The Truth About Our CPF and the Minimum Sum
“CPF is my money. Why can’t I use it as I please?”
“The CPF is a scam. It is how the Government cheats you of your money.”
“Government is raising the Minimum Sum to keep you from taking your money.”
We have been hearing some of this online. In many dialogues and conversations, I have asked if people actually read about what CPF is really about. Most admit that they don’t. But there are also those, especially the ones keen on financial planning, who put out thoughtful pieces to help Singaporeans understand how it helps.
Let me state that the CPF is put in place to help Singaporeans have peace of mind when it comes to their retirement years. With increasing longevity, it has become even more important to help Singaporeans sustain their retirement adequacy for longer. There are 3 main points I would make.
1) CPF helps us to retire.
2) CPF is your money. You are already using it! Everyone has received their CPF monies plus top-ups and interest.
3) The Minimum Sum is increasing because we are living longer so we need to spread out our payouts.
We will all retire one day so we need to prepare for it. The CPF is how Singapore does it.
Many countries do the same through a pension system. They collect taxes or get citizens to contribute to a social security fund. This pooled monies is then paid out to citizens who reach a certain age. However, many of these systems are facing challenges, because those who are young are now paying for the old. As most countries age, there are less and less young people paying for more and more aged people. The status quo cannot hold. Either taxes will have to rise, or old people will get a lower and lower pay-out. The pension payout age is also being increased.
In Singapore, we have the CPF. Rather than pool all our monies together, every individual saves for his own retirement via his personal individual CPF account. We contribute monthly into the account. Our employers contribute too. The Government also contributes into the accounts for those who need more, through Workfare and other schemes such as Pioneer Generation Package. We then make sure this CPF account grows at a reasonable interest rate without risk. In fact, your CPF monies are backed by the full faith and credit of the Singapore Government – only one of a few countries in the world with a triple A credit rating from all of the world’s major credit rating agencies.
Unlike most other systems, our CPF does more than just give us a monthly pension. We use it to help own our homes and pay for healthcare. In countries where a significant proportion of retirees do not own their homes or are still servicing their mortgages, pension payments have to be used for these costs. As the vast majority of Singaporeans including lower income retirees own our homes, paid for out of our CPF, and have fully paid our loans, we do not need to use our CPF LIFE payouts to pay for rentals. Many of us are already using our CPF monies to fund expenses that would otherwise have come from our disposable income.
In many other countries, pension monies are not drawn out in a lump sum, but paid out monthly. This helps retirees spread out the use of their retirement savings over their retirement years.
When the British introduced the CPF scheme in 1955, we could withdraw all our savings at 55. Do we remember what our retirement age was then? It was 55. What was the life expectancy in 1955? It was about 60. Hence, what you withdrew at age 55 would have to last you for just a few years.
Today, the retirement age is at 62 and we could be re-employed until 65. And life expectancy is at least 82 and rising fast. For those turning 65 years old today, 1 in 2 will live beyond 85, and 1 in 3 beyond 90. What would happen if we withdrew everything at age 55? Or even 65? Would we ourselves be able to manage our monies for two decades or more?
Source: MOM infographic
Unfortunately, most savers are unable to achieve good returns with low risk. Many have lost money because they chose the wrong products to invest in, or because of market downturns that occur in their retirement. Would we have peace of mind if we were subjected to the same uncertainties? What would happen if our monies ran out? Who would bail us out?
As we retire, we will need more money, because
1. We are living longer. In fact, we can probably expect to live 10 years longer than our parents did. Unless we intend to work and retire much later, we will spend more years in retirement.
2. Prices will increase over time. The same things will cost more as the years go by. Although prices of basic items have gone up by less in Singapore than in most other advanced countries, the fact is the cost of living will go up over time.
3. Our daily needs have increased. What we consider to be “basic” has changed over the years. The food we eat is of better quality, the medicine that we consume is more advanced, and technology that we now enjoy didn’t exist before. So our daily needs have increased. This is a good thing, because it means that our quality of life has increased.
Hence, the Minimum Sum has been increasing over time. When we turn 55, we set aside a Minimum Sum from our savings in the Ordinary and Special Accounts (OA/SA) to meet out retirement needs, and we can withdraw any remainder (see footnote).
In 2003, we wanted the Minimum Sum to be able to meet the expenditure needs of a lower-middle income retiree couple. This was why we decided in 2003 to bring the Minimum Sum from $80,000 then, to a target of $120,000 in 2003 dollars. The target was to be reached over a period of 10 years, so that by 2013, a lower-middle income retiree couple could have had their expenditure needs met.
Many have forgotten that this is what we decided to do many years ago and are surprised each year when the Minimum Sum is raised.
In fact, we pushed back the target by another two years to 2015 so as to make the increases more gradual because of higher inflation in recent years.
Let me try to clarify a few main points again.
First, if you did not have sufficient savings to set aside the Minimum Sum at age 55, you do not need to top up the shortfall in cash. You also do not need to sell your property just so that you could meet the Minimum Sum!
Second, only half of the Minimum Sum must be maintained in cash. The savings above that can be used for housing needs. Any contributions into the Ordinary Account after age 55 can also still be used for housing.
Source: MOM infographic
Yes it is achievable. Even as the Minimum Sum has increased in recent years, more and more Singaporeans have been able to attain the Minimum Sum. About half of active CPF members are able to now, compared to one third just five years earlier.
Note: Active members refer to members who have at least one CPF employment contribution paid for them for any of the four months preceding the members’ birth month at 55. The sum of a member’s cash balances and property pledge are used to measure MS attainment in recognition that the member’s property can be used to supplement his retirement income.
A number of older Singaporeans are not able to meet the Minimum Sum because they were working when Singapore was still developing and wages were low. These vulnerable Singaporeans may need help if they do not have family support. We will help them. Indeed, we introduced the Pioneer Generation Package so as to help lighten the burden of their healthcare costs.
There are those who do not meet Minimum Sum because they did not work regularly. But many among these may have a spouse or family who are able to support them.
Furthermore, the majority of older Singaporeans own their homes. Many prefer to hold on to their homes and rely on their children for support in their retirement years if their own savings are inadequate. But there are several schemes to help them if they wish to get cash from their homes. Besides renting out rooms, which many do, they can move to smaller flats or make use of the Silver Housing Bonus and theLease Buyback Scheme.
I know there are also low-income workers who need more help. This is why we introduced Workfare, which pays into the CPF accounts of lower-wage workers. And that is why we pay an extra interest of 1%for the first $60,000 of CPF savings of every Singaporean so that those with lower balances can grow their savings faster. We also raised the amount that employers must contribute to CPF recently, especially for older workers and lower-wage workers.
We are looking into other ways to further strengthen our support for those who might need more help.
I believe that our CPF is a good system and a fair one. It is also a more sustainable system than most other retirement schemes. Your CPF funds are absolutely safe.
Would we be better off if we dismantled the CPF Minimum Sum and left it completely to individuals to provide for their retirement themselves? It is tricky providing for many years of retirement. We believe it is prudent to set aside a portion of our monies to be managed via the CPF system so as to provide the basic needs of retiree households. Individuals continue to decide how they use the rest of their monies. And the truth is, CPF monies are already being drawn upon for a range of uses. Some have even argued that we should tighten this.
We will continually strengthen our CPF system to improve the assurance we can provide our seniors for their retirement, healthcare and housing needs.
Footnote: Those of us who have not met the Medisave Minimum Sum (MMS) from our Medisave savings will first need to top up our Medisave Account to the MMS. More info on this here.