CPF

I have been avoiding starting this page because it will be a lot of work maintaining it.

In fact, someone should start a blog on just the CPF. It will consume your life. Or your life savings if you are an idiot who makes unfounded defamatory statements.

Oh yeah. Been there. Been sued.

Maybe I can start a blog on CPF when I retire. The "Advisory" will read, "Full disclosure: This blog is financed by my CPF savings."

So because of the MASSIVE impact of the CPF in our lives, and the extensive use of CPF for various aspects and stages of our lives, and the constant tweaking of policies, this page will almost certainly NEVER be up-to-date.

So be warned. Don't expect to learn anything current from this page. Always check with the CPF website. Information here may be outdated.

And because of the aforementioned extensive use of CPF, there are probably many policies and criteria that I am unaware of. For example, I do not use CPF for investment so I have no knowledge as to how to do that. My best advice is this (link). So this page will be concerned mainly with the original intent of the CPF, which is retirement savings and planning. Other policies if mentioned will be in relation to its impact (intended or not) upon the main purpose of the CPF.

This page is by no means, intended to be a comprehensive and exhaustive examination or critique of the CPF system and scheme.

Critique the CPF scheme? I barely understand it!


First, a Brief History of the CPF.

In Point form, the Timeline (adapted from the above link).


1 Jul 1955 : CPF implemented with 5% from employee, and 5% from employer
1 Jun 1957 : Members required to nominate beneficiaries for their CPF savings.
1 Sep 1968 : Public Housing Scheme introduced. CPF allowed to be use to purchase flats directly from HDB. Contribution raised to 13% (up from 10%)

1970: Contribution rate raised to 16%  (8%, 8%?)
1971: Contribution rate raised to 20%  (10%, 10%?)
1 Mar 1972 : Pensionable government officers join the CPF scheme. Contribution rate raised to 24%  (12%, 12%?)
1973: Contribution rate raised to 26%  (13%, 13%?)
1974: Contribution rate raised to 30%  (15%, 15%?)
1 Jul 1977 : Special Account created. Contribution rate raised to 31% 
1978: Contribution rate raised to 33%  
1979: Contribution rate raised to 37%  
1980: Contribution rate raised to 38.5%  
1 Jun 1981 : Residential Properties Scheme, which allows members to use their CPF savings to buy private homes, was introduced.
1 Jan 1982 : Home Protection Insurance Scheme (HPIS) introduced.
1 Apr 1984 : Medisave Scheme/Account introduced.
1 Jul 1984 : CPF contribution rate reached its peak at 50 percent (25 percent from employer and 25 percent from employee).
1 Mar 1986 : CPF began paying market-based interest rates.
1 May 1986 : Approved Investment Scheme (AIS) introduced. Members are allowed to use up to 40 percent of their CPF savings to buy gold, shares, unit trusts and stocks.
1 Jan 1987 : Minimum Sum scheme introduced at S$30,000.
14 May 1989 : Dependants’ Protection Insurance Scheme (DIPS), which is a term-life insurance covering members in the event of death or permanent disability, was introduced.
1 Jun 1989 : CPF Education Scheme introduced. Members are allowed to draw on their CPF savings to finance tertiary education in Singapore for themselves or their children.
1 Jul 1990 : MediShield Scheme introduced.
1 Jul 1992 : Medisave Scheme extended to the self-employed.

1 Mar 1993 : The Share Ownership Top-Up Scheme (SOTUS) was set up to help CPF members buy shares in government-owned companies.
1 Oct 1993 : The Basic Investment Scheme (BIS) and the Enhanced Investment Scheme (EIS) were introduced to replace the Approved Investment Scheme. Members are allowed to set aside a higher portion of their CPF savings (80 percent) for approved investments.
1 Jan 1997 : The Basic Investment Scheme (BIS) and the Enhanced Investment Scheme (EIS) were merged to form the CPF Investment Scheme (CPFIS).
1 Jan 1999 : Members are allowed to use Special Account savings to help meet their housing installment shortfalls.
1 Jul 2003: Minimum Sum (see below) remains at $80,000 for CPF members turning 55 after 1 Jul 2003 but will rise over the years. See table below.

1 Jan 2004 CPF members who turn 55 and are able to meet the CPF Minimum Sum are required to set aside a Required Amount in their Medisave Account when they make CPF withdrawals.
19 Jul 2005 : Cash payment for private residential properties lowered from 10% to 5%. CPF may be used to top up the 5% deposit. Cash deposit payments for HDB flats also set at 5% (from 1 Jan 2006).
1 Jul 2006 : Contributions to the Medisave Account which are in excess of the Medisave Contribution Ceiling are automatically transferred to members’ Ordinary Accounts.
1 Jan 2007 : The cap on the CPF withdrawal limit for the purchase of private residential properties and HDB flats financed with bank loans was reduced.
1 Jan 2008 : The CPF Board began paying an extra interest rate of 1 percent per annum on the first S$60,000 in the combined accounts of each CPF member.

1 Jan 2009 : 50% Withdrawal rule starts to be phased out. Previously, a member turning 55 is able to withdraw at least 50% of his combined OA and SA. As at 1 Jan 2009, the percentages is reduced to 40%, and then 30% in 2010, 20% in 2011, 10% in 2012, and as at Jan 2013, only the first $5,000 can be withdrawn without condition. After which the available balance is required to meet the minimum sum, and if it meets and exceed the minimum sum, the excess can be withdrawn.
1 Sep 2009 : CPF Life introduced. Members who turn 55 automatically enrolled from 2013
1 Jul 2010 : First $40,000 of members’ Special Account balances are not allowed to be used for investments.

Jul 2015: CPF Minimum Sum reaches $161,000
1 Jan 2016: Basic Healthcare Sum replaces Medisave Minimum Sum
1 Jan 2017: CPF Minimum Sum reaches $166,000

Colour Coding. Red are for policies/changes relating to the purchase of property, Blue are policies/changes relating to Medical care, and Purple/violet(?) are for policies/changes relating to the Minimum sum.


What is the CPF?
From this  article, a concise summary:

A DEFINED contribution (DC) plan - like the CPF, the 401(k) programme in the United States and Australia's Superannuation scheme - is one in which the employee, along with the employer in many cases, make contributions to an employee's individual retirement account on a monthly and tax-advantaged basis.

In a defined benefit (DB) plan, the sponsor promises to provide the retiree with a pension income, which is usually a function of her salary, tenure of service and so on.
The CPF savings scheme, along with CPF Life, an annuity plan with a clear schedule of benefits, is almost a hybrid of the two plans. But that is where the similarities end.

In America, many DB plans are going broke or are grossly underfunded, which means they are making promises to future retirees that they cannot keep.

As a consequence, the trend around the world is for systems to move towards a CPF-like, hybrid DC/DB retirement savings system - that is, with fully-funded individual accounts that cumulate over one's working years, with some (but not a large) amount of investment and withdrawal flexibility, and that converts to a life annuity upon retirement.

The beauty of the CPF system is that it has been practising this for many years, with savings rates of up to 5 per cent per annum. There is also the recent CPF Life annuity scheme, both fully-guaranteed by the Government. There is an employer-matching and tax-advantaged supplementary retirement scheme to boot.

The CPF offers 3.5 per cent interest for the first $20,000 of Ordinary Account savings, and 2.5 per cent for sums above that in the OA. It gives 5 per cent on the first $40,000 of balances in the Special, Medisave and Retirement Accounts (SMRA) and 4 per cent for sums above that in the SMRA.

What's the problem?

The main problem is that over time the "agreement" with CPF has changed. In the early years, the deal was that at 55, the CPF member could withdraw everything from their CPF accounts. Then,
Just over 30 years ago, when a straight-talking Cabinet minister by the name of Howe Yoon Chong set out the rationale for raising the CPF withdrawal age from 55 to 60, it provoked such anger and took such a toll on the People's Action Party (PAP) at the 1984 polls that his report was shelved.
Instead, three years later, in 1987, the Government introduced the CPF Minimum Sum scheme. (From this Article)
The minimum sum was introduced in 1987 and members could withdraw just 50% of their savings as one lump sum, then the rest had to go towards the minimum sum, and then after satisfying the minimum sum requirement, the member could withdraw the rest.

From 2009, the 50% withdrawal rule was phased out until by 2013,CPF members at 55 was only assured of withdrawing the first $5000 from their Ordinary Account (OA), and the rest after satisfying the Minimum Sum (MS).

At the same time the MS rose from $80,000 in 2003 to $155,000 in 2014 (and will be $166,000 from Jan 2017).

This meant that the anticipated lump sum withdrawal at 55 dwindled farther away from the average (and below average) CPF member.

The percentage of members who could meet the minimum sum fell between 1996 and 2006 from 57.1% to 36.4% because of the increase in the MS (from $40,000 to $94,600).

Note that the 50% withdrawal rule was still in effect, so although only 36.4% could meet the MS, all CPF members turning 55 could withdraw at least 50% of their funds.

However, from 2009 onwards and by 2013, though more could meet the MS (because they could not withdraw 50% of their account first), more CPF members were unhappy.

Lump-sum withdrawals at retirement would be sub-optimal irrespective of your religion, race, nationality and education level.

To a certain extent, financial theory and anecdotal evidence in the United States suggest that the temptation is to spend lump sums, especially if one is cash-strapped, not realising there may be too little left for one's retirement needs until it is too late.


The Minimum Sum

The Minimum Sum (MS) was established in 1987 requiring CPF members reaching 55 to set aside a sum of money $30,000 then for their basic retirement needs.

Previously, on reaching 55, the CPF member would be entitled to withdraw all their CPF funds. CPF members did not always use their CPF savings wisely.

While many were prudent with their funds, there were also many who, unused to their temporary "wealth", squandered or otherwise lost their savings.

With the introduction of the MS, CPF members were required to keep a minimum sum with the CPF at 55. This was to be used to buy life annuity from a participating insurance company, placed with a participating bank or left in the Retirement Account with the CPF Board. After reaching the drawdown age (62, or 65), the member will then get a monthly payout.

Between 1987 and 2003, the MS was raised from $30,000 to $80,000

FromFull MS in RACash Minimum
1 Jan 1987$30,000-
1 April 1989$30,900-
1 April 1990$31,600-
1 April 1991$32,700-
1 April 1992$33,800-
1 April 1993 $34,600-
1 April 1994$35,400-
1 July 1995$40,000$4,000
1 July1996$45,000$8,000
1 July1997$50,000$12,000
1 July 1998$55,000$16,000
1 July 1999$60,000$20,000
1 July 2000$65,000$25,000
1 July 2001$70,000$30,000
1 July 2002$75,000$35,000
1 July 2003$80,000$40,000



 From 1995, part of the minimum sum had to be in cash, but the rest could be covered by a property pledge.


In 2003, the MS reviewed and the plan was that it be raised gradually until it reaches $120,000 (in 2003 dollars) in 2015. The MS is adjusted yearly for inflation (see third column).

55th birthday on or after
MS
(in 2003 dollars)
MS
(after adjustment for inflation)
1 July 2003
$80,000
$80,000
1 July 2004
$84,000
$84,500
1 July 2005
$88,000
$90,000
1 July 2006
$92,000
$94,600
1 July 2007
$96,000
$99,600
1 July 2008
$100,000
$106,000
1 July 2009
$104,000
$117,000
1 July 2010
$108,000
$123,000
1 July 2011
$112,000
$131,000
1 July 2012
$113,000
$139,000
1 July 2013
$115,000
$148,000
1 July 2014
$117,500
$155,000
1 July 2015
$120,000
$161,000
1 Jan 2017
$122,500?
$166,000

[This puts paid to the suggestion that the MS was truncated to 2015 because of public protest and the PAP's fear of a public backlash.]

How the CPF works

Or, "how is the CPF able to give 2.5%, and 4% interest." This is a summary of how it is done:

1 CPF members (and their employers) contribute to the CPF.


2 The CPFB buys Special Singapore Government Securities (SSGS) - basically govt bonds from the Singapore Government - with the CPF member's money. These bonds are special in that they are only issued to the CPF board, so the number of bonds issued are only as much as the CPF Board are willing and able to buy. The SSGS are also not listed and not trade-able.  That is, no one else can buy the bonds, and the CPFB cannot sell the SSGS (except back to the SG government).

(Side question: So the govt "borrows" money from the CPF. So they can spend our money! How do we know they have not spent all the money frivolously?
"No CPF monies go towards government spending. Government borrowings, whether via SGS or SSGS, cannot be used to fund expenditures. Under the reserves protection framework enacted in 1990 in the Constitution and the Government Securities Act (enacted in 1992), the monies raised from government borrowings cannot be spent."
Persistent Side Question: Just because it's not allowed doesn't mean it's NOT DONE. After all, 1MDB is not supposed to be use for Najib's corruption.  So how can we be assured that our CPF money is all safe?

Answer
1) Because of Audits. 
2) Because financial analysts are watching and looking for weaknesses and lies, and fraud just to take advantage of them and if they suspect that SG is being mismanaged and figures are being doctored, they will bet against the SG govt. That said, not all financial analysts are made equal. Some are idiots. Some look at SG govt bonds, compared the value against our GDP and scream that SG govt is going to collapse because our loans are 100% of our GDP (or something) and that means the SG finances are weak. Not realising that the SG Govt is borrowing money from CPF in order to invest so that CPF members could get 2.5% and 4% interest on their account.
3) Because our accounts are transparent. Figures for revenue (from taxes, fees and charges) can be tracked and verified. As can figures for expenses. If govt expenditure is higher than revenue, then there should be a deficit. If borrowed money is being used, it would be obvious.
4) Because we are an open economy. If there are any credible suspicions about our financial position, it would be reflected in our foreign exchange rate, our credit rating, interests rates, and negative news reports. )

3 The SSGS provides a coupon rate that allows the CPFB to pay 2.5% and 4% on OA and SA & MA funds.

4 The proceeds from the sale of the SSGS are then transferred to the GIC, together with other govt funds - budget surplus, revenue from land sales, etc - for GIC to invest. As a result of the pooling of the funds, GIC is able to invest with different risks and returns and generate a reasonably high return for the SG govt to pay the SSGS coupon rate.

The interest rates are set by law, and there is a "floor rate" for OA (2.5%) and SA/MA (4%). 


Making CPF Work better for members (A proposal)

1. CPF contributions from the Employees (Members) will go into the Ordinary Account. 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. The OA could be called the "55 Account" (or "55A"). This will 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 "Pension money" and goes into the Retirement Account and the Medisave Account. Allocation rates will vary as the member ages to reflect the needs of the members at different ages (see table below). However, at any time the member can transfer balances from their "55A" account to either the RA or MA. But this transfer is "one way". They cannot transfer back. Why would they do this? For higher interests.


Suggested contribution and allocation rates.

Age
Member’s contrib'n
To Ordinary Acct (a.k.a. "55A")
Emp'er’s contribution
To Retirement Acct
Emp'er’s contribution
To Medisave Acct
Up to age 55
20%
10%
7%
55 - 60
13% 3%10%
60 - 65
7.5%
2%7%
Above 65
5% 1%6.5%

 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 can be "upgraded" in multiples of say, $25,000.

4. At that time, if the member with less than a Targeted Sum (say $120k, previously known as the Minimum Sum) in his RA, chooses to top up his RA to boost the CPF Life annuity, the govt will match ($1 for $1) the voluntary top-up up to a cap of say $20,000, and not exceeding the Targeted Sum.

Say the member only as $80k in his SA/RA. And more than $20k in his OA. He decides to transfer $20k to top up his SA/RA at age 55. The govt will match his top-up dollar for dollar up to $20k or the Target Sum ($120k). So he has $80k in his SA/RA, he tops up $20k, and the govt match his top up with $20k. Total in his SA/RA will be $120k. So at age 65, CPF Life will pay out (say) $1000 a month
5. It is estimated that more than half of CPF members should be able to meet this Targeted Sum. This top up scheme is for the lowest income earners who may not have enough (less than $120,000) to fund an adequate retirement. The estimated monthly payout (at age 65) for an RA of $120k at age 55 would be about $1000 (2017 estimate).

6, The cost of this proposal (govt top-up of RA/CPF Life) is not expected to exceed $300m in the foreseeable future. And funds is proposed to be sourced from a "payroll tax" for every employee earning more than $100,000 a year. The employer will be "taxed" a flat rate of $1000 a year for these high income employee. This "tax" is expected to draw revenue of $300m - more than sufficient to fund this scheme for the retirement income for low income earners.
See Table below.


Tax-payer by income. 
Figures in red are tax-payers earning more than $100,000 a year. There will be a payroll tax on these employees to be paid by their Employers. There are about 300,000 of them. At $1000 (flat rate) for these 300,000 employees, the revenue will be $300m. Which would be sufficient to fund the CPF Top-Up for members with insufficient RA savings.

Assessed Income Group
Number of Taxpayers
S$
Tax Resident
Non-Tax Resident



20,000 & below
-
19,907
20,001 - 25,000
66,410
1,705
25,001 - 30,000
121,292
1,334
30,001 - 40,000
270,703
1,837
40,001 - 50,000
207,250
1,180
50,001 - 60,000
148,420
844
60,001 - 70,000
107,135
576
70,001 - 80,000
79,742
411
80,001 - 100,000
108,754
555
100,001 - 150,000
140,914
618
150,001 - 200,000
61,029
246
200,001 - 300,000
53,623
186
300,001 - 400,000
22,535
58
400,001 - 500,000
10,639
25
500,001 - 1,000,000
13,714
33
1,000,001 & above
4,231
32



Total
1,416,391
29,547
Source: IRAS (2013, Individual Income Tax - Taxable Individuals by Income Group)

From an updated post in August 2017:

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?
Wrong.  
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 Salary.sg, 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.

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