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CPF under review to better buffer against inflation: Manpower Minister

The Government is also reviewing how the CPF Minimum Sum is being calculated.

SINGAPORE:  The Government is looking at how it calculates the Central Provident Fund (CPF) Minimum Sum figure, and the amount by which it should go up every year, based on inflation, said Manpower Minister Tan Chuan-Jin on Tuesday (July 22) at a forum organised by the Institute of Policy Studies to discuss impending changes to strengthen the CPF system.

When the CPF system was introduced in 1955, the retirement age was 55. Life expectancy then, was between 60 and 62. Today, for those turning 65, one in two will live beyond 85, and one in three will live beyond 90. 

"What happens if you are that one in three? What happens if you are that one in two?,” said Mr Tan. “So when we talk about shifting goal posts, I would say it is actually not about shifting goal posts. I think the game has changed, it is the same game but the rules have changed. The playing pitch has enlarged in very significant ways, the game is played slightly differently."

The Minimum Sum provides for a basic level of retirement payout. As people live longer, the Minimum Sum goes up too, to ensure adequate payouts. Currently, the Minimum Sum stands at S$155,000, after adjusting for inflation, for those who turn 55 in July. How the sum will be calculated beyond that is being reviewed.

The CPF Minimum Sum is pegged to the Consumer Price Index, a measure of inflation. This rate includes imputed rent, which is what home owners would pay if they were renting their homes. This component may be done away with.

“I think it's a fair point, in terms of computing our inflation rate, one of the things we are looking at is imputed rents, it's something that perhaps we may want to consider not including it,” said Mr Tan. “I think, increasingly, we are looking at disaggregating some of that figure because it may have a different impact on the different things that we are doing." 

Ensuring that CPF returns keep up with inflation is another area the Government is studying. Currently, CPF savings across the various accounts earn interest of between 2.5 and 5 per cent. "Some of these, apart from returns on your savings in your CPF, is also meant to address some of the concerns of inflation. But it is a valid concern and it is one of the areas we are looking at and exploring how best to address some of these concerns for the long term and that is something we will be making some announcements on," said the minister. 

One forum participant suggested that adjustments to life expectancy be automatically built into the CPF system - much like what is already practiced in Sweden. Said Mr Donald Low, Senior Fellow at the Lee Kuan Yew School of Public Policy: "Certainly in today's context if the Government were to announce that it has plans to raise the CPF withdrawal age, it will be extremely politically controversial. But if you look at the successful pension reforms that some of the European countries have undertaken, the trick was somehow to insulate it from populist and political pressure. The country I know best is the Sweden pension reforms, and the series of reforms that they started undertaking from around the mid-1990s onwards were essentially designed to make adjustments to the pension system automatic. And to insulate it from the whims and fancies of politicians and political mood and sentiment. One of the very clever things the Swedish government did was to link the size of pension benefits automatically to increases in life expectancy, such that when life expectancy increases, pension benefits adjust or shrinks automatically."

One of the concerns raised during an earlier dialogue session was the issue of over-consumption: Are Singaporeans using too much of their CPF monies to pay for their housing? And is that necessarily a wise thing to do, given Singapore's shrinking and ageing population?

Associate Professor Lum Sau Kim, Director of Graduate Programmes at the National University of Singapore’s Department of Real Estate, said: "When we go forward, we notice two things. One is that the total fertility rate goes down, and the other is that we have been downsizing generally over time. What this implies is we're going to be needing less housing in future and the numbers that we see going forward 20, 30 years, the demographic profiles change. So if you are lacking that basic demand driver then you'll have slow process of asset decumulation, as people want to sell, to monetise, and then you don't have a demand driver, so the net effect will be, all things being equal, that you might have a compression on prices. 

Mr Tan said any changes to the CPF system must provide a level of assurance to Singaporeans, be sustainable, and not be a burden to future generations.

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