It will ensure retirement adequacy amid inflation and rising living standards, says Josephine Teo
Rising living standards and the impact of inflation mean that successive cohorts have to set aside more money in their Central Provident Fund (CPF) Basic Retirement Sums to help ensure they have enough for old age. This is one way the Government tries to ensure retirement adequacy, alongside raising the retirement age and helping people unlock the value of their homes, said Manpower Minister Josephine Teo. Still, the CPF must remain a "live system", and she called for more research by academics to see how to fine-tune the system for emerging needs.
Speaking at the National University of Singapore Faculty of Arts and Social Sciences 90th anniversary gala dinner yesterday, Mrs Teo noted that the CPF Basic Retirement Sum should be regularly adjusted to ensure that payouts remain relevant to members. After setting aside a Basic Retirement Sum at age 55, CPF members receive lifelong monthly payouts that can cover basic living expenses from the time they turn 65.
The Basic Retirement Sum is raised yearly as part of the recommendations made by the CPF Advisory Panel in 2015. The panel recommended that the Basic Retirement Sum be increased by 3 per cent each year for members who turn 55 between 2016 and next year. This rate of adjustment takes into account long-term inflation and increases in standard of living.
The Basic Retirement Sum for a CPF member who turned 55 in 2016 was $80,500, while the Basic Retirement Sum for a member who turned 55 in 2017 was $83,000. The Basic Retirement Sum for a member who turns 55 this year is $88,000. This amount will go up to $90,500 next year.
Mrs Teo said: "One factor affecting retirement adequacy is inflation. When savings and monthly payouts are fixed, their real value erodes over time."
For instance, she brought up the minimum sum - the rough equivalent of the Full Retirement Sum today - which was first introduced in 1987. The sum was set at $30,000 and provided about $300 in monthly payouts for 20 years. "The same payout may have felt all right when the payouts first started, but fast forward to today, that same payout feels inadequate," she noted. She explained that the Government wants to ensure the Basic Retirement Sum is properly set, taking into account the CPF member will get the payouts a decade later.
A member turning 55 in 2020 who sets aside his Basic Retirement Sum of $90,500 will get $740 to $800 in lifelong monthly payouts from age 65 in 2030. She said: "How can we be better assured that the Basic Retirement Sum will produce adequate payouts 10 years down the road, and throughout retirement? How can we ensure that the Basic Retirement Sum is set so that payouts continue to cover basic expenses in the future?" She added: "With rising aspirations, retirement adequacy is not just a matter of meeting basic expenses."
Mrs Teo noted that over the last decade, the proportion of active CPF members who met their Basic Retirement Sum at age 55 has improved, from 38 per cent to 62 per cent. This is even as the Basic Retirement Sum has been gradually raised to keep pace with inflation and improvements in standard of living. The CPF has to evolve to keep pace with changes like increasing longevity, she added. "With people living to 100 or beyond, patterns of working life and retirement will change... More people change careers or re-skill later in life."
She said that over the next decade, CPF contribution rates for older workers will be gradually raised. This was first announced by Prime Minister Lee Hsien Loong during this year's National Day Rally. He had also announced that the retirement and re-employment ages will be raised to 65 and 70 respectively by 2030.
Mrs Teo said: "Progressive CPF interest rates of up to 6 per cent per year benefit all members, especially those with lower balances. We provide tax reliefs to people who top up their own retirement savings or that of their loved ones."
She added that homes can also potentially supplement retirement incomes. For example, people can rent out rooms or the home. The Lease Buyback Scheme and Silver Housing Bonus can help flat owners unlock value from their homes. Singapore has done well, but the system can be constantly improved by planning ahead, she added. "In that sense, the CPF must remain a 'live system', always evolving and ever responsive to emerging needs."
WHAT IS THE CPF BASIC RETIREMENT SUM?
The Central Provident Fund (CPF) Basic Retirement Sum is a minimum sum, set aside at age 55, that will provide CPF members a basic payout for life from the time they turn 65. This is set at $88,000 for this year, and provides a monthly payout of $730 to $790. The Basic Retirement Sum is adjusted yearly to ensure it takes into account the standard of living and inflation.
These monthly payouts are meant to help CPF members to cover their basic living expenses after retirement. The retirement sum increases by around 3 per cent every year for each cohort turning 55 from 2016 to next year, following the Government accepting recommendations made by the CPF Advisory Panel in 2015. The Basic Retirement Sum is made known to members ahead of time so they can plan for retirement.
It is for those who own a property and have a sufficient property charge or choose to pledge their property. Members who do not own a property or do not have sufficient property charge and choose not to pledge their property would need to set aside the Full Retirement Sum, which is double the Basic Retirement Sum. Those who wish to put in more savings to receive higher payouts may choose the Enhanced Retirement Sum, which is triple the basic sum.
Institute of Policy Studies senior research fellow Christopher Gee said that the yearly increase of the Basic Retirement Sum is important: "If you set a standard minimum sum at a certain point in time, it does not take into account inflation. Then you start to fall behind especially when healthcare and long-term care inflation costs go up at a pace that is higher than the general inflation rate. "We want to make sure people have sufficiently provided for their retirement to live a longer life."
Associate Professor Chia Ngee Choon, economist at the National University of Singapore and co-director of the Next Age Institute, said: "The accumulation of savings will depend on the macroeconomic environment and labour market experience. As long as CPF members continue to be employed and are receiving salary increases, they will be able to meet the target. Otherwise, adequacy issues still loom."
Adapted From The Straits Times, Oct 15 2019