Planning for the future with the CPF

Updates to the current CPF rules can help to meet the changing lifestyle and retirement needs of Singaporeans.

With growing concerns over retirement adequacy and the rising cost of living in Singapore, does the Central Provident Fund (CPF) need a refresh to accommodate the population’s changing needs? We speak to Panneer Selvam, EY Asean People Advisory Services — Integrated Mobile Talent Leader on how the CPF scheme could be updated to keep up with the changing landscape. 

Following the COVID-19 pandemic, there have been discussions if the CPF model should be relooked to focus on social security, with some even comparing it with other all-encompassing social security schemes that provide a social safety net. Do you think this comparison is fair and do you see the CPF adjusting towards that style of support?

The CPF is not a social security scheme where the contributions are pooled and redistributed to individuals as needed under government programmes. The CPF is an intentional saving scheme — what you put in; you should receive back with interest.

The intention of focusing on the CPF model as opposed to the social security or welfare model has always been to encourage self-reliance. While there are schemes in place to support social mobility, the emphasis has always been on the individual driving their own success. In the 2020 General Election Debate, Dr. Vivian Balakrishnan said that the best form of welfare is a job and suggested that we should have active government support for personal responsibility, rather than active government support to take over personal responsibility^[1]. This mentality is embodied in the CPF scheme.

The government, however, does play a supporting role to ensure guaranteed returns. At an interest rate of 2.5% per annum on monies in the Ordinary Account (OA) and 4% per annum for monies in the Special Account (SA) for those under 55 years old, this is higher than the average bank interest available. The government has also implemented schemes to incentivise voluntary contributions to CPF. These schemes encourage people to play an active role in building their CPF savings rather than relying on the mandatory contributions. Incentives are reviewed and revised periodically. For example, the CPF top up relief cap will increase from SG$7,000 to SG$8,000 in 2023.

Of course, for all intents and purposes, the monies in the CPF are to be kept until retirement, except under specific circumstances. Many Singaporeans do take advantage of the home ownership scheme, resulting in high levels of home-ownership at 88.9% in 2021^[2].

For those who are younger, or perhaps have a higher risk appetite, there is always the argument that you could potentially obtain a higher rate of return investing on your own. And for those with immediate needs but cannot access their money, this was something highlighted during the COVID-19 pandemic where individuals felt at risk of losing their jobs, with no state unemployment benefits available.

The CPF Board has tried to address some of these concerns with the implementation of the CPF investment scheme. However, it must be said that higher rates of return come with higher risk, and not everyone is willing, or able, to take that risk.

For the average Singaporean, the CPF will be their main support through key life milestones, such as purchasing a home, growing and supporting a family and retiring. As the CPF provides a higher return than a bank, and also requires a percentage of employer contribution, the scheme helps to support the everyday worker to build a safety net of their own that they may not otherwise have been able to achieve.

The CPF contribution rates for individuals aged 55 to 70 are set to increase gradually over the coming years. Do you think the pay-out from CPF is sufficient to prepare for this age group’s upcoming retirement?

The increase in contribution rates for the age group 55 to 70 was announced in 2019, and it directly impacts the disposable income of the individual and the cost of the employer. By increasing both the employee and employer contribution rates, the individual’s overall compensation is actually increased, as the additional contribution from the employer would not otherwise be received.

The increase itself is directly allocated to the SA, which has a higher rate of interest of at least 4%, and can be rolled into the CPF Life scheme to provide a higher monthly pay-out at retirement^[3]. This could be considered a short-term hit for a longer-term pay-out. It is part of a number of updates and changes to the CPF scheme intended to support individuals as life expectancy grows.

The government is also continuously assessing and adjusting the parameters of CPF, taking into account increasing costs of living, economic forecasts and changing social needs. Every two years the CPF will conduct a retirement and health study to identify needs and apply the findings to improve policies and services. For example, the government launched MediShield Life in 2015 to address concerns about access to medical care and CareShield Life was introduced in 2020 to provide financial support in the event that an individual requires long-term care due to disability or chronic conditions. The Workfare Income Supplement was also introduced in 2015 and enhanced in 2022 to help low-income earners build their CPF savings, while also helping to meet immediate cost^[4].

The topic on retirement adequacy and cost of living have drawn significant attention in the media recently. Do you think there is scope for the CPF to meet both conflicting needs, particularly for those in the younger age brackets?

With rising costs, it would be sensible to establish a strong retirement base early, particularly before additional costs associated with having a family and caring for elderly parents come into the place. However, this needs to be balanced with current needs.

The CPF is a savings scheme for retirement purposes, but it can also be used to support current needs, such as home ownership, medical insurance and treatment costs, and tertiary education, subject to meeting stipulated conditions. While we can look at increasing contributions to build the retirement base, how the CPF savings can be used to meet immediate needs should also be considered.

To address retirement adequacy, an increase in CPF contributions is necessary.

Increasing the CPF contribution rates would impact everyone, from low- to high-income bracket, which may be detrimental to low-income earners if the cost of living is rising. It may also result in people putting off certain life milestones, such as pursuing further education, getting married, or purchasing a home, as they feel they do not have the disposable income to support it. In addition, the cost to companies would also increase for all employees.

The alternative could be to increase the wage ceiling.

An increase in the Ordinary Wage (OW) ceiling would only impact those earning over S$6,000 a month, which means those earning less than S$6,000 would not have their disposable income reduced until they have reached a higher earning potential. This allows them to continue to manage their living expenses, however it is important to note that this would also mean that they would not see an increase in their CPF savings until their wages increase.

Historically, the OW cap reflects the salary of individuals in the 80th percentile of income^[5]. In 2011, the OW cap was increased from S$4,500 to S$5,000, followed by a further increase to S$6,000 in 2016. We are now in 2022, six years later — and some may say that an increase in the OW cap is overdue.

In order to address current needs, the CPF can review what the funds can ultimately be used for.

To allow further flexibility, the education scheme could be extended to cover overseas education where costs may otherwise be prohibitive, perhaps for certain areas of study only with a view to build necessary knowledge and skills in the Singapore workforce.

Another option could be a similar loan scheme in the event of unemployment to cover necessities, which could go some way to support individuals without compromising their retirement.

We cannot lose focus that the CPF is an intentional savings scheme intended to ensure the individual can meet their needs when they stop working. While it may be frustrating in the short-term when individuals have limited access to their monies, this is a long-term commitment where current needs must be balanced with future costs. To meet this ultimate goal, how the savings can be used before retirement should be considered carefully.                                       

In your view, should we expect any announcements from the CPF Board or the government in the coming months, or perhaps the next budget?

I would definitely say it is a matter of when, rather than if. The world is still recovering from the ramifications of the COVID-19 pandemic, and there is also a fear of recession and inflation, which may put a pause on any movement at this stage. That said, we cannot be complacent — individuals must keep an eye on the future. If we want to be able to support ourselves throughout our golden years, concessions must be considered in the present.

This In conversation with article features Panneer Selvam, EY Asean People Advisory Services — Integrated Mobile Talent Leader.