Following the convening of the Electoral Boundaries Review Committee, election fever will no doubt gradually heat up. One hot topic at the heart of elections campaigns, from coffeeshop talks to organised rallies, is our CPF system.
The Reform Party has wasted no time in throwing its first punch – reiterating its plans to return (or at least push for the return of) CPF monies to members at 55 if they are voted.
We have written extensively on the CPF scheme at DollarsAndSense, and while no system is perfect, we generally think the positives outweigh the negatives. We’re not alone either, with the Melbourne Mercer Global Pension Index ranking the CPF as the 7th most comprehensive pension system in the world.
How The CPF Provides Retirement Adequacy For Singaporeans And PRs
In Singapore, there are three main stakeholders in ensuring the retirement adequacy of Singaporeans and PRs.
As employees, we are required to build our own retirement pension by contributing up to 20% of our monthly salary to our CPF accounts. More specifically, our contributions to our Special Account (SA) is set aside for retirement, while our Ordinary Account (OA) and MediSave Account is meant more for other important expenses such as housing and medical respectively.
Employers in Singapore also play an active role in safeguarding Singaporeans and PRs in their retirement, by contributing up to 17% of an employee’s salary to their CPF accounts.
Finally, the government helps grow our retirement nest egg by paying a relatively decent base interest rate of 2.5% per annum (p.a.) on our OA savings and 4.0% p.a. on our SA savings. This ensures that our funds compound through the years, fighting both inflation and increasing standards of living.
What Happens When We Turn 55
Before we go into why we don’t want our CPF returned at 55, we take a look at what actually happens in the CPF system when we turn 55 today.
At 55, our Retirement Account (RA), a fourth CPF account, is opened. Combining our OA and SA balances to form our retirement nest egg, this account definitely does what it’s name suggests.
Any amount in excess of the FRS will be returned to us in cash. Even if we are not able to meet the FRS, we can still withdraw up to $5,000 from our combined CPF savings. We can also choose to go on the Basic Retirement Sum (BRS), by pledging our property, or the Enhanced Retirement Sum (ERS), by not withdrawing excess funds or contributing even more to our RA.
At 55, we also start earning an annual additional extra interest of 1.0% p.a. on the first $30,000 of our CPF savings, which will be channelled to our RA balances.
Why I Don’t Want My CPF Returned When I Turn 55
Going back to the Reform Party’s promise to return our CPF at 55, it may not be the wisest decision we can make, especially at the cusp of our retirement. Here are a few reasons why:
# 1 What Is Our CPF Meant For Then?
After painstakingly contributing a hefty chunk of up to 37% of our salary to our CPF accounts each month over nearly three decades, it makes little sense to put our retirement nest egg at risk by cashing out just as we near retirement.
The obvious question is why contribute in the first place?
# 2 We Are Only Saving The Bare Minimum In CPF After 55
The current system already gives us the flexibility to withdraw anything in excess of the FRS in cash. As it stands, the FRS, on the Standard Plan, only provides a basic level of monthly income in our retirement. This also means we are only locking up the bare minimum in our CPF accounts after 55.
For reference, the FRS today is $176,000. If we opt for the Standard Plan at 65, we will receive a lifelong monthly payout of $1,374 to $1,516 a month. At the lower end, this is in line with a recent study from the Lee Kuan Yew School of Public Policy (LKYSPP) which found that the Minimum Income Standard (MIS) for an elderly single in Singapore is $1,379.
# 3 Help Us Avoid Potential Pitfalls
I can imagine several scenarios where a safety net would be crucial, even if we can make better use of our CPF money in cash. For example, with that extra cash in hand at 55:
# i We may decide that we don’t need to work anymore, only to run out of savings years into our retirement. At that point, we will find it close to impossible to return to meaningful work, as we won’t have up-to-date skills.
# ii We may decide to start a business, or invest in stocks and properties. While our CPF funds enable us to pursue personal fulfilment or higher returns, there is a chance our business or investments may not succeed. This would leave us without a safety-net for our retirement.
# iii We could squander what is meant to be our retirement savings on a world tour, buying a car, living beyond our means or even gambling it away at our integrated resorts, even if we cannot actually afford it.
# 4 We Continue To Earn A Good And Risk-Free Return On Our Savings
Our SA and RA savings are compounded at a rate of 4.0% p.a. Moreover, we also earn an extra additional 1.0% p.a. on the first $30,000 of CPF savings after turning 55. This is the system’s way of boosting our retirement savings once we enter a crucial stage in our lives. This is separate from the 1.0% p.a. additional interest all CPF members already enjoy on the first $60,000 of our CPF savings.
If we get our CPF back at 55, we need to find ways to compound it for our retirement. Achieving a risk-free return of 4.0% can be really difficult to uncover, especially with a shorter investment time-horizon.
# 5 Having A Retirement Safety Net
Cashing out our CPF at 55 would obviously mean that we no longer enjoy CPF LIFE, which starts paying us a lifelong monthly income from 65.
This guarantee of a lifelong monthly income provides a strong retirement safety net that is going to be difficult for us to replicate on our own.
# 6 Protection Against Legal Liabilities
Another thing to consider is that our CPF savings is protected against our legal liabilities. If we have debts that we are unable to pay or become bankrupt, creditors cannot touch our CPF savings. Similarly, even after entering CPF LIFE, creditors will not be able to claw back any of our debt from our CPF LIFE payouts.
If we get to cash out our CPF at 55, we risk having our retirement savings exposed to creditors if we fall into financial trouble or bankruptcy.
But I Still Want My CPF LIFE Payouts When I Turn 65
Today, those in our generation are told that this is how the CPF system functions, with the major milestones for retirement coming at 55 and 65. As good as the CPF system may be, we do not want to see our “goal post” shifted when we are nearing retirement.
With rising life expectancy, increasing retirement and re-employment ages as well as advancements in medicine, there’s no guarantee that these milestones will continue to be unchanged in the next two to three decades.
Even then, I think there are fair reasons to demand that our “goal posts” not be shifted.
# 1 We Are Encouraged To Make Plans Today, So Should The Government
When we speak to financial planners or read CPF-related content, we are constantly told that we need to have a plan for our retirement and work on it as early as possible. If we have planned for retirement at 65, and have adjusted our finances towards a retirement at 65, it would be painful to be told that someone else (i.e. the CPF Board or the government) has determined we cannot.
If we are encouraged to make plans for our retirement today, it’s only fair to ask that the government or CPF Board, or any body that has the ability to shift our “goal posts”, have foresight (rather than being reactionary) in what today’s working class generation should be planning towards for our retirement.
# 2 We Will Be Psychologically Impacted
For those in our 20s, we would planning for our retirement close to four decades in advance. As we work towards these plans, if we are told in our 60s that CPF LIFE will be deferred beyond 65, it’s not hard to see why we may feel wronged.
Whether the government says it’s going to be for our own benefit or not, it’s fair to say that we have been playing by their rules, and they should abide by it. Otherwise, what’s the difference in some of us managing our own money – things may not go to plan either, but that may be no different to how the CPF is being run either.
# 3 Our Earnings Potential Decline Into 60s
According to the Report on the Household Expenditure Survey 2017/18, resident households where the main income earner is 60 and above saw a drastic decline in household income, compared to resident households where the main income earner was between 25 and 59.
This shows that the earnings potential, whether by choice or ability, of those above 60 tends to decline. If we have already planned for a retirement at 65, we will be looking forward to our monthly payouts to supplement our income at a time that our earnings potential dip, regardless of whether life expectancy increases.
Looking To CPF To Guide Our Retirement Plans
While anyone can retire at any point in time, the reality is that CPF locks up a significant chunk of our nest egg, and we need to look to its schemes to guide our retirement plans.
If we are told today to plan towards a retirement at age 65, and to save 37% of our salaries towards this end, it would be unfair for the government to later say that it wasn’t enough or we should have been saving more for a basic retirement at 65.
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