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Live in Parliament: Questions on CPF Minimum Sum and investments

Manpower Minister Tan Chuan-Jin and DPM Tharman Shanmugaratnam are scheduled to speak in Parliament on Tuesday, July 8.

SINGAPORE: Manpower Minister Tan Chuan-Jin and Deputy Prime Minister Tharman Shanmugaratnam will be speaking in Parliament on Tuesday, July 8, in response to the queries from Members of Parliament on the CPF Minimum Sum scheme and the investment of CPF funds.

READ: CPF remains 'key pillar' of Singapore social security system

MR TAN CHUAN-JIN: MANAGING RETIREMENT CONCERNS

1.32pm: Every country is concerned about how to help their people manage when they retire. While some argue that as individuals we should be left to sort our own lives out, in reality it often doesn't work out that way. Almost all developed countries have some form of pension or retirement system because most people generally don't save regularly nor do they effectively plan for their own retirement.

For us in Singapore, assurance in old age revolves around a few key considerations: healthcare, housing and retirement needs. The CPF is our key pillar in the social security system. It is a mandatory savings account that helps us put aside money today to cover our needs in old age.

1.35pm: When the CPF was first introduced almost 60 years ago, members could withdraw their money at age 55 in a lump sum. That was because at that time, someone could expect to live only another six to seven years after that. The situation is very different today where one could expect to live a further 30 years or more. Allowing a full withdrawal from CPF at age 55 will put us at real risk of outliving our savings in old age. To blindly keep to the earlier model of full withdrawal at age 55 would be wrong and irresponsible.

This is why we introduced the Minimum Sum scheme. The policy is not a new one and has been in place for about 30 years. The idea is to stream out our CPF savings every month to meet living expenses instead of having them all withdrawn in a lump sum. Neither do we need to set aside all our CPF savings to be streamed out in this way. Only a basic amount necessary for retirement expenses is required, and you can withdraw your CPF savings above that in a lump sum. This basic or minimum amount is known as the Minimum Sum.

'DISPELLING MISCONCEPTIONS AND MYTHS'

1.37pm: First, the Minimum Sum quantum is cohort specific. Once it is set for a particular cohort, it does not change. For example, someone who turns 55 between July 2014 and June 2015 will need to set aside $155,000. This is slightly higher than what a person who turned 55 last year needed to set aside, which was $148,000 and which would remain unchanged. To further illustrate, for someone who turned 55 five years ago, the Minimum Sum was $117,000 and that also remains unchanged.

1.38pm: Second, the increases to the Minimum Sum for each successive cohort over the last decade are part of a major, planned, gradual adjustment starting in 2004, to catch up with what a lower-middle income household would need in retirement.

How did we arrive at $155,000? That is the amount you need to get a monthly payout of about $1,200 in 10 years’ time when you reach age 65. We estimate that is how much a lower-middle income household would spend on daily living when they enter retirement 10 years from now. $1,200 per month in 10 years time is not an excessive amount.

1.39pm: If a married couple has a property, then they can pledge that property to set aside only half the full Minimum Sum in cash, so that each one only needs to set aside $77,500 for retirement – half of $155,000. Then the combined payout of their Minimum Sums will be a total of $1,200 per month – or just adequate for basic living expenses.

1.40pm: If you do not meet your Minimum Sum at 55, you do not need to top up the shortfall in cash nor do you need to sell your property to make up the shortfall. 

Only half of the Minimum Sum needs to be set aside in cash. The savings above that amount can be used to finance housing purchases, or be withdrawn through a property pledge. This means a member turning 55 this year only needs to set aside $77,500 in cash and the rest can be withdrawn through a property pledge.

1.42pm: It would not be responsible of this Government to leave unchanged the CPF rules for those who are younger, when the situation around us has changed dramatically. Singaporeans are living longer – that is a reality. The things that retired households spend on have also risen in quality – that is also a fact. The more we postpone the needed changes, the more disruptive the changes will be when it is forced on us in future.

MEETING THE MINIMUM SUM

1.44pm: Over the years, more members in each cohort reaching the age of 55 have been able to meet their cohort Minimum Sum. This is despite the Minimum Sum having increased over the years. For younger workers we are even more optimistic about their ability to attain the Minimum Sum. There are several reasons why this is so: wages have been growing, and labour force participation rates have also been increasing. Significantly, it is also because we have been making enhancements to the CPF system to help members grow their savings and meet the Minimum Sum.

1.46pm: The key group we are concerned about who may have insufficient CPF balances are our seniors, who are currently in retirement. Many have low CPF balances because of lower wages in the past and because more liberal withdrawal rules which were calibrated for shorter life spans depleted their CPF savings. However, we also know that the majority of current seniors own their homes and have fully paid up their housing loans. These housing assets have appreciated significantly and, if needed, can be tapped on to supplement their retirement income.

1.48pm: As the CPF is founded on the principle of self-reliance and work, those who do not work and contribute regularly to the CPF are naturally less likely to attain the Minimum Sum. To give you a sense of the numbers, which Mrs Lina Chiam has asked for, we know that 23% of Singaporeans who turned 55 in 2013 were inactive CPF members, while the remaining 77% were active members or self-employed. For the group of inactive members, many of whom have not worked regularly, family support will have to come in and other social safety nets are in place to provide assistance for example through the various ComCare schemes.

FLEXIBILITY ON MINIMUM SUM RULES

1.49pm: I understand that there are concerns about CPF members’ ability to continue servicing their housing loans with CPF savings after 55. Let me first state that in the 10 cohorts aged 55 and above, only 1 in 10 are still using their CPF for monthly instalments, and only 1 in 20 may have to meet their monthly instalments with some cash. For CPF members who do face difficulties with their housing loan repayments, we have exercised flexibility where a case merits it and allowed them to use part of their Retirement Account savings for housing even if they do not have half the Minimum Sum.

1.51pm: We are ready to exercise flexibility in the use of CPF for housing after 55 because we recognise that helping a member maintain a roof over their heads is an important part of our overall retirement adequacy goals. But I don’t think we want to make it automatic for members. We do not want to encourage rash and imprudent housing purchases by members who think that they can automatically draw down fully on their Retirement Account funds to service their loans.

1.53pm: One way that we protect Singaporeans from the risk of outliving their payouts due to increasing life expectancies is through our CPF LIFE annuity scheme. Among the members who joined CPF LIFE upon turning 55 in 2013, about 70% are on the Standard Plan.

1.54pm: To sum up, the CPF remains a key pillar to help Singaporeans cater for their needs in old age. There are areas that can be improved, and I welcome different views and perspectives. While it is not possible to meet every single member’s specific needs, I can assure members that we will look into all feedback and make changes where warranted. We will also put in more resources to help Singaporeans better understand the CPF system.

DPM THARMAN: RISKS VS RETURNS

1.57pm: The first challenge faced by retirement schemes around the world is financial sustainability. An estimated 85% of US public pensions will go bankrupt in the next 30 years. The second challenge is to give individuals a fair return on their retirement savings but avoid exposing them to more risk than they can bear.

1.58pm: But in many such schemes, unlike the CPF, the worker has to choose his own investment plan, and bears the risk on investments. In theory, an individual can get more returns, but evidence has shown that the individual underperforms the market. In the US, individuals earned just one-third what the market benchmark returned in the past 30 years.

2.00pm: One risk is retiring when interest rates are low. The pot of money you have will then give you a smaller stream of income for the rest of your years. Many schemes require individuals to convert their retirement funds to an annuity or a monthly payout. But there is often no floor, or minimum interest rate for these schemes. Low market interest rates mean less income.

READ: CPF monies are safe: DPM Tharman

2.01pm: The CPF scheme is aimed at meeting basic retirement needs. It also avoids presenting risk on taxpayers. The CPF is not a perfect retirement scheme, but it is among the better regarded internationally. It also gives those who are asset-rich but cash-poor more convenient options for monetising those assets.

2.03pm: While the CPF does not give the highest returns, it provides fair returns, one of the safest returns in the world. Few systems offer a minimum rate - 3.5% on OA, 5% on SMRA. The returns are guaranteed by one of the few remaining AAA-rated governments in the world. On top of guaranteed rates, the Government subsidises CPF through the Budget.

2.05pm: Taken as a whole, the CPF system prepares Singaporeans well for the future.

EXPLAINING INTEREST RATES

2.07pm: There are fundamental differences in OA compared to other SMRA rates. It can be withdrawn at any time, it is a liquid account. More than half of all CPF members enjoy the full 3.5% on their OA.

2.08pm: CPF interest rates are not the only help members get to build up their savings. Govt also provides subsidies through the Budget, targetted especially at lower to middle income owners.

2.11pm: For several years, the OA has earned 2.5-3.5%, well above the market rates. In fact, the OA has earned more than what the 10-year SGS earns. The SMRA is pegged at a slightly generous 1% above the 10-year SGS, and the returns have been enhanced over the years. Two-thirds of CPF members earn the full 5% on SMRA. We have shielded members from the risk of low market interest rates.

ON INVESTING CPF FUNDS 

2.15pm: I will next explain how CPF monies are invested. The CPF Board (CPFB) invests CPF members’ monies in Special Singapore Government Securities (SSGS). These are issued specially by the Government to CPFB. The payout from the SSGS is pegged to the interest rates that the CPFB is committed to pay its members.

The Government guarantees these SSGS bonds, so that CPFB faces no risk of being unable to meet its obligations to its members. This is a solid guarantee, from a triple-A credit-rated government.

What does the Government do with the proceeds from SSGS issuance? It pools them with the rest of the Government’s funds, such as proceeds from the tradable Singapore Government Securities (SGS), any government surpluses as well as the proceeds from land sales which under our Constitutional rules have to be accounted for as Past Reserves.

The comingled funds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. A major portion of these assets are however of a longer term nature, and are hence transferred over to be managed by GIC.

2.17pm: The SSGS proceeds are not passed to Temasek for management. Temasek manages its own assets, and does not manage any CPF monies.

What these investment arrangements mean is that CPF members bear no investment risk at all in their CPF balances. Their monies are safe, and the returns they have been promised are guaranteed. Neither does the CPF Board bear any risk, regardless of whether GIC’s investments earn or lose money in any particular year. The risk is wholly borne by the Government, on its own balance sheet.

2.19pm: The Government pools the proceeds from SSGS with its other assets, and invests long-term funds through the GIC. The GIC does not in fact manage SSGS monies on their own, separate from the Government’s other assets. GIC is fund manager for the Government, not owner of the assets and liabilities.

2.23pm: Our CPF system is hence sustainable, so long as the Government continues to run prudent budgets, and invest the reserves wisely. Then the Government’s balance sheet will remain strong and investment returns over the long term can continue to meet our debt costs.

AUDITED INVESTMENTS

2.26pm: As I have explained, CPF monies are invested in SSGS that guaranteed by the Singapore Government. The Singapore Government’s guarantee is a key safeguard. CPFB, besides its own internal auditors, is externally audited by professional audit firms approved by the Auditor-General. As for Government’s investments, I can assure Members that GIC is audited on a regular basis. Its financial statements are independently audited by the Auditor-General every year, and are submitted to the President and the Council of Presidential advisors annually. The President also has full information about the size of the reserves and the performance of GIC’s investments.

2.28pm: To conclude briefly, let me just reiterate that our CPF system is sound, and provides a solid foundation for Singapore’s future. It is not a static system. Over the years, we have adjusted the system, such as to reduce the scope for housing withdrawals and focus increasingly on retirement and medical needs in old age. 

Whatever we do to improve the system, we must provide fair returns to the ordinary member who is unable to take on much risk, and ensure that the CPF remains sustainable over the long term. The Government should continue to subsidise CPF members, especially those with lower incomes, but these subsidies should be provided through the Budget, so as to ensure the CPF is sustainable.

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