Friday, 30 January 2015

A CPF for those who need it most

The CPF scheme was set-up to
... enable Singaporeans to have a secure retirement, through lifelong income, healthcare financing and home financing. (CPF Mission statement)

But those in the lowest 10th percentile cannot rely on the CPF alone to provide for their retirement. The current rates are too low and if the contribution rates were raised, they would have little to take home for daily expenses.

So... the recent brilliant idea to have different minimum sums for different groups of people, was... kinda silly, really.

To be fair, I think the idea is just an idea. But then again, this is a government that doesn't broach ideas unless they are reasonably enamoured by the idea. So...

This idea is still paternalistic, and prescriptive. It would require categorising people according perceived needs and it would not be able to make fine distinctions, or address special considerations or circumstances.

The net effect is that there will still be complains and resentment.

My issue with the Minimum Sum is that it is mandatory, prescriptive, and paternalistic. And that it takes away personal responsibility from those who have it least (which may be a pretty good definition of paternalism.)

The best thing to do with the minimum sum is to do away with it.

At 55, whatever is in your Special Account (SA) should just go to your Retirement Account (RA) for your "pension" payouts at 65.

Instead of a minimum sum, provide a table of payouts for the CPF members to consider.

For example, $155k at 55 will mean $1,200 per month at 65. $140k = $1100. $120k = $1000. $100k = $900. $80k = $700, etc.

This would be similar to having different minimum sums, except there is NO PRESCRIBED Minimum Sum for you based on an arbitrary "category" you have been put in.

Instead, CPF members should be given the choice: let the SA money go into the the RA as is. And get whatever payouts you get according to the table of payouts.

Or, top up their RA with their Ordinary Account or with cash. Or their children/relatives/spouse can top up their RA.

A matching grant for top-ups

And to encourage members to top up their RA, the government should provide a matching grant up to a cap (say $20k).

So for every dollar the member or his/her family contributes into the RA, the govt will match with a dollar, up to the max of $20k from the govt, for a total top up of $40k.

In order to meet the minimum sum, the CPF member must have an average income of about $2500 over his 30 - 35 years of working life. This is about the 30th percentile of income earners in SG, the lowest 30 percent.

So instead of a "Minimum Sum", there should simply be Retirement Savings Target (RST) amount and a matching grant cap (say $20k). If you have less the RST - which, coincidentally will be equal to the current minimum sum, the government will match your top up to this ceiling, or the cap, which ever is lower.

So if you have $140k in your SA, and the RST is $161k (from July 2015), you are short by $21k. You can top up $10,500, and the govt will match your top up to help you get to $161k.

If you have $120k in your SA, you can top up $20k and the govt will match you $20k to help you get to $160k. If you want to put in another $1000 to hit the ceiling you can, but the govt matching grant has hit the cap, so you would put in $21k, and the govt will match your first $20k.

If you are fortunate enough to have more than $161k, and you want to top up, the govt will not match your top up, because you will be alright, and don't need additional help.

To the CPF Advisory Panel:

1A) Do away with mandatory minimum sum. Instead have a Retirement Savings Target (RST) for the Retirement Account (RA) (which, by coincidence, will be equal to the prevailing Minimum Sum, so it will be $161,000 as at July 2015).  At 55, whatever is in the Special Account will be transferred to the Retirement Account (RA) and if the amount exceeds the RST, the excess will first top up the Medisave Account (MA), and if that has also reached the ceiling, then the excess is transferred to the Ordinary Account (OA). And the member can withdraw whatever is in the Ordinary Account. However, the member should be advised as to what the CPF life payout at 65 will be based on the sum in the RA at 55. So if it is less than the RST (e.g. $161k), the CPF Life payout would be less than $1200. The member then has the option of topping up the RA to $161k with his OA, cash, or his/her family members can top up the member's RA.

Why would they do that?

1B) Provide matching grants for members to top up to the RST. Instead of forcing members to top up their retirement accounts, have matching grants for voluntary top-ups from the members (and/or their family members). This way, low income CPF members would be incentivised and encouraged to top up their Retirement Account.

This also allows members to decide what retirement sum they want or need or are willing to sacrifice for. Instead of deciding (and imposing) different minimum sums for different groups of people, this allows the members to decide what is the retirement sum they require.

This also avoids the problem of categorising people according to some arbitrary criteria of need.

The voluntary top-up with matching grant will allow low income (likely the bottom 30th - 40th percentile) to prepare themselves for retirement.

To contain costs, the government's matching grant could be cap at some amount, say, $20,000 per CPF member or when the RST is reached, whichever is sooner. So if a CPF member has $121k at age 55, the member can top up $20k, and the govt will match the $20k. To encourage family support, the family members can also top up the retiring member's RA, and this would also be matched subject to the cap (of $20k from the member's OA, cash, and family top-up).

2) Simplify the names of the accounts. Instead of a Special Account that is transferred to the Retirement Account, have instead a standard Retirement Account from the start. This pays 4% interest (or prevailing interest  according to the CPF act). The Medisave account can remain the Medisave account. The Ordinary Account, could remained, or be renamed the "Savings Account". Or choose some name to make clear to the CPF member that this is THEIR money, and the more they use it (for housing for example), the less they have at 55 to withdraw. ("The 55 Account"?).

3) Streamline and Simplify the Source of the Contributions. Currently, Employers contribute 17% and CPF members contribute 20% (up to age 50). Let the members' contribution ALL go to their Ordinary Account ("55 Acct") because this is THEIR money. The Employer's 17% will go into their Retirement Account and Medisave account, say 9% and 8%. THIS DOES NOT CHANGE  up to age 50 (currently, they do). From 50 to 55 years, the employer's contribution drops to 16%, and contributions should be tilted towards boosting the RA (as in the table below) - at 10% and 6% (or more - 12% & 4%, for example). This would help the member achieve their Retirement Savings Target.

TABLE 1: Suggested contribution rates, amended.

Member’s contrib'n
To Ordinary Acct
Emp'er’s contribution
To Retirement Acct
Emp'er’s contribution
To Medisave Acct
Up to age 50
50 – 55
55 - 60
60 - 65
Above 65

At age 55 (currently), the employer's contribution is further reduced to 12%. At this time more of the contribution could be channeled to medisave (10%).

If the Medisave Account reaches the maximum ceiling, the extra funds will overflow into the Retirement Account. (And vice-versa, though mathematically, this is unlikely.)

At age 55, if there is more than sufficient in both RA & MA to meet the RST and the MA ceiling, the excess can be transferred to the OA for withdrawal as a lump sum.

Considerations for the Government

How much would it cost the government to provide matching grants for top-ups to the RA? Most CPF members should be able to meet the RA target. Based on historical statistics, about half the members are able to meet the minimum sum (or now, RA target). Each year about 50,000 - 60,000 citizens turn 55. If half of these have less than the minimum sum, that is 30,000. If each of them is short by $40,000 and top up to the max with a matching grant of $20k from the govt, it would be 600,000,000. This is a ballpark, high-end estimate. In all likelihood, it would be closer to half of that, say $300m, as not all deficits will be as much as $40k, and not all members would be willing (or able) to top up the full amount.

[Perhaps for the very very low income there should be an additional incentive if the member uses even the $5000 that he is allowed to withdraw to top up the RA, the government should provide a higher matching grant for this $5000 (or part thereof). So if instead of withdrawing $5000, the member draws only $2000 and puts in $3000 to top up the RA, this $3000 could be match 3 for 1 ($9000) instead of just 1 for 1 and this is not counted to the cap ($20,000). ]

I'm assuming that $300m for a $50b govt should not be an issue, but in case it is, this top up could be funded by a simple targeted "payroll" tax.

CPF is capped at the first $5000 of salary. This works out to about $70k annual salary (with 2 months of bonus). Employers of staff who are paid more than $80,000 annually will be required to contribute just $1000 per year for each of this high salary employee. From the IRAS table below, there are about 410,000 tax residents with income over $80k per year. $1000 per person would be $410m, sufficient to fund the matching grant for top-ups scheme.

(On the one hand, Corporate tax is only 17%. But on the other hand, CPF contribution is 17% for the first $5000 per month of every employee. This additional $1000 "tax" for high income earners should not be a major costs especially if the company is paying high income staff. This would also avoid taxing the SMEs who are unlikely to have such high income individuals.)

Or the govt can declare a budget of $410m (or however much funds they have available for the year) for matching top-ups and when this is exhausted for the year, there would be no matching grants. Those who turn 55 in the later part of the year (Oct, Nov and Dec), can indicate their intent to top up early in the year to reserve their share of the $410m. Or the top-up cap can be adjusted depending on the demand.

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 (2013, Individual Income Tax - Taxable Individuals by Income Group)

Update (4 Feb): CPF Review Panel Recommendations.

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