Committee Of Supply Speech (Part 2) by Dr Ng Eng Hen, Minister for Manpower and Second Minister for Defence, 04 March 2008, 3:00 PM, Parliament

Dr Ng Eng Hen, Minister for Manpower and Second Minister for Defence, Parliament

Financial Security in Retirement

(I) CPF LIFE – START RIGHT, STAY STRONG

The Government has accepted the recommendations of the National Longevity Insurance Committee chaired by Prof Lim Pin. In my reply, I had called it a landmark report and it is so. The Committee's proposals for annuity plans now called CPF LIFE significantly strengthens our CPF system, and provides a much needed tool to address the increasing longevity of Singaporeans and our ageing population. CPF LIFE will provide members an income for as long as they live, instead of an abrupt cut-off with no income when they are older and most dependent, as in the current Minimum Sum scheme. I am gratified by the positive response to CPF LIFE from members of the public, the media and MPs. The Straits Times said that it “recommends it thoroughly”, saying “that this is a plan that… sells itself.”¹ These positive responses from the media and unions reassure the Government's efforts to improve the retirement adequacy of Singaporeans, even though it required substantial changes, are correct policies, and indeed appreciated by the public at large.

2. I thank members in this house for the support of CPF LIFE. At the same time, some have pointed out gaps that exist and proposed good suggestions to further improve CPF LIFE. We will incorporate suggestions that are useful. But I want to caution that we should not impose demands on CPF LIFE to deliver on goals which it is not meant to address. Neither should we expect CPF LIFE to carry burdens for which it was not designed. Doing so, it would doom the scheme to fail eventually. Because this is a scheme that will have to provide for retirement needs for successive generations of Singaporeans, we must ensure that it CPF LIFE is financially sustainable for the very long term. CPF LIFE must be started and operated based on the correct principles.

3. The cardinal principle and critical pillar underpinning the viability of CPF LIFE must be that a member can only spend what he saves. This has been the guiding star of our CPF system since its inception more than 50 years ago in 1955. We have never wavered from this guide-post, despite any challenge, and we should not do so now. All of us contribute to our CPF with that clear expectation that only we can spend what we saved. We should be very careful to re-iterate that CPF LIFE does not dilute this principle. This principle ensures that assets within the CPF LIFE match its liabilities. This is why the Committee was also careful to point out that payouts from CPF LIFE must take into account future mortality experience and actual investment returns, to ensure that CPF LIFE remains fully funded.

4. This does not mean that we do not assist those who do not work and do not have CPF funds, but we should use other financial assistance schemes to achieve this. Neither does it imply that we should be satisfied that some groups are left out of CPF LIFE. But they must be brought in on the correct terms and indeed, we must step up efforts to increase the reach of CPF LIFE to include as many as possible – including low wage workers, contract workers and the self-employed. I will touch on more of these efforts later.

5. Singapore would not be alone in applying the principle of self-provision to provident funds. That you receive amounts proportionate to what you have saved is an established principle of most pension systems – even those which provide defined benefits. For example, in the U.S, a person's Social Security benefit payment is based on how much he earned during his working career. I quote from the Social Security website, “Higher lifetime earnings result in higher benefits. If there were some years when you did not work or had low earnings, your benefit amount may be lower than if you had worked steadily.”² It is intuitive and sensible.

6. This is why those who do not have enough in their CPF to provide an income for life will not be automatically included. When the compulsory LIFE scheme starts in 2013, about 75% - 80% of the first cohort of active members will have sufficient cash in their Minimum Sum ($40,000) to be automatically included into the Lifelong Income Scheme. But because of the extra 1% interest earned on the first $60,000, subsequent cohorts will have more in their MS and over time almost all active members will be automatically included into CPF LIFE. But even for those with less than $40,000, we want to encourage them to opt in, as well as for those who are older than 50 this year.

7. The L-bonus has indeed been structured to be generous to encourage opt-ins. Those who opt in must be willing to receive monthly incomes lower than those who are automatically included, but they will have the assurance that this will last for life. We have also lowered the threshold amount in the CPF by half to $20,000 for eligible members to receive the full L-bonus, and those with sums lower than this will receive pro-rated bonuses. The message underlying the L-Bonus is clear – CPF LIFE is a good scheme that provides for your old age, and the Government is providing incentives to get as many as possible to opt in, even if they are not automatically included.

(A) Rules eased to encourage family support

8. The introduction of CPF LIFE will help CPF members to better provide for their own retirement. This is good but some members of the public were concerned that this could undermine family support for the elderly. Indeed the Committee and other members of the public also articulated the fear that we should not “over-sell” CPF LIFE. We must not give rise to the wrong impression that the responsibility of children to help support their parents, or family members to support one another is diminished because of CPF LIFE.

9. Family members must continue to play a key role in looking after the elderly and each other. This is a value we must reinforce, not diminish. This is why, in tandem with the introduction of CPF LIFE, we further liberalise the Minimum Sum Topping-Up Scheme. This year's measures come close to enhancements to the Topping-Up Scheme made last year, which included the raising of the top-up limit to the prevailing MS with effect from October 2007. The results of last year's measures have been very encouraging. Comparing the last quarter of 2007 to the same period in 2006, the number of Topping-Up applications increased by two and a half times, while the total amount of top-ups received increased by almost three times – to $44m up from $15m. This year, we will make further enhancements to the scheme.

Easier to Top-Up Minimum Sum

10. All in all, the new rules make topping up simpler and with added incentives. More will be able to receive top-ups and those who top up for others can receive incentives.

a. Firstly, you can top up more each year. Cash top-ups to the Minimum Sum will no longer be subject to annual caps currently set at $26,393 per year. Which means that you can top up to the full MS, presently at $99,600, for both cash and CPF top-ups.

b. Secondly, for cash top-ups we will remove restrictions on age and specific family relationships. Now, more people including extended family members will be able to make cash top-ups to members above or below age 55.

c. Cash top-ups will also enjoy enhanced tax relief, as announced in the Budget Speech. Cash top-ups by a member or his employer can enjoy up to $7,000 tax relief per year. In addition, if the member makes cash top-ups to his family members, he can receive up to an additional $7,000 tax relief a year.

To facilitate, CPFB will step up its communication efforts to encourage members to top up their relatives' CPF. These changes will take effect from 1 Nov 2008.

Employers can also Help their Employees

11. From 1 Nov 2008, employers will also be allowed to make cash top-ups to their employees' Minimum Sum. Employers will also enjoy a full tax deduction for top-ups to their employees' accounts.

12. The message from the L Bonus and the liberalisation of top-up rules is simple and clear: Family members who can afford to should support one another. We strongly encourage husbands to top up the accounts of their spouses. The incentives are great. Let me give you an example (Annex A). If a husband at age 55, top ups his 50-year old spouse's account by $20,000. After 5 years, at age 55, his wife stands to receive up to $4,000 in L-Bonus and after 15 years, at age 65, his wife stands to receive up to $5,600 in extra interest. The husband could gain a further tax incentive of up to $1,400 in 2008 if he makes the top-ups in cash. That simple act of transferring $20,000 into his wife's account can ensure that she will be included into CPF LIFE and have an income of about $360 for the rest of her life. With the extra interest and L- Bonus, Government would have matched his contributions by half – nearly $10,000 more, when his wife reaches 65 years.

13. Let me address now specific concerns about CPF LIFE which have been raised. Many people have asked – what do I do now? I don't understand it fully but from what I hear and read, it seems to be good, so what do I do? My general assurance to all Singaporeans is this – Don't worry, you need not do anything now, if you are younger than 55. When the time comes for you to join CPF LIFE, CPFB will contact you and help you. Let me now sketch how the scheme will affect different broad groups, and provide some details.

(B) CPF LIFE – Smooth implementation

Members older than 50 today

14. Let me start by re-iterating who will be automatically included into CPF LIFE when it starts in 2013 – those who are 50 years this year or younger will be involved. For those older than 50 today, they can opt in.

15. For members aged 51 – 54 this year, they only need to opt in when they reach 55. CPFB will contact them then and facilitate the opt-in process.

16. For members aged 55 and above this year, we will give them ample time to opt in. They will be given 1 year or so to opt in. For those who can benefit from CPF LIFE, CPFB will contact them and provide them the necessary information and opportunities to opt in. All those who meet the eligibility criteria and opt in will receive L-Bonuses. This will increase their CPF funds and monthly payouts.

LIFE Plans

17. Some have feedback that CPF LIFE is complicated. To make it easy to understand, there are only 3 key points to remember. First, CPF LIFE guarantees you an income for life. Second, a member's beneficiaries will always get back unused Minimum Sum, unless he chooses otherwise. Third, you can choose to have higher income for life if you put more of your Minimum Sum into CPF LIFE. This may leave your beneficiaries less; and vice versa.

18. At age 55, all members automatically included will be put into the Standard Plan. The Standard Plan provides a balance between what the member receives each month for life and how much would be left to his beneficiaries. For those who want they can choose higher income plans than the Standard Plan, but they may leave less for their beneficiaries. Or they can choose lower payouts than the Standard Plan but may leave more for their beneficiaries. For a very select few, there are finally the non-refundable plans which generally provide even higher payouts but may leave the least for your beneficiaries (Annex B)

19. What will happen when a member in the first cohort reaches 55 in 2013? CPFB will provide essential and personalised information to each member: They will be told how much he or she has in their Minimum Sum and placed under the Standard Plan and told how much they will receive for life. Any unused amount remaining in their MS will be returned to the beneficiaries when the members pass away. If the member wants he/she can choose the other options, which will no refund so they get a higher payout.

20. We will continue to educate members on LIFE plans. CPFB will be stepping up its communications effort to explain the scheme to members.

Those who do not qualify for LIFE

21. Questions have been asked about how Self-Employed (SE) and LWW can save enough to be included into CPF LIFE and what plans the Ministry has to help those who do not qualify for CPF LIFE to cope with their needs in old age. MOS Gan will later elaborate on our efforts in helping low wage workers and self-employed persons make regular CPF contributions.

22. Here, let me point out that we have in place measures to help LWWs, SE and contract workers to build up their CPF balances. Firstly, Workfare will contribute up to 20% of a worker's wages into his CPF. (Please refer to Annex C). This is significant help. A low wage worker who earns $900 a month (10th percentile) age 40 years who works until 65 will have approximately $82,000 in his RA at age 55, and $122,000 at age 65. Which means that even if he uses half his CPF contributions to buy a home which is made more affordable with the additional housing grant, he can still have the $40,000 necessary at age 55. This will give him an income under CPF LIFE for as long as he lives.

23. The Government is helping LWW to participate in CPF LIFE. They can save enough if they work regularly and contribute regularly to their CPF. In addition, when the Government can afford it, CPF members have received CPF top-ups from the Government from time to time. Since 2001, and including the GST Offset package, special transfers from the Government have totalled $11.8 billion.

24. As for the retirement adequacy of housewives, I encourage husbands to top up their wives' accounts. Housewives were one of the reasons why the L-Bonus was introduced. Please take advantage of it. For the disabled, there are also other employment assistance schemes, such as the Open Door Fund and the Enabling Employers under MCYS.

Inflation

25. Prof Lim's Committee extensively discussed the proposal for inflation to be taken into account in the design of CPF LIFE and decided against inflation indexed incomes. It would mean higher premiums or significantly lower incomes in the initial period. Many members of the public were also concern that they would not live long enough to receive the later payouts. There are other ways to increase income, for example through the HDB Lease Buy Back Scheme.

Guarantees and sustainability

26. I was asked whether CPF LIFE payouts are guaranteed and whether CPF Board can meet its liabilities if there is a major medical breakthrough. CPF Board will indeed be taking on significant interest rate and mortality risks in running the LIFE scheme. To be financially viable, payouts and premiums must correspond to actual interest rates and mortality experience.

27. In fact, Prof Lim's Committee had specifically noted the difficulties annuity providers abroad had run into when various risks were not properly managed. A notable example was Equitable Life in the U.K. (Annex D) which eventually became insolvent and had to put itself up for sale.

28. What is guaranteed is the CPF interest paid by the Singapore Government which will not fall below the floor rates of 3.5% if the member has less than $60,000 or 2.5% for amounts above that. Beyond this, the payouts will be paid based on actual interest rates and mortality experience. This is in line with standard practice of annuity providers, to ensure that CPF LIFE remains adequately funded and sustainable over the long term. Its hard to predict how the 10YSGS will perform in the future, but if it performs according to historical assumptions, it will be about 4%.

(II) OTHER CPF ISSUES

(A) Contribution Rates for Members Aged 50 – 55

29. Members have also asked about other aspects of CPF. There was a suggestion that the CPF contributions rates of workers aged 50 – 55 years old be reviewed as they are 6 percentage points lower than those who are younger. There was also concern that the reduction of CPF contribution rates for older low wage workers might make it more difficult for them to build up retirement savings. The reduction in CPF rates for both groups was intended to help increase their employability.

30. This approach has worked because the employment rate of workers in the 50-54 age group has risen from 68.3% in 2002, to 74.6% in 2007. More importantly, both older workers and LWW have not lost out on CPF contributions. The WIS pays up to $2,400 and 25% of wages, and in the majority of cases more than makes up for the CPF contribution cut. I also want to add that our CPF top ups are usually more for older people as well.

(B) Use of CPF for Part-Time Education

31. The issue of CPF members using their CPF to fund their own part-time tertiary education was also raised.

32. Our primary effort should be to ensure that members have enough CPF savings for their old age, especially with our rapidly ageing population and corresponding increase in retirement and healthcare needs.

33. Part-time students are likely to be working adults and would be in a better position to pay their tuition fees. In particular, it has also become easier for them to afford the part-time university degree courses subsidized by the Government, and there should not be a need to use CPF. As such we will not be expanding the CPF Education Scheme to fund part-time studies.

(C) Use of CPF for Investments

34. There was also a suggestion that those who want to invest their own CPF savings to earn more than the extra 1% interest be exempted from the new investment restrictions in the OA and SA.

35. Members will not be able to use the first $20,000 in the OA and the first $20,000 in the SA for investments under the CPF Investment Scheme from 1 Apr 2008. This is because the extra 1% is intended to be paid on longer term funds – for example the 3.5% floor rate for the first $20,000 of OA is now higher than the yield on the 20-year Singapore Government Securities. We should not be paying long term rates of interest on short term funds.

CONCLUSION: MEMBERS TO BUILD UP THEIR CPF

36. Sir, recent changes in our CPF system, especially with CPF LIFE, have put us in a much stronger position to address the challenges of our ageing population. We now have a more robust CPF system. The challenge now is to get as many members on it and enhance retirement sums. With the extra 1% interest on the first $60,000 and the introduction of CPF LIFE, there is even greater benefit for Singaporeans to contribute to and grow their CPF savings. Family members and employers can play a part through top-ups. The more members save, the more LIFE payments they will receive. Therefore, I urge working Singaporeans who have not been doing so, to regularly contribute to their CPF, and for family members who can afford it, to top up the CPF of their loved ones.

¹ 13 Feb 2008 ST Editorial “A Good Plan to Retire on”.

² http://www.ssa.gov/pubs/10035.html

Factsheet on Mininum Sum Topping-Up Scheme and Voluntary Contributions