Roy Ngerng Yi Ling and Leong Sze Hian
At the IPS Forum on CPF and Retirement Adequacy two weeks ago, the Manpower Minister said that, “So when we talk about shifting goalposts, I would say that it’s not about shifting goalposts, I would say the game has changed. The pension system game has changed.”
The Manpower Minister went on to describe what he considers are the parameters for designing the CPF system:
- Frequency of work
- Contribution rates
- Rates of return
- Draw Down age
- Payout quantum
From what the other speakers had discussed at the forum, other parameters should also be included, indeed so since the a large part of the CPF has now been apportioned for housing (55% of CPF Ordinary Account goes into paying for housing loans) and healthcare (21% of CPF contribution goes into Medisave) as well, and the inflation of these items would need to be taken into account:
- Housing costs
- Healthcare costs
The Manpower Minister also showed the following chart of how the CPF works:
Now, this is a chart that retirement planning advisors commonly show to clients, to explain retirement planning.
Why Didn’t the Government Reveal How Much a Person Needs to Earn in Wages and CPF Interest Rates to Meet the CPF Minimum Sum of $155,000?
But note something that is different between what the government has shown, and what typically retirement planning advisors may show.
There are some things that the government seems to have omitted from showing in the chart:
- How much would a Singaporean be required to save every month to be able to save $155,000 (or the CPF Minimum Sum) after 30 years?
- How much interest should the savings earn every year to accumulate $155,000 after 30 years?
- If the CPF would accumulate $155,000 by age 55, how much would it accumulate by age 65, when the CPF payouts starts?
Without this information, how would Singaporeans know whether we are reasonably earning enough in wages and the CPF interest rates, to be able to save enough to meet the CPF Minimum Sum of $155,000?
A Singaporean Today Would Need to Have at Least $234,500 (or a Quarter of a Million) inside the CPF to Have Enough to Retire On
There is also some very crucial information that the government seems to have omitted from mentioning.
First, not only does a person have to meet the CPF Minimum Sum, before he/she is able to withdraw the any excess monies out, a person would also have to also meet the Medisave Minimum Sum (with effect from 1 January 2013). The Medisave Minimum Sum is $43,500, so in total, a person would need to have at least $198,500 inside the CPF at age 55.
Second, the Manpower Minister had previously revealed earlier last month that, “Among members who turned 55 years old over the past five years and had used CPF monies to purchase HDB flats, an average of 55% of their OA savings had been withdrawn to finance their flats at age 55.” This means that Singaporeans spend a substantial amount of our CPF (or more than an estimated 30% of our CPF) into paying for housing loans. (And for a higher income earner and someone who purchases a private property, they would be using as much as more than an estimated 60% of their CPF to pay for housing loans.)
Now, this $155,000 CPF Minimum Sum is what a Singaporean who started working 30 years ago would have to meet. So, if we assume a couple had bought a HDB flat about 30 years ago, a flat would cost about $25,000 in 1984. If the couple had used the CPF to pay for their housing mortgage, they would have to pay about $36,000 to pay for the housing mortgage. And in order for a person to have the full CPF Minimum Sum of $155,000 in cash for retirement, a person would need to have an additional $36,000 inside the CPF which had been spent for housing.
In total, today, a Singaporean at aged 55 would have to save a minimum of $234,500 ($198,500 + $36,000) inside the CPF, before he/she would be able to withdraw any access funds from the CPF, and be able to have enough for retirement. Note that “enough” refers to the government’s calculation of the CPF Minimum Sum of $155,000 that would let a person receive a monthly payout of about $1,200 from age 65 for life, or what the government estimates as enough for the basic living of a lower-middle income household.
A Singaporean Aged 55 Today Would Need to Have Earned $700 in 1984 to Earn Enough to Retire Today
As such, if we look at this $234,500 that a person would minimally need to save inside the CPF, how much would a person need to earn every month?
This would mean that a Singaporean would need to have earned at least a constant $700* in 1984 at a CPF interest of about 5% every year (averaged out over past 30 years), in order to be able to save $234,500 inside the CPF!
(*Note: For simplicity in illustrating the conceptual issues of our CPF system, salaries have been assumed to be the same throughout, considering that for the last 15 years or so, real wages have hardly grown, CPF contribution rates start to decline from age 50, there is a CPF contribution ceiling, 30 per cent of households spend more than what they earn, job losses and pay cuts, etc.)
In 1984, the median wage would be about $1,300, which means that the majority of Singaporeans should have earned enough over the past 30 years to meet the CPF Minimum Sum today!
In view of the above, it then begs the question – if most Singaporeans should be able to save enough, why is it that the government has revealed that 50% of ‘active’ CPF members would not be able to meet the CPF Minimum Sum, even after pledging their property?
And if we look at how many of ‘all’ Singaporeans who are able to meet the combined Minimum Sums of $198,000 fully in cash, only about 15 per cent, or 1 in 7 Singaporeans who reached 55 last year would be able to do so! How come 85% of Singaporeans won’t be able to save enough? What happened along the way?
Singaporeans Cannot Save Enough to Retire Because of Escalating Housing Prices, Rising Costs and Unemployment
Why is it that the majority of Singaporeans cannot retire, even though it looks like they should be able to! Well, in order to be able to retire with enough, a person would need to be constantly employed for the whole duration of his/her working life and never lose a job.
Also, if someone has upgraded his/her HDB flat (instead of staying in the 1984 $25,000 flat illustrated above) to the highest-priced public housing in the world today, lost his/her job, had substantial pay cuts, became self-employed, failed in business, became home-bound for various reasons, fell sick or had an accident and had to stay home in the long term, etc, then this would have meant depleting or having less CPF savings.
Indeed, the dramatic increases in flat prices have a large part to play in explaining how Singaporeans are not able to save enough today. In fact, between 1981 and 1988, four-room flat prices rose by an average of only 2.5% per year, but between 1988 and 1992, prices increased dramatically by an average of 12% every year!” In fact, since 2008 to last year, resale flat prices have grown by 9.1%, land costs have grown by an even higher 18.2%! But incomes have only grown by 5.3%.
Indeed, in 1999, The Straits Times had reported that Associate Professor Linda Low had said that, “The CPF is slave to so many schemes, it cannot serve all its masters simultaneously.” She also “cited the Government’s decision to allow money in the Special Account to be used to finance mortgages earlier this year as her “greatest disappointment”, (as) implicit in that decision, she notes, was that housing, not retirement, took priority.” And today, we finally see the side-effects of the misplaced priorities.
A Singaporean Aged 25 Today Would Need to Earn $4,000 to Be Able to Earn Enough to Retire in 2044: Majority of Singaporeans Would Not Be Able to Retire
But what if we look at the present cohort of Singaporeans aged 25 who are just starting work?
If we look at how much the CPF Minimum Sum has been growing on average since the mid-1990s, the CPF Minimum Sum would have grown to $365,000 in 30 years’ time in 2044. The Medisave Minimum Sum would have grown to $133,500.
If we assume that a Singaporean couple buys a flat for the average $300,000 price today, they would have to spend about $200,000 each to pay for the mortgage.
So, in total, a person would need to minimally have $698,500 in his/her CPF in 2044 to be able to have enough to retire on!
And if you work backwards, this means that a person would need to earn a starting pay of at least about $4,000 at the current CPF interest rates to be able to have enough to retire!
However, today, more than 60% earn even lesser than $4,000! This means that the majority of Singaporeans today wouldn’t be able to save enough to retire at all!
Did the Government Increase the CPF Minimum Sum, with the Knowledge that the Majority of Singaporeans Won’t Be Able to Meet It?
So, if you really look at it, these are the things that the government hasn’t told you. For the majority of Singaporeans aged 55 today, they simply couldn’t save enough to be able to retire today. For the Singaporeans who expect to reach 55 in 30 years’ time, we are also not being paid enough to be able to retire!
So, the government might create a fanciful chart on how the CPF works and increase the CPF Minimum Sum to $155,000, but this is with the knowing that the majority of Singaporeans wouldn’t be able to meet the CPF Minimum Sum and wouldn’t be able to save enough to retire anyway!
Which begs the question which we have asked repeatedly – why did the government create and increase a CPF Minimum Sum, knowing full well that Singaporeans wouldn’t be able to save enough to meet this minimum sum?
Roy Ngerng: Will the Government Increase Wages and the CPF Interest Rates, and Moderate Housing Prices, to Grow Our CPF?
Minister, you have also pointed out that the parameters for the CPF’s accumulation is the frequency of work wages, contribution rates, rates of returns, withdrawals, Draw Down age and payout quantum.
Thus far, the government has increased the CPF contribution rates and asked Singaporeans to work longer to increase the Draw Down age.
However, at a time where wages and the CPF interest rates have grown much slower than the CPF Minimum Sum and where the National Development Minister Khaw Boon Wah had admitted that the government controls the construction program and the prices of HDB flats, will the government consider:
- Implementing a minimum wage and increase wages in tandem with the CPF Minimum Sum?
- Increase the CPF interest rates in tandem with the CPF Minimum Sum?
- Moderate housing prices
to ensure that Singaporeans will be able to truly accumulate wealth in our CPF?
However, these questions were arguably, not answered.
(1) Will Singaporeans Be Able to Save More in the CPF if We Do Not Pay for Land Costs for the HDB Flats?
But let’s just look at these for a moment.
Now, today, for HDB flat prices, land costs take up as much as 60% of prices (Note: However, the Managing Director of Building Technology and City Management, Surbana International Consultants Pte Ltd, had highlighted in his presentation at a World Bank Anchor City Innovations Seminar Series in Washington, D.C. on 7 October 2010, that, “Land Cost (is) not factored into the Sale Price of (an) Apartment (HDB)”). What if Singaporeans pay only for the construction costs, and not for the land since we do not own the land and also, since after the lease of 99 years, the flats would be reduced to having zero value and would be returned to the HDB? This would mean that a person would only need to pay about $80,000 for housing, and not the $200,000 that we would need to pay.
This would reduce what a person needs to save inside the CPF to $578,500.
(2) Will Singaporeans Be Able to Meet the CPF Minimum Sum if the CPF Minimum Sum Did Not Increase at Such an Extravagant Rate?
Then, what if the CPF and Medisave Minimum Sum did not increase as dramatically as they have today? What if they had only increased as fast as the average inflation rate of 3%?
If so, the CPF and Medisave Minimum Sum might be only grow to a total of $400,000. And when including for what a person would need to spend for housing, a person would need to save only $480,000.
(3) Will Singaporeans Be Able to Save More in the CPF if the CPF Interest Rates are Increased?
But finally, what if we the CPF interest rates are increased? Currently, Singaporeans only earn a 2.5% to 4% interest rate on our CPF (and additional 1% on the first $60,000). The average pension return among developed countries is around 6%.
If the CPF interest rates are increased to 6%, Singaporeans would be able to grow the CPF at a much faster rate, which also means that a Singaporean would need to only earn a starting pay of $1,500 and be able to save enough inside the CPF.
And this is actually quite doable!
Singaporeans Would Be Able to Save Enough to Retire If There is a Minimum Wage of $1,500, the CPF Interest Rates are Increased to 6% and Housing Prices are Pegged to Construction Costs
Thus Roy Ngerng had asked the Manpower Minister if the government could increase wages and the CPF interest rates in tandem with the CPF Minimum Sum and to moderate housing prices, in order to enable Singaporeans to be able to retire.
And indeed, when we look at the exercise that we had just gone through, Indeed, if we are able to:
- Implement a minimum wage of at least $1,500 (currently more than 110,000 residents work full-time for less than $1,000, about 400,000 work full and part-time for less than $1,200 and about 600,000 work full-time and part-time for less than $1,500)
- Increase the CPF interest rates to 6%
- Reduce the rate of increase of the CPF Minimum Sum to inflation level
- Remove land costs from HDB flat prices
then it does look like we have a plan!
We do have a solution to ensuring that Singaporeans would be able to retire adequately!
The majority of Singaporeans would be able to save enough in the CPF and be able to retire!
What the Government is Only Willing to Do Now to “Grow” the CPF
Thus far, among the parameters brought up by the Manpower Minister (as highlighted earlier in this article), the government has only been willing to do the following to “grow” the CPF:
- Increase the frequency of work: ask Singaporeans to work longer (Singaporeans already work the longest work week hours in the world)
- Increase the CPF Contribution Rates: Ask Singaporeans to pay more from our wages into CPF – 37%
- Increase the Draw Down age to 65: Retirement age may be increased to 67
- Reduce the withdrawal amount: Lengthen the CPF withdrawal period to for life
- Reduce the payout quantum: Reduce CPF payouts to be paid over a longer period
But the government has not been willing to take bolder action on the larger reforms required to enable Singaporeans to save enough in the CPF.
One reason could be that increasing wages, the CPF interest rates and removing land costs from HDB flat prices seem to be bigger ticket items, whereas the current “solutions” by the government involve only tweaks to the system.
Why the Government Would Take Some Actions to “Grow” the CPF But Not Others?
But here’s another way to look at it.
If you look at the different parameters highlighted in this article, you can broadly categorise them into two groups.
Group A: Real Ways to Grow the CPF by Injecting Funds into CPF – To be truly able to grow the CPF, the government should take the following actions, because this will allow the CPF to actually grow, through a stronger external injection of funds, or by reducing the usage of funds for non-retirement related purposes:
- Increase wages
- Increase the CPF interest rates
- Reduce housing prices
Group B: Grow the CPF by Extending Duration of Labour and Extracting More from Wages – The following actions would enable more CPF to accumulate by asking a worker to work longer, and extracting more of his/her wage into CPF. But note what else it does – it allows the CPF to “grow” without additional fund injection from the government but places the burden on the worker instead (note: the government currently does not spend any money on our CPF system, as essentially all the contributions are made by the people, and contributions exceed withdrawals every year by a wide margin:
- Increase the CPF contribution rates (again on stagnating real wages and CPF interest rates)
- Increase the frequency of work by asking Singaporeans to work longer (while still paying stagnating real wages and CPF interest rates)
- Increase the retirement age
Group C: “Grow” the CPF by Slowing-down Outflow of CPF – Finally, the following actions would prevent the extraction of retirement funds by Singaporeans, thereby delaying the withdrawal rate and thus allowing the CPF to be depleted slower. But these actions do not actually grow the CPF, instead they only slowdown the outflow of the CPF. Again, note what else it does – it allows more of our CPF monies to be stuck inside the CPF, which can be used at the government’s disposal (such as for investment in the GIC – with the excess returns kept by the government and never returned to CPF members):
- Increase the CPF and Medisave Minimum Sum
- Increase the years for withdrawals
- Reduce the payout quantum
Now, of Groups A, B and C, which actions have the government taken?
It is clear that the government has only been willing to adopt actions in Groups B and C but has failed to address Group A actions. And in doing so, it is clear that the government would rather shift the burden towards Singaporeans to grow the CPF by extending our labour years, instead of the government taking on the responsibility by actually injecting at least some funds (instead of spending nothing on the CPF system) or increasing the CPF interest rates.
But more importantly, the government’s actions in Group C is what may be most unacceptable.
Perhaps the following will give you a clearer picture. Since the mid-1990s, the government has kept increasing the CPF Minimum Sum, knowing full well that the average net CPF balance that Singaporeans have would never be enough to meet the CPF Minimum Sum! In fact, it has only become more and more difficult for Singaporeans.
Once you are able to understand this, you will understand why the government has adopted only several measures to “grow” the CPF, but not other more effective ones (of increasing wages and the CPF interest rates). The current measures – most importantly, Group C actions – prevent the government from having to spend some money or increase CPF interest rates to grow Singaporeans’ CPF and shifts the burden onto Singaporeans by forcing Singaporeans to work longer and to part with more of their wages into CPF, while keeping their CPF stuck inside for longer and longer periods.
And not only that, the CPF that gets stuck enables the government to have a ready pool of CPF that is kept aside for their investments (in the GIC).
A truly effective solution would be to increase wages and the CPF interest rates, and reduce housing prices, to allow Singaporeans’ CPF to actually grow. But this policy does not seem to be in the sights of the government. Why would the government not be interested in doing this, when this is the clearest solution to the growing of the CPF monies?
Why would the government instead keep increasing the CPF Minimum Sum, knowing full well that the CPF monies wouldn’t be able to grow and catch up with the minimum sum? Why is the government doing this to keep our CPF stuck inside? For what?
The Solutions to Grow Singaporeans’ CPF are Clear But is There Political Will to Do It?
So, you see, the solutions are there. We have worked it out for you step-by-step:
- Increase wages and implement a minimum wage
- Increase CPF interest rates
- Peg housing prices gradually to construction costs
These solutions would have the immediate effect of ensuring that Singaporeans would be able to save enough to retire. The current piecemeal measures do not allow the CPF to grow with sufficient efficacy.
Again, as we have said many times, the question isn’t about whether there are solutions, but whether there is political will to do it.
There is a glaring problem when the government’s so-called solutions are aimed at increasing the money they can get hold off by keeping the CPF stuck inside, but not by actually growing the wealth of Singaporeans to enable Singaporeans to save enough to retire.
When that happens, you have to question the government.
Indeed, it is outrageous that the government would not consider solutions to actually increase our CPF monies itself, but would instead increase the CPF Minimum Sum, which forces more of our CPF monies to be “trapped” inside.
3rd Edition Of The #ReturnOurCPF Event: Why Singaporeans Cannot Retire Because Of The HDB
It is time Singaporeans stop taking this sitting down. The solutions are there, and in the government doesn’t have the integrity to act on these solutions, then it is time we show them we mean business.
On 9 August, there will be a National Day Protest, and on 23 August, there will be the third edition of the #ReturnOurCPF event. In the first edition on June 7, it was revealed to you many facts that the government has finally admitted to – how they are using our CPF to invest in the GIC. In the second edition on 12 July, we exposed further facts about the estimated number of Singaporeans who were not able to meet the CPF Minimum Sum.
Join us at the third edition as we reveal even more glaring facts about how our CPF is being used by the HDB and for housing, and find out why Singaporeans are not able to retire adequately, because of the HDB. We cannot let up on this fight for answers and for transparency. Our lives are being held in a sense, at hostage, by the government’s lack of transparency and accountability. We must continue to fight for answers, in order to allow our lives to be protected.
You can join the Facebook event page here.
Also, Roy Ngerng’s first court hearing will be held on 18 September 2014, at 10.00am. It will be a full-day hearing.