Monday, 28 August 2017

CPF for those who need it (Update)

This is an update of a post from Jan 2015.

Firstly, everyone thinks they can improve the CPF scheme. I am sure you have a grand idea for improving the CPF scheme.

So take this with a grain of salt, and if you think you can improve on these ideas, feel free to suggest tweaks. Or write your own blog and post your own suggestion. You could be the next CPF Blogger!

This update considers changes to the CPF scheme and the CPF Life projections.

And this hopes to address two issues: "CPF is my money", and the original intent of CPF (to finance our retirement).

CPF Contributions and Allocation.

To keep things simple, it is suggested that employee's (your) CPF contribution should ALL go to the Ordinary Account. We shall rename the Ordinary Account as the "Age 55" account. It can be fully withdrawn at age 55. This is also the money you use to pay for your flat before age 55. By calling it the "Age 55" account (or "55A") members will be reminded when they use the money to pay for their flats/property, that they are spending THEIR retirement (or "Age 55") money.

The Employer's contribution (17% up to age 55), will be allocated this way - 10% goes to the Retirement Account/Special Account, while 7% will go to their Medisave Acct. (The actual allocation rates to the Retirement Account, as at May 2017, are 6% up to age 35, 7% up to age 45, and 8% up to age 50, and then 11.5% up to age 55. For Medisave Account, the respective rates are 6%, 6.75%, 7.875%.)

When you are younger, you would not need so much in your MA. But your salary may not be very high, and you may need the medisave for "young people's medical expenses" - like maternity charges. So 7% up to age 55 will help to build up the MA for medical expenses. If you are fortunate to hit the ceiling on the MA, the surplus will flow into the RA.

When the CPF member reaches age 55, the contribution rates falls to 13% each for employer and employee. Up to age 60. Of the 13% contributed by the Employer, 3% will go to the RA, while 10% will now go to the MA.

At 60, the contribution again changes, and now the Employer is contributing more (9%) - 2% goes to the RA, and 7% to the MA. The purpose is to build up the MA. The member's 7.5% like all his contribution, goes to the "55A". Why is it still going to the "55A" after the member turns 55? Good question. Maybe it doesn't make sense anymore to have this contribution, and just reduce the members' contribution to 0% after 55?

Alternatively, have the employees' contribution after 55 go to the MA. Maybe after 55, the member only contributes 5% CPF and all this goes into the MA for medical expenses (such as health insurance, Medishield Life), up to a cap. Once the cap is reached, the contribution is returned to the member.

Finally at age 65 and above, if the member is still employed, the member contributes just 5% (or 0%), and the employer puts 1% to the RA, and 6.5% to the MA.

TABLE 1: Suggested contribution and allocation rates, amended.

Member’s contrib'n
To Ordinary Acct (a.k.a. "55A")
Emp'er’s contribution
To Retirement Acct/ Special Acct
Emp'er’s contribution
To Medisave Acct
Up to age 55
55 - 60
13% (0%)3%10%
60 - 65
7.5% (0%)
Above 65
5% (0%)1%6.5%

Member's contrib'n to 55A after age 55

Member's contrib'n to MA after age 55
55 - 60
10% (0%)
3% (13% total)
60 - 65
2.5% (0%)

5% (12%)
Above 65
0% (0%)
5% (11.5%)
Table 1 above follows the current CPF contribution rate, but tweaks the allocation - employees' contribution ONLY goes to their 55A (until age 55). And Employers' contribution goes only to the RA and MA. After age 55, Member's CPF contribution could maybe be cut to 0%, since they can withdraw their 55A money, or the contribution can be re-allocated partially to MA, since medical costs may be an issue in old age.

Anyway, the point of the above allocation table is to show that the CPF members contribution (what they may call, "my money") goes into the "55A". Which they will be able to withdraw in full when they turn 55.

At 55

At Age 55, the Retirement Account will be used to purchase CPF Life. Whatever sum is in the RA will be used to purchase a CPF Life of that value.

Instead of offering only 3 CPF Life annuity - Basic Retirement Sum, Full Retirement Sum and Enhanced Retirement Sum, CPF Life could be offered in $25k blocks with a minimum starting level of say $75,000 or $100k. Members would be presented with a range of "savings" and the payouts at age 65.

As at 2017, the BRS is $83,000, the FRS is $166,000, and the ERS is $249,000.

If you are not turning 55 in the next 10 years, the various retirement sum is going to be quite a bit higher.

Within the next 10 years

Considering that the FRS was $161k for 2016, that's a $5k increase in just one year. Assuming a straight line projection, in 10 years, the FRS might be $216k!

Can you save $216k by age 55?

Or half that for BRS at $108k?

Here are some projections.

If you earn on average, just $2500 pm throughout your life, your employer will contribute over $100k to your Retirement Account, and with the 4% interest, you would have enough to meet the FRS of $216k. Assuming you are retiring in the next 10 years.

If you earn an average of $2000 throughout your life, you would probably be short of about $30k. Again if you are retiring within the next 10 years.

But this is all within the next 10 years.

Just starting your work life

If you are just starting to work, 55 is about 30 years away. 30 years away at $5000 increase each year for FRS, means that when you are 55, the FRS may well be $150k more. Or about $316k, assuming a straight line projection.

Is this achievable?

Yes, on an average salary of $3500 pm for 35 years or so. Or $4500 pm for 30 years.

According to, a monthly salary of $3000 is just below the median (48.6 percentile) for those in the 25 - 29 age group. That is, more than half of those in the 20 - 29 age group will earn that much.

This may sound iffy, but note that this is the median salary at age 25 - 29. By age 40 - 44, the median salary would be just under $4500. Most people's salary will rise with time, pulling the average salary over 30 - 35 years up. (The $3500 or $4500 pm salary is the average salary over 30 or 35 years. so even if you don't earn $3500 or $4500 at the start of your working life, it may be ok. If your salary rises over time.)

From a news article,
The mean gross monthly salary among fresh graduates who have permanent full-time jobs was higher at $3,515 [in 2016], up from $3,468 in 2015.
(Just to note that that is the mean (average) monthly salary, for "permanent full-time jobs" for fresh graduates just starting their working life. I would have preferred a median income figure (there is one for types of degrees in a table) for graduates as a whole, as the mean could be skewed by extreme outliers. But a mean, assuming a normal distribution, is not too bad an indicator. And this would suggest that most people could meet the CPF Life requirements by 55.)

If employment trend follows the past. For simplicity, let's assume so for many jobs.

So if you start working at around 25 years old, earning a salary of about $3000, and over time your salary goes up as you get promoted, and you advance in your career, or you change jobs as better paying jobs present themselves, and you take advantage of these opportunities, by the time you are 45, your salary should or may be about $4500.

So you should be able to meet or be close to the (projected) FRS of $316k. Let's say your RA balance at 55 is $300k, which would almost be the FRS.

You have a choice. You can either get whatever CPF Life you can get for $300k (i.e. close to the full retirement sum payout of about $1300 in today's dollar), or you can top up the RA with your 55A up to $316k (or whatever the FRS is then - but just for illustration, let's say it is $316k in 30 years).

[Note, this is assuming there is still an FRS, instead of the BRS + multiples of $25k.)

Why should you? Your 55A balance is "YOUR MONEY". You want to use it. You don't want to use $16k of YOUR MONEY for the CPF Life.

But... what if there is matching top-up scheme? The govt will match your Top-Up to the RA. So if you are short by $16k, the govt will match your top-up 1 for 1. So if you top up $8k, the govt matches with an $8k top up and you have the FRS.

Why should the govt do that? Well, if you are well-provided (by CPF Life), you won't fall into hard times and require public assistance at some later stage. $8000 today is better than spending $20k or more on you in the future. (Current Public Assistance rates are $500 for an individual, or $6000 a year. If the $8000 can help the citizen stay off PA for 16 months, it would have broken even for the govt.)

To manage costs, the government's matching grant could be capped at some amount, say, $20,000 per CPF member or when the FRS is reached, whichever is sooner. So if FRS is $316k, and a CPF member has $276k in his RA at age 55, if the CPF member tops up $20k, the govt will match with $20k, and he will be able to meet the FRS sum for a full CPF Life.

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 total from the member's 55A, cash, and family top-up).

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

Yeah, but the govt will never give away free money. How much will this cost the govt?

In the 2015 post, this was also considered.
Based on historical statistics, about half the members are able to meet the minimum sum... 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.
How to fund $300m? Well, our govt's annual budget is more than $60b. $300m is less than 0.5% of the budget. It is not nothing, but it is not exceedingly huge.

How to fund this?

With a payroll tax on high income earners.

Employers are required to contribute 17% CPF for their employees. So for an employee earning $5000, they would contribute $850. And for an employee earning $10,000, they would contribute $1700. Right?


For the employee earning $10,000, they would only contribute $1020. Because CPF contributions are capped at the Ordinary Wage Ceiling of $6000 (since Jan 2016). This means that if the employer had 2 employees paid at $5000 per month, each month they would have to contribute $1700 for these 2 employees. But for the high income employee making $10,000, the employer would only contribute or pay $1020, "saving" about $680. Per month.

What if we "tax" that "savings". A flat payroll tax of say $80 per month for all employees earning more than say... $7000. The Employer would have saved $170 per month for each $1000 above the Ordinary Wage Ceiling. The tax of $80 is less than 50% of the "savings". For employees earning between $6000 and $7000, there would be no "tax".

If you earn $7000 a month, your annual income could be as much as $100,000, depending on bonuses. According to IRAS (download the "Assessable Income of Individuals by Income Type"), there are over 370,000 taxpayers earning more than $100k a year in 2015. An $80 tax would be about $1000 a year. With 370,000 taxpayers, that would be $370m which should be sufficient to fund this top up scheme.

We don't like taxes, and taxes are bad news for businesses. Especially small businesses. But because this "payroll tax" is on high income earners (earning more than $7k a month or more than $100k a year), it is less likely to impact the SMEs. Any impact would also likely to be small.

According to, someone earning $100,000 a year is in the 77th percentile or earning more than 77% of the population in 2015. So only about 23% of employees would be "taxed" and this would be high income earners, but the tax will be on the employers. If an SME is able to pay their staff $100k a year, $1000 a year is just a 1% tax or less.

The very poorest

Now, let's consider the very poorest, those earning less than $20,000 a year. Or less than $1700 a month.

Interestingly, at $1700 a month, after 35 years, there would be about $160k in the RA. This should be enough to get the a CPF Life at the BRS level in 2047, which would pay about $1200 (in 2047 dollars - figures are all simple projections and may not be very accurate).

What about those who earn less than $1700 a month?

Those who earn $1200 a month throughout their working life would have about $110k in their RA at 55. They would be short of the BRS by about $50k.

Perhaps I am out of touch or have no exposure to the other side of Singapore, but I cannot imagine that there will be a lot of people at this level of unskilled labour. I would imagine that someone with some education would be able to get a job that pays about $2500 a month. At 55, these people would have almost $240k.

That would be more than enough for a BRS, though short of the FRS (2047) by about $77k.

These low income earners could top up their RA with their OA/55A if they have any balance.

Or the govt could offer a higher matching grant from these low income workers - say $2 for every $1 topped up by the CPF member, but cap to a value of the member's total lifetime contribution. (This is me being cynical and worrying that a criminal who had a life of crime - been in prison for 20 of his adult years gaining unduly from his life of crime.


1. CPF contributions from the Employees will go into the Ordinary Account, now called the "55A". This is the "members' money" that they can fully withdraw at age 55. This is also the account that they draw down on for purchase of property. By renaming the account the "55A", it serves to remind the members that they are drawing down on "THEIR MONEY" that they are hoping to withdraw at age 55.

2. Contributions from the Employers will be known as "Retirement Money" or "Pension money" or Employment Benefits and goes into the Retirement Account, and the Medisave Account, in varying allocation to reflect the needs of the members at different ages. However, at any time the member can transfer balances from their "55A" account to either the RA or MA. But this transfer is irrevocable and irreversible.

3. At age 55, the "55A" balance may be fully withdrawn by the member. At that time the Balance in the RA will be used to purchase CPF Life for whatever payouts the balance can purchase subject to a minimum (say $100k), and to multiples of... say, $25,000.

4. At that time, if the member so chooses to use his 55A balance or cash savings to top up the CPF Life annuity, the govt will match ($1 for $1) the voluntary top-up up to a cap of say $20,000.

5. It is estimated that more than half of CPF members should be able to meet their CPF Life retirement savings target. This is a top up scheme for the lowest income earners who may not have enough to fund an adequate retirement.

6, The cost of this proposal is not expected to exceed $300m in the foreseeable future. And funds is proposed to be sourced from a "payroll tax" for employees earning more than $100,000 a year. The employer will be "taxed" a flat rate of $1000 a year for every high income employee. This "tax" is expected to draw revenue of over $300m - more than sufficient to fund this scheme for the retirement income for low income earners.

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