Tuesday, 26 August 2014

CPF Realities and Alternative Policies (CRAP)

The CPF is being reviewed. Again.

Because people aren't happy with it currently.

What are they unhappy about? Many things. Everything.

Here's a no-brainer prediction: Whatever the review recommends and is implemented, not everyone will be happy.

And it's not just that SOME people might be unhappy. That SOME people might include YOU!

Who are the people who are having problems with the CPF?

Maybe it might be easier to list who are NOT bothered by the CPF and the various schemes - including the Minimum Sum Scheme.

The first group of people not bothered by CPF policies -  Rich People.

Did you know the CPF has a income ceiling?


You are only required to contribute 20% of your salary up to $5000. Same for your Employer - 16% of your salary up to $5000. (It will be 17% from Jan 2015.)

That means, if you earn $5000 per month, $1000 (20% of $5000) will be deducted from your salary each month and this goes into your CPF. Your Employer will contribute $800.

If you get a raise to $6000. Your CPF deduction will still be $1000. And your employer will only contribute $800 (16% of $5000).

You don't earn $5000, so you didn't know about this?

What does it mean?

Well it means that if you earn $5000, and the CEO of the company that employs you earns $$150,000 per month, you both contribute $1000 to your respective CPF.

So you are thinking, your boss and you (if you earn $5000 or more) contribute the same to CPF. So if you can't meet the minimum sum, he can't either.

EXCEPT... he would have earned more than you over the years, and if he is even a little bit prudent, he would have more savings than you and would likely not care if he did not meet the minimum sum.

Which is why, the rich (or the high income earners) won't care too much about the minimum sum.

Yes, if you and your boss managed to meet the minimum sum, you will both get $1200 per month.

But he's rich.

Say on your first day of work, you earn $5000 a month. You start working at the age of 25. By the time you are 55, you would have work 30 years, or 360 months. On average about $400 goes into your special account each month. Assuming no 13 month bonus, your 360 monthly salary and CPF contribution would put $144,000 in your Special account. Throw in the thirty 13th month contributions, and you'll have about $12,000 more or $156,000. Yay! You made it!

(Yes, that is a very rough computation that a) assumes you earn $5000 from day one, and b) ignores the 4% - 5% interest your CPF would have been earning over the 30 years.

The second group of people not bothered by CPF policies are...

Erm... I miscalculated. There is no second group of people not affected by CPF policies.

Pensioners? Or working people who are on pension schemes. Well yes, but generally, these are also rich people. Or high income earners.

Unemployed and unemployable? Yeah. Ok. Right. But they have other problems. And CPF is a non-issue for them as they would have NO CPF. So yes, they don't worry about changes to the CPF.

So... Almost everyone's affected by CPF policies...

Who's most affected?

Well, if the Rich are the least affected, then the poor must be the MOST affected.

Firstly, their contribution isn't going to be very much. Or just not enough.

How is this a problem? Because the CPF is a "defined contribution" "pension scheme". Other countries (the notorious "welfare" countries whom I shall not name) have a "defined benefits" scheme or programme.

"Defined benefits" (DB) means everyone gets the same benefit. When you reach the pension age, the govt (or some central authority or fund) will give you a "pension" or an allowance for living expenses.

"Defined contribution" (DC) means you get out of it what you contribute. No more. No less.

Which is fairer?

Depends on what is your basis of fairness, right?

If you believe that in old age, it should not matter if you are rich or poor or that your contribution to the country should not be quantified by your earnings, then a DB approach would be fair, no?

But if you believe that there are no free rides in this world, and you get what you put in, then a DC approach would appeal to you. With a DC approach, you reap what you sow. It's fair because you get out of it what you put into it. It's YOUR money.

Sounds familiar?

But as the income gap between the low income earners and the high income earners grow, and as income growth for the low income slows down, the question is whether the low income earners can actually prepare for their retirement. But what is "low income"?

PM Lee used a hypothetical Mr Tan with $4500 income. This apparently is around the 25th - 30th percentile of income.

Let's take an example with lower income - say an average income of $2,500 over the working life. If a CPF member starts working at 20 years of age (non-graduate), with an average income of 2,500 over the 35 years of work (from 20 to 55), $200 on average goes into the special account each month for 420 months. At age 55, the CPF member would have contributed $84,000 in the Special account. Add the 13th month salary for 35 years, and that would be $7,000 more, or a total of $91,000. Hopefully, the 4% interest over 35 years would kick that into the minimum sum level.

My quick and dirty math suggests that with 4% interest compounding, the Special Account balance would be about $177,000. Enough to meet the minimum sum.

But that's with an average wage of $2500 over the course of his entire working life. Is that a reasonable assumption?

The income at the 10th percentile is about $1700 per month. The SA contribution at this income is about $130. The total contribution will be about $59,000 and with 4% interest, he may have less than $120,000. Well short of the $161,000 minimum sum for those turning 55 in 2015.

To make the minimum sum in 35 years of contribution (from age 20 to 55), your average income over 35 years must be at least $2,200 (including 13th mth salary).

More than 10% of Singaporeans earn less than $2,200. Maybe as many as 20%.

How can we help them?

Or is the correct question, should we help them?


I think the correct answer is "yes" we should help them, because meritocracy has not helped them. Or rather meritocracy results in a belief that successful people are successful because of merit, and unsuccessful people are unsuccessful because they lack merit. Meritocracy promotes a belief in a Just World, and in a just world, the rich are rich as a reward for their merit, and the poor are poor because they deserve it.

And I think we are beginning to question (if we aren't already questioning) such a belief, such a value system.


"...if you have never had a decent job... to make you work till you practically drop dead is not human," he said."
We treat people the way we hope to be treated. And one thing we can agree on, is that in our old age, we would like to be able to "retire" from the stress and strains and be relieved of the worry about money.

Especially if we have had a hard life. Surely one has earned the right to some rest before the eternal rest?

Well, we are making some progress towards a DB scheme, or at least a scheme to help the poor that does not require them to have made a cash contribution.

The Silver Support Scheme was announced at the National Day Rally. It is intended to help the poor elderly with "bonus" payouts each year. Details would be announced at Budget 2015.

I am cautiously optimistic at best.

The devil is in the details. A $500 payout annually may not make much of a difference. $200 per month? More helpful but game changing?

Helping the Poor Help themselves


Well, let's give them some money.

How and on what basis?

Matching Grants. We have done this with baby bonus. We can do this with the SA.

If the SA cannot be used for any purpose at all, then the final balance when the member is 55, is an objective assessment of the member's income level over the last 30 years or so. If the SA is less than the minimum sum, we can conclude that in the course of his working life, the member did not earn on average more than $2200. And therefore has met the "means-testing" to qualify for a Minimum Sum Matching Grant Top-up.

Let's relook the example of the CPF member earning on average the 10th percentile salary ($1700).  At age 55, he would have about $120,000 - not quite the minimum sum. His monthly payout at 65 may be less than $900 (or thereabouts). Under the current rules, he would be required to top up to the minimum sum (to get CPF Life payouts of $1200).

But nobody likes to be forced to do anything.

BTW, how much would he have in the OA?

Approximately, $184,000 if he did not use any for housing. Say he used $150k for housing, and he has about $30,000.

Under current rules, he gets to withdraw $5000 and the rest could go to meet the minimum sum.

OR, he could pledge his flat, halved the minimum sum (cash) to $77,500, meet it all with his SA, and get to withdraw all his OA ($30k) and $40k of his SA.

BUT, his payouts at 65 would only be $600 per month.

What if there is a THIRD option?

If he tries to meet the full cash ($155k) of the minimum sum voluntarily; if he puts all his OA (less the $5k he can withdraw), he would only have $145k - below the MS.

What if the govt matches his contribution at age 55 to the MS? For every dollar he puts into the MS, the govt matches it with $1. So he is short by about $36k, he contributes $18k, and the govt matches $18k. And he gets to withdraw $12k at age 55 - more than the $5k he would have under the current rules.

And if the govt wants to keep things within budget, it can perhaps cap the matching contribution to a certain amount, say $20,000 (or up to half the MS shortfall whichever is lower) in the first instance, for this "pilot" phase.

And they can match anyone's contribution, so if the member's children wants to help him meet the minimum sum, their contributions would be matched by the govt (incentivising filial care).

And to reassure members, the cap should meet any future increases to the MS. So this year the MS is $155k. Next year it would be $161k, a $6k increase. The $20k cap on matching contributions would be raise to $26k next year.

[I'll leave the question of what happens to matching grant if the member dies before age 65 to others to think about. Should the govt recover the contribution? Should the beneficiaries benefit?]

This approach is a true cooperative approach. The CPF member is ask (not ordered!) to top up his Retirement account, and the govt matches his top up. Up to the minimum sum. In fact the "minimum sum" is now a misnomer. It is now the maximum you can top up, so it is the maximum sum now.

And yes, have the Silver Support Scheme as well.

Getting the Rich to help as well

So from the earlier point about how CPF does not affect the rich, the rich don't really need CPF much. They can easily meet the MS, and even then, they don't really need the CPF Life payouts.

Easily about 25% of households have income of more than $5000 per person in the household. Depending on their circumstances, let's say about 15% still need CPF Life payouts. That leaves about 10% of CPF members who may not actually need the payouts because of their wealth or other income stream in their "retirement".

If so, the CPF (with the government's support) could have a scheme where these rich members can "donate" their minimum sum or even their OA funds (partially or wholly) to a central pool to further top-up the RA of some poorer CPF member.

So, lets say a low-income CPF member only has $50,000 in his SA, and he uses $25k in his OA to top up the MS. But because there is a $20,000 cap, the government only matches $20,000 of his top-up. The CPF donors (Rich CPF members) could top up another $5000, or even up to the full minimum sum, so this poor CPF member can have the full $1200 payout.

Why would a rich CPF member donate to this Central Top-up Pool?

Well, firstly, there is a specific purpose, a specific target, and a specific disbursement of the donation. The donors will be assured the the donated funds will go towards easing the lives of the poor in their retirement. They can be sure that the beneficiaries would not be taking the money out to go to Vietnam and get a mail-order bride.

[The proposal mentioned in the NDR to allow those over 65 to withdraw from the CPF would have to be limited to cash the CPF member or his family has contributed, and not to draw down on any top-ups from the govt, or from donors.]

So how many donors can we expect?

From the table below, there were about 28,000 people earning over $400,000 a year. I am quite sure all of them met their minimum sums. If all of them donated their minimum sums, there would be 28,000 X $161,000 or approximately $4,800,000,000.


BUT this is based on voluntary donation. This $4.8 billion is a big "if". So we cannot depend on the kindness of strangers to fund the top-up. I'll be VERY conservative and assume only 1% donates their CPF - or about $48m. It's not nothing, and it can help, but it won't fund the full top-up scheme.

Funding the Top-up

So... where's the money going to come from?

Taxes is usually the answer and this may well mean increase in the GST.

[Income tax is not the solution and I'll just leave it at that. Explaining will just take too long.]

But first, let's figure how much it's going to cost. Let's say 50% of CPF members turning 55 are unable to meet the MS. And let's say this number is about 20,000 each year. [Each cohort has approximately 45,000 people, but assuming some may have passed away by then, we will assume about 40,000 people turn 55 each year, and of this, half do not have enough for the MS.] Who are these people?

Housewives, mainly. Some may have dropped out of the work force or interrupted their careers for family or other reasons. (All the more reasons to support them in their old age, no?)

Let's assume all of them are short by $40,000 or more and even if they could top up their MS, let's say the government's contribution is capped at $20,000. So $20,000 for 20,000. That is $400 million per year. A small ministry's budget.

That's what we need to fund. This is a small sum by our budget. For FY2012, the budget was about $56 billion. GST provide $9b. Income Tax, $7.7b. $0.5b would only be 1% of the budget in FY12.

Remember the CPF cap mentioned earlier?

If you are an employer and you have 1 employee paid $10,000, you'd pay CPF of just $800 for this employee (16% of $5000).

If you have 5 employees each with a salary of $2,000, your CPF contribution for all 5 of them would be $1,600.

Employers get a "concession" for more "expensive" staff. In the above, the employer actually save $800 per month because of that one high-income staff. What if some of that savings is channeled to help the low income CPF members?

Let's take an annual income/salary of $80,000. If this $80k is a $5,000 monthly salary, it means this employee has 16 months of salary or about 4 months bonus. Excessive?

Doesn't matter.

If we take annual salary of $80,000 as the cut off, there are over 410,000 tax payers with income over $80,000, or definitely earning more than $5000 per month.

Individual Income Tax                                                   
Taxable Individuals by Income Group                                
As at 31 March 2014 for the Year of Assessment 2013                   

Assessed Income Group
Number of Taxpayers
Tax Resident
Non-Tax Resident
20,000 & below
20,001 - 25,000
25,001 - 30,000
30,001 - 40,000
40,001 - 50,000
50,001 - 60,000
60,001 - 70,000
70,001 - 80,000
80,001 - 100,000
100,001 - 150,000
150,001 - 200,000
200,001 - 300,000
300,001 - 400,000
400,001 - 500,000
500,001 - 1,000,000
1,000,001 & above
Source: IRAS

If the employers contribute just $1000 per year  (or less than $100 per month) for each of these 410,000 employees into the central pool, there would be more than $410m. We would have enough to fund this MS top-up scheme.

To be safe, we could make a it straight $100 per month per employee earning over $80,000, and that would net us $1200 per employee per annum and the fund would have almost $0.5 billion.

Together with the donors, we could top up a lot of lot income CPF members Retirement accounts.

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