Yawning Bread. August 2007

CPF and its creaky assumptions




Ever since Prime Minister Lee Hsien Loong announced changes to rules governing withdrawals from the Central Provident Fund (CPF) in his National Day Rally speech, there has been much talk about the subject. Basically, he announced four broad changes:
  • Annual pay-outs from the Minimum Sum will eventually start from age 67 instead of age 62 currently. This will be phased in over the next decade.
  • The retirement age (currently 62) will be raised to 65, and then new legislation will be enacted to require employers to offer continuing employment, though not necessarily in the same job or on the same terms, to those retiring, for a few years more.
  • The government will throw in a few incentives to pacify people. The CPF will raise the interest rate that it pays, subject to ceilings and conditions. Those who are approaching retirement age and suddenly find themselves affected by postponement of the withdrawal age will receive a Deferment Bonus.
  • For the aged who are in dire need of cash, the Housing and Development Board (HDB) will soon initiate a scheme to buy and lease back the person's flat. This however looks like it will come with many restrictive conditions with the result that few are likely to be able to benefit from this option.

Lee took considerable trouble to explain why the starting age for paying out the CPF Minimum Sum has to be raised to 67. He pointed out that in the 1950s when the CPF was set up, and the retirement age was at 55, life expectancy was not much more than 60. Now, although the retirement age has been raised by 7 years to 62, life expectancy has increased by 20 years to 80. For many people there just isn't enough money in their CPF accounts to cover such a long period of retirement, hence changes have to be made.

Basically, they should retire later, and leave their CPF funds in the CPF for as long as possible. One cannot quarrel with the logic, but the devil, as always, is in the details. Letters and blogs have been written asking why annuities have such poor pay-outs compared to the annual pay-outs by the CPF -- though people don't seem to see the sharp difference between an open-ended annuity and a term-delimited CPF installment plan. Others have queried why the buy-and-leaseback scheme for HDB flats has to be so restrictive.... and so on.

I don't intend to get into the minutiae of any of those things. I hope to look at the bigger picture.


What is CPF?

For the benefit of foreigners, here is some background:

The CPF is not a form of social security. It is nothing more than a compulsory savings scheme. During a person's working life, the law requires employers and employees to transfer about a quarter of the employee's total remuneration into the employee's account with the CPF.

When the person reaches age 55, he can withdraw his savings from the CPF except (a) a Minimum Sum, currently S$99,600, to rise to $120,000 by 2013, and (b) Medisave Required Amount, currently S$11,500, to rise to $25,000 by 2013.

The Medisave Required Amount can be used to offset part of most medical and hospital expenses, whenever incurred.

The Minimum Sum has to be remain frozen - though it earns interest - until age 62 (to rise to 67 in a decade). After that the person an elect to buy a lifetime annuity with it, or choose to receive installment payments from the CPF for the next 20 years until the funds are exhausted.


Provided there is work

I can't recall who said it, but someone pointed out that it's all very well to say, work longer, retire later, but it all depends on whether there is work to be had. He hit the nail on the head.

Passing a law to raise the retirement age to 65 and requiring an employer to offer some kind of job till 67 is only good if you still have a job at 64.

In fact, this question partly explains the hue and cry over the pushing back of the CPF withdrawal age. Many Singaporeans fell out of work in the aftermath of the Asian financial crisis of 1997 and the dotcom bust of 2001. We have plenty of stories of middle managers becoming taxi-drivers overnight. As a result, for many years, they either stopped contributing to their CPF accounts, or if they were lucky enough to find a new job, albeit at a lower salary, they contributed less than before.

There were many caught in those circumstances, as evident from the fact that 10% of Singapore households have no income. Another 50% saw their household incomes fall or stagnate between 2000 and 2005. See the article Income inequality widens markedly.

Ten years on, many of those who were made redundant in their forties, are now in their fifties. To them, it's academic to say, keep working to 65 or 67. If they are not working now, what are they going to do for income until the CPF withdrawal age? Even if they are working, how secure are their jobs? Would their employer try some way to get rid of them before they get too close to 65?

I think it's a truism that generally, it is those who work with their brains who will remain economically valuable into their sixties. Those who do more physical work will be much more insecure since physically, the human body starts to decline from age 40 onwards. Yet, the brain workers tend to earn more. Brawn workers -- from waiters to escalator technicians -- tend to earn less.

Couple this with the fact that the legal retirement age is relatively toothless in an economy that leaves much hiring and firing discretion to employers, what is likely to happen then is that the well-paid have a higher chance of getting an extended working life all the way to 67 or 70, while the less well paid risk being replaced by younger, nimbler workers, or by machines, sometime in their fifties.

CPF assumptions undercut by changing economy

This should therefore draw our attention to the key assumption behind the CPF scheme. It is after all, not social security, but merely a savings scheme. To be an effective social safety net, the unsocial CPF rests on the assumption that just about everybody works, for long enough, and for enough pay to build up a nest egg.

The CPF scheme has no fall-back provision should these assumptions not be met. It will fail to live up to its promise if:

  1. An economy does not have nearly full employment consistently over decades
  2. Even if working, a significant percentage are not employed in the formal sector
  3. Wage differentials between the highest earners and lowest are great.
  4. High inflation sets in.

The first condition I have discussed above. If a significant percentage of the population does not work or cannot find jobs, then the CPF scheme does nothing to mitigate the social distress that results. In short, the effectiveness of CPF is incompatible with structural unemployment.

The second is something we seldom think about, but in fact it's happening before our eyes. As people are laid off from big companies and have to find scraps of casual, part time work, more and more slip out of the formal sector into the informal sector. Contributions to CPF are not made, nor do they save enough on their own to make up for this -- most likely because the casual or part-time jobs don't pay enough.

The third is related to the cost of living. People may be working and contributing, but is what accrues in their CPF accounts still enough to live on for 20 30 years of retirement? The cost of living tends to float up and down with average wages, because labour cost is a significant component of many things or services that we consume. If the bottom section of the population earn very far below average, then they will also be far from being able to afford most things. Forced savings of  30% of their puny wages through the CPF still doesn't buy very much in retirement.

The fourth should also be obvious. Inflation tends to hit savings disproportionately hard. Fortunately, this is not an imminent prospect in Singapore.

But (2) and (3) are very real issues here. Consider too the increasing reliance by the government on consumption taxes, such as the Goods and Services Tax (GST). By their nature, consumption taxes are regressive, hitting the low income disproportionately more than the higher income.

The government is not unaware of the increasing social distress in Singapore. For example, earlier this year, they made Workfare an annual program. Workfare is basically an income supplement for those earning very little. But to qualify, one has to work. The government still takes the view that those who do not work are undeserving, lazy bums. Once again, this shows the extreme reluctance of the government to think beyond the "preserve the work ethic at all cost" principle.

What about 80 year-olds who do not work, and who do not have enough savings?

Workfare is a small step towards compassion, but it is still far from being any kind of social safety net. As Singapore changes into a much more unequal, but long-lived and aging society, tinkering with the CPF may not be enough as the assumptions on which it rests are hollowing out. We may need to begin thinking outside its framework.

Yawning Bread 




28 Aug 2007
Straits Times

Minimum Sum: Figures show many don't meet the mark

Only one-third of Central Provident Fund (CPF) members who turned 62 last year met their Minimum Sum requirement when they reached the age of 55 in 1999.

Manpower Minister Ng Eng Hen said that of the 22,600 CPF members who turned 62, 7,600 - or 34 per cent - were able to meet their Minimum Sum, which in 1999 was set at $60,000. 

The remaining 15,000 members who did not meet the Minimum Sum had a median shortfall of $49,300. 

The Minimum Sum is the amount people must keep in their retirement accounts after withdrawing their CPF at age 55. It is meant to ensure those who live beyond 62 will get monthly payouts for 20 years.

The Minimum Sum will be raised in stages until it hits the target $120,000. The current sum is $99,600. 

Dr Ng also noted that of the 9,700 entitled to draw down their Minimum Sum in the first half of last year, 3,800 - or 39 per cent - delayed doing so by at least one year. 

He gave the statistics in response to Ms Josephine Teo (Bishan-Toa Payoh GRC), who wanted to know the situation in the past five years. 


But the picture looks better for those who work - and thus have active CPF accounts. 

Of the 7,100 such members who reached 62 last year, 3,900 - or 55 per cent - were able to meet their Minimum Sum, said Dr Ng. 

Of the remaining 3,200 members who did not, the median shortfall was $34,500. About 1,700 delayed the draw-down of their Minimum Sum by at least one year





  1. A reader wrote to me in an email: We always assume that the CPF Minimum sum will be raised to $120,000 in 2013.  We need to remember that the $120K will have to be in 2003 dollars, i.e. a further inflation rate will be used to increase that amount when 2013 approaches.  So it could be $150K or $180K for all we know.