Use CPF only as a cushion for retirement

This article touched on something that I had mentioned before in Parliament, in my Budget speech back in February. The Government has always used CPF as a convenient tool for cutting wage costs when the economy is doing badly. I had, in my Budget speech, touched on some of the drawbacks of doing this. Now that there is so much focus on CPF's crucial role in ensuring a financially-independent retirement, it becomes so much more important that CPF contribution rates are not changed on an ad hoc basis.

Use CPF only as a cushion for retirement

Also, resist temptation of cutting contributions during economic downturns

Wednesday • August 29, 2007

Siew Kum Hong

THE Prime Minister announced sweeping changes to the Central Provident Fund (CPF) scheme at last Sunday's National Day Rally. The past week has seen more details being disclosed, and Minister for Manpower Ng Eng Hen will make a ministerial statement in Parliament next month.

The changes are far-reaching, even more so than the graduated increases in the Minimum Sum (to reach $120,000 by 2013) announced in August 2003. They are aimed at helping Singapore's ageing population be financially independent in its old age, together with other measures such as the proposed re-employment legislation.

The latest announcements have once again focused attention on the primary objective of the CPF scheme, as a compulsory long-term retirement savings scheme. This is welcome, as CPF has over the years taken on other functions, ranging from housing payments to funding education to the management of healthcare costs.

Indeed, in the past year, CPF seems to have taken on an increasingly significant role as a policy instrument with a key role in accomplishing the Government's different objectives, in particular to manage the consequences of the widening income gap and to address the issue of an ageing population.

The Workfare Income Supplement scheme introduced this year is heavily linked to the CPF scheme, especially for casual workers. The CPF also plays an important role in the Additional Housing Grant, which aims to strengthen the role of housing as a crucial pillar in the Government's policy response to the widening income gap and the ageing population. When a grant recipient sells his flat, the grant amount must be paid into the homeowners' CPF accounts.

The key consideration seems to be that CPF is a useful vehicle to ensure that grants and assistance provided to people are not misused, since CPF funds may only be used for certain specified purposes. This is especially important for retirement planning, where a long-term view is necessary in ensuring that funds generate the necessary returns for funding retirement.

Indeed, the Government's own calculations demonstrate the power of compound interest over the long run. As the Prime Minister noted in his speech, it could mean up to $20,000 more in interest. Similarly, deferring the draw-down age for the Minimum Sum by one year means that the Minimum Sum can last for two extra years down the road.

That being the case, I would urge the Government to refrain in future from using CPF as a tool to manage the economy, specifically by cutting the CPF contribution rate (in particular, the employer's contribution rate) when times are bad so as to preserve our cost-effectiveness. This is because of the disruptive effect on people's long-term plans resulting from such changes, especially when the reductions are amplified over time.

Over the past 20 years, the Government has repeatedly cut the CPF contribution rate whenever the economy was doing badly. The rate hit a high of 50 per cent (25 per cent for employers and 25 per cent for employees) in the 1980s, but was cut sharply to 35 per cent (10 per cent to 25 per cent) in 1986 in the wake of the 1985 recession.

By 1994, the rate had been restored to 40 per cent (20 per cent-20 per cent) for those aged 55 and below. But the Asian financial crisis in 1997-1998 saw the Government cutting the contribution rate to 30 per cent (10 per cent-20 per cent). This was restored to 36 per cent (16 per cent-20 per cent) in 2001.

Although the Government had promised to restore the rate to 40 per cent, then-Prime Minister Goh Chok Tong announced in 2003 that 40 per cent was unsustainable and that moving forward, the CPF contribution rate would float between 30 per cent and 36 per cent.

He also announced a 3-percentage-point cut in the rate, to preserve Singapore's cost-competitiveness. This was only partially restored earlier this year, through a 1.5-percentage-point increase that took effect in July.

These swings in the CPF contribution rate would surely have adversely affected most people's retirement planning to varying degrees. That is to say nothing about the impact on their servicing of housing loans, or even education. For the middle and upper classes, all this would have been seriously compounded by the reduction in the CPF salary ceiling from $6,000 to $4,500.

While I accept that it is important to ensure that Singapore remains competitive and that it is always better for Singaporeans to have jobs than be unemployed, the ageing population — and its financial self-sustainability — is a pressing issue that will increasingly preoccupy us in years to come. Changes in the CPF contribution rate affect everybody, and can have exaggerated repercussions over time. It is about time that we resist the temptation to tinker with the rate, however hard the economic going gets.

The writer is a Nominated Member of Parliament and corporate counsel, commenting in his personal capacity.