] of the interests guaranteed to acct holders. And with the ageing population it could result in a lot of cash being withdrawn in a very short amount of time. I think this is also the reason why they raised the minimum sum level).

    Whatever reasons they provide for all their actions is hogwash to justify it cos they think the general population is unable to see through the illogicality of their reasonings and accept everything wholesale.

    So don’t bother suggesting alternatives. They are not interested in it.

  10. at82 said

    “Another consumption tax after 2% GST hike will not go well.”

    If the GST $ goes solely to topping up CPF, it is not impossible to sell the policy.

    But is that possible under the current govt?

    I am not opposed to higher taxation, but I need to know where the $ is gg to.

  11. Daniel said

    Whatever crap and rubbish gov said to justify anything, we should know better by now.

    The root problem is not annuities or CPF, but the question of whether we can continue to trust gov to do anything for the people. For one, I no longer has confidence in gahmen who believe money is the solution to all problem. Money is in fact the problem to the solution, because obsessive love of money breed greed.

    To people who run business, they should know how Singapore Inc work ! First, the scheme is to get as much money from the public and lock them in to use money for investment and pay hefty salary to gahmen. This is the same principle of business. In business, the employers pay themselves first, and remaining as tax, so just pay just themselves large salary or just expand as fast as possible so there is no profit but expense, so no need to pay tax.

    Secondly, when money is used, use same old reason of terrorism, globalization, economic bad times, inflation, and blah and blah to come out more plan to get money because the money is always not enough.

    Remember, the time value of money. The gahmen pay themselves first of large money collection from their Money scheme every month, whereas the people get to the remainder of whatever is left over after 85 years ! By then, these gahmen could possibly be dead, and migrate and leave !

    What there to be accountable by the gahmen ? Easy said as Minister Ng has assured us, but isn’t this the same MIW guy who don’t have credibility and integrity in first place ? Use what to assure us if one don’t have accountability and responsibility to the public in first place ?

  12. If HDB makes secret profits by the billions which it keeps quiet about and turns such profits over to the consolidate fund and then buys back the lands at market price thereby incurring book losses which it then claims as housing subsidy (S$900 plus million per year as revealed in PM’s Lee National Day Rally speech), then do people trust the honesty and integrity of government in its future statements and other information about subsidy or surpluses any more?

    Minister Ng Eng Hen has given similar untruths about unemployment figures to parliament not willing to disclose his basis or definition of unemployment in his statistics but he went on to claim success with job creations.

    What people are more interested to know is whether he has admitted too many foreigners to come in and take over citizens’ mundane jobs thereby hyping up figures of new jobs created lowering the unemployment counts.

    When he earlier claimed Singapore needs to have reserves and surpluses in order to attract foreign investment without answering question like how much reserves are enough reserves again he was short on truth and specifics.

    Is he now again telling the same half truth – on what basis he could not reveal to citizens that CPF can indeed outperform the projected 4% returns eventually?

    Do we need this kind of ministerial talents to run modern-day globalised economy?

  13. Doreen said

    I am Australian and my mother is an ex-Singaporean. I also have family in Singapore and was really quite shocked to hear about the new changes.

    1. I don’t think the Singapore Govt actaully values the elderly (Singapore would not be where it is today without their contributions)

    2. The elderly seem to be discriminated in the workforce- their experience is invaluable . Their wages should not be cut because of their age.

    3. How many people are going to live to 85 yrs- really! Lets get real. I had a very healthy grandmother who hardly had a illness in her life and she only lived to 81yrs.

    4. Clearly these changes are to benefit the govt not the people of Singapore.

    For example, in Australia the govt encourages the elderly to work until 75yrs if possible and their income is not cut because of their age. Retirement age is 62 (female)and 65 (males). The elderly are building blocks in Australia to lead the new generation forwards.

    It’s time for Singapore to reconsider how they view the elderly. Come on, respect them and do justice by them.

    Money isn’t everything. Yeah it’s important but does Singapore really want to drive Singaporeans out of the country- that is not beneficial to the country. WAKE UP!

  14. limcy said

    The Big Truth about CPF Annuity

    LKY- We don’t want to see you in 20 years time at the meet the people session and complaint that you got no money to eat.
    Then we will probably give your food stamp…

    That is the grant scheme of things.

    In 2001, PAP knew that more than 50% of people don’t even have the mimium sum when they reach 55. They are worried.

    They stop people from taking out the money and at same time increase the minimum sum so that chances of taking out is almost zero at 55.(for the poor)

    They increase the minimun sum to $120,00 by 2013 and they knew that again more thant 50% cannot match that sum at 55.

    2008 Annity scheme, the objective is that most people who live until 85 can have something $600…. and got no reason to see the government for food stampo

    So that how it work.

    To earn interest on your CPF, someone have to borrow the CPF money and invest something that is at least higher than 2.5%.
    That someone is GIC or various government agencies.

    The CPF board buy government bond and earn the interest in order to pay you.

    So, Dr Ng at first said No and then said the relationship is not simple. The truth is Yes.

    Now how do earn interest with the pool of money for the annuity.

    the trick is the same. THe pool has to be big enought, so that any big distortion payout along the way can be smoothen out. That’s why it must be complusory!

    The money will be invested on the government bond again and earn a low interest of 3%. by the way there is no mention of rate of return in the CPF
    annuity schemes.

    the CPF annuity is very clear give you a choice to choose, at 65, 70 75, 80, 85, 90
    with payback or no payback when you goes to heaven!

    You have to choose at 55, but you cannot get it until 65 earliest. So that 10 good years of your money is pooling inside to fun the payout. Ha ha 10 years, go and buy the savest bond in singapoe or dividend yield from good company SPH, you get at least 3 to 5%. Go and count yourself, you lost at least 50% of capital appreication on your money compounded from premium

    So how do you choose?

    Now, let say you are OK fellow, work 30 years in your life middle income, at 55 got 135K in the minimum sum.

    Hint from LKY
    1. check you family history, your anuty, uncle, how long they live, die of what illness?
    2. Estimate what is your likely hood of your Life expectancy. If it is below 65

    Choose 90, minimum premium committed is (4%)annuity and the rest return to your family if you die before 65.

    But you contribute 10 good years of money to the pool for investment.

    2. If you expect to leave until 80, Choose 65 and get your money fast but you pay a high premium.

    3. If you father/mother, uncle and auntie are at least 90 years old and you live a healthy lifestyle, choose 65 and pay maximum premium ,get maximum payout from annuity account every month.

    4. From 85 to 90, not many people are sane?

    Finally, if you follow what Dr NG said, well I have not think about it, you know most Singaporean are lazy, I will leave it at default 80, ha ha good luck to you.

    Dr Ng is rich, Cancer surgeon before and minister for at least another 10 years. He don’t need this annuity.

    The truth is most people die at 75 to 85. you get nothing before 80, you are not only lazy but also stupid!

    So the Default is 80, ha ha for the lazy and stupid.

    If what the newspaper said that the scheme is easy to understand and it only takes 3 to 5 minutes to explain to the layman(security guard, delivery man) than I am sure this people will choose 80 default.
    CPF hopes many people choose 80 because that is the best outcome.

    why, A big pool of money to invest for next 25 years and then the majority of the payee will die at that age. No refund is even better.

    Whan happen when everybody choose 90, no refund. The is scheme will work but the people can go and see the MP when their money in the retirement account is depleted.
    MP will give you food stamp! from 85 to 90 years old.

    What if everyone choose 65, it is a big responsibilites for the CPF, if everyone live until 90. (that will never happen!)

    So my prediction for the next ten years

    GST will raise to 10% as they attempt to reduce the personal income and company tax down.

    ERP will be paid as you move the car from your house.

    Mimimum Sum will be raised along with inflation and again >50% can never make it.

    The govenment will raise the retirement age to 65 or even 70 to make sure as long you work and don’t need to give food stamp.

    The Mean Test by Mr Khaw will be refined and expanded to make it even More Mean?

    Guess what all this they will do it after election and before election a lot of goodies……

    Collect $2 return $1 and collect again another $2 and return $1……

    Bao Chiak—Dr NG said about the CPF annuity scheme. ya ya where got bao Chiak

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