Singaporeans could be given greater flexibility to put in more money into their Central Provident Fund (CPF), if they want to enjoy a higher level of payouts in retirement. This is among the issues studied by a panel tasked to review the national savings scheme.
Other issues reviewed by the panel included adjusting the CPF Minimum Sum for inflation and standard of living, and having an additional lump sum withdrawal from age 65. The panel will submit its first set of recommendations to the Government next week. This will cover two areas – how to adjust the Minimum Sum beyond 2015 for future retirees, and lump sum withdrawals at age 65.
Appointed by the Ministry of Manpower, the CPF Advisory Panel is studying possible enhancements to the CPF system, to make it more flexible in meeting the needs of more Singaporeans and provide additional options in retirement.
Singaporeans are living longer – for those aged 65, about half are expected to live beyond 85 and a third are expected to live beyond 90. So it is important to ensure they have enough money for their retirement.
A panel was formed in September last year to look into such issues, including the Minimum Sum. This is the amount set aside for retirement needs when a member turns 55 – half this amount can be in the form of a pledge from a property purchased with CPF savings.
The Minimum Sum now stands at S$155,000. It provides a monthly payout of about S$1,200 for life, through the national annuity plan called CPF Life.
For those who turn 55 from July this year, the Minimum Sum will be S$161,000. One area the panel is looking at is how to adjust this sum beyond 2015.
Professor Tan Chorh Chuan, chairman of the CPF Advisory Panel and president of the National University of Singapore (NUS), said “If we didn’t adjust our retirement payouts for successive cohorts of retirees reaching 55, then we cannot keep pace with inflation and cost of living increases.
“So we need to make sure that the payouts for successive cohorts are adjusted, and because we want to make these adjustments to the payouts, the amounts you have to set aside in the retirement accounts will have to go up, but the rate at which it will go up will not be as high as what we’ve seen in the preceding ten years. It’ll be lower, but it will not be zero either – because if you don’t adjust it, then by the time the members reach retirement and get their payouts, it may not be adequate.”
There could also be an option for members to put aside more money, so they can receive higher payouts. “For those who want to have a higher payout in retirement, today in fact, the Minimum Sum is the Maximum Sum – you can’t actually annuitise more,” said Professor Tan.
But I think going forward, we feel that that flexibility should be afforded, so that those who wish to, can actually put in more money into their CPF, so that they can receive a higher level of life-long payout. It will provide people with higher incomes an opportunity to put aside more, to have a larger payout in retirement,” he added.
Professor Tan added that participants at earlier focus group discussions also had concerns about not having sufficient time to plan for retirement. They said that the Minimum Sum is set quite late, when they turn 55. Professor Tan explained that this is because the Minimum Sum is adjusted based on inflation in the preceding year.
Authorities thus need to get the full year inflation data, so that it can be included in the computation for the Minimum Sum. This also means the Minimum Sum can fluctuate depending on how year-to-year inflation may change, which will in turn make planning harder, said Professor Tan.
“If we move to a system where we use longer term inflation rates, and longer-term trends in retiree increases in expenditure, then we would be able, I think, to give a more predictable pattern for the changes in the sums that must be set aside, that need to be set aside, in order to allow members to receive a certain level of payout.”
ADDITIONAL LUMP SUM WITHDRAWAL
Another area the panel’s recommendations will cover is that of additional lump sum withdrawals. Professor Tan said: “The panel looked at this quite carefully and after much discussion, we decided that it would probably be better for us to have the withdrawals at the draw-down age at 65 or beyond because that’s the period when you’ll be able to see much more clearly, the implications and the trade-offs between making a cash withdrawal and its impact on your long-term monthly payouts.
“By having the withdrawal decision put at the same time as you look at your payouts, members will be better able to make a well-informed decision that will allow them to ensure adequacy of support in their retirement.”
Currently, members can choose to withdraw a portion of their CPF savings only at age 55. Professor Tan said the withdrawal amount proposed will be “reasonably close” to what was mentioned at last year’s National Day Rally. Prime Minister Lee Hsien Loong had said a possible cap could be 20 per cent of the CPF savings.
“Frankly, the concern is probably more with those with lower balances. Because if you have a very high balance, even if you take out a large percentage, the impact on your absolute amount of payout is not as great. But if you have a very low balance, and you take out a high percentage, then it would have a big impact. So when you look at this, I think that you’ll find that a cap which is a little bit narrower probably strikes the best balance,” said Professor Tan.
He also pointed out that Singaporeans are continuing to work longer. “Some of these members may actually not need to have a CPF payout at 65. They may wish to have it come a bit later. And the advantage of course, to them, potentially of starting their CPF drawouts later is that the payout will be permanently higher,” he said.
“So if you decide to start to draw down on your CPF Life monthly payout one year later, say 66 instead of 65, the payout amount will be 6 to 7 per cent higher than if you had started the payout at 65, and that’s a permanent increase. So for people who are continuing to work beyond 65, we think it’ll be good to provide an option for a delayed time of starting of the monthly payouts, but this will be an option so that those whose circumstances would make them want to have this option, would have the flexibility to exercise it,” Professor Tan added.
LOOKING OUT FOR NON-WORKING SPOUSES
On the topic of CPF members who have not saved enough for retirement, Professor Tan said that the panel has a number of suggestions on this. Only about half of CPF members who turned 55 in 2013 achieved their Minimum Sum in cash plus property. “There are different groups, for example housewives who have not worked very much and have relatively low accounts, who are therefore dependent on their husbands’ CPF Life payouts.”
Professor Tan added: “So it’s very important therefore that we encourage more Singaporeans to top up the CPF accounts of their non-working spouses, particularly, in most cases, it’ll be their wives, so that they too can have their own CPF Life plans. And with that, therefore they can have greater assurance of adequate retirement payouts.
“Within the ambit of how we would like to recommend a series of things which apply to all members but understanding that, say, within these groups for example, that if you have no CPF account, or you have very low balances, then we actually ought to be looking at ways in which to encourage that.”
Subsequently, more focus group discussions will be conducted. They will help shape the panel’s recommendations on how CPF members can seek higher returns through private investment plans. The panel will also propose how CPF payouts could be adjusted for an increase in the cost of living. These recommendations will be out by the middle of the year.
The panel was supposed to submit its recommendations on CPF payout adjustments in the first phase too. However, Professor Tan said: “We feel that our recommendations are pretty substantial in themselves and it would be better and easier if we just focus on two and try to explain these as clearly as we can, rather than encompass too many things in the first phase of our report.”