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Speech at 5th Citi-SMU Financial Literacy Symposium

Mr Zaqy Mohamad, Minister of State for Manpower, Singapore Management University

Employment practices
  1. Good evening. Thank you for having me here today. I am heartened to see Citi-SMU’s programmes benefiting so many young people every year.

Achieving Financial Security

  1. From time to time, I have the opportunity to meet students like you and I often ask them what they would like for themselves. Their answers will not surprise you. They want good jobs that pay well and use their talents meaningfully. They want to pursue their passions, which are increasingly varied. The big dream, the one true symbol of “adulting” almost everyone aspires to, is a home of their own. And yes, although it is still a bit far in the future, they want to retire comfortably.
  2. These are good goals. My next question to the students is whether they are within reach. This is where they are not so sure. Some of them think HDB flats cost $1 million dollars. They have heard people say “you can die but you cannot fall sick in Singapore.” Some are worried they might have to save millions in order to retire comfortably.
  3. All of these concerns about money can be confusing. I remember being worried in my 20s too, that my wife and I would not be able to buy our own flat. Over the years, I have also seen my younger cousins, nieces and nephews, most of whom went to either ITE, polytechnic or a local university, experience this feeling of uncertainty before they settled down and gained confidence.
  4. One good thing about young Singaporeans is this strong sense of wanting to develop financial security. This desire spurs you to work hard and keep upgrading. But it may also cause some of you to feel more anxious than you need to. Since this is a seminar on financial literacy, I hope to share some information that will help you understand your money situation in future.

How the CPF Helps

  1. The first thing to know is that when you start work, 20% of what your employer pays you every month goes into your CPF. On top of that 20%, your employer pays an extra 17% into your CPF. That’s 37% in total. If your salary starts at $2,000 a month, you are saving at least $740 in your CPF, every month, automatically. This is split across your Ordinary, MediSave and Special Accounts. These savings will earn attractive, risk-free interest of up to 5% per year.
  2. You might say, okay, so what? “CPF money can see, cannot touch.” That is wrong. Let me explain what your CPF savings can do for you.
  3. Suppose that after three years of work, you decide to get married and buy a flat. You and your partner will have to decide what and where to buy. If you choose a 4-room resale flat in Punggol, the median price is about $440,000. With some grants, this can go down to $360,000. If you can wait, a similar BTO flat after subsidies and grants will cost even less, at $260,000 – great value for money. Hang on a minute, what about the million-dollar HDB flat? Yes, they do exist, but they are the exception rather than the norm. Most flats, even resale, cost much less.
  4. Supposing your partner also earns $2,000 and has worked for three years. Can you really afford the flat? The answer is yes. Together, you will need to pay off a 10% down-payment of $26,000, as well as a HDB mortgage payment of $1,000 every month. From age 25 to 28, your combined savings in your CPF Ordinary Accounts will grow to over $40,000. This will be more than enough to pay for the flat’s down-payment. By age 31, with some salary increases, both of you can subsequently use your monthly OA contributions to fully cover your HDB mortgage payments. Well before retirement, you will have comfortably paid off the loan and owned the flat fully. The CPF will have helped you join the 90% of HDB residents who own their homes.
  5. Some of you might still be sceptical. Perhaps you would not be content with a 4-room BTO in Punggol. You and your partner might want a 5-room flat instead, or a flat in a more central location.  Such flats will, of course, cost more. So you will have to consider whether these flats are within your budget. Some of you here will go on to earn more than $2,000 in your first job. Take the median wage of an SMU graduate in 2017 - $3,500. Naturally, your CPF OA contributions will also be higher, at around $1,600 together every month as a couple. With that, and with some luck at the ballot, you and your partner can afford a 5-room flat in Bidadari with your CPF.
  6. What about medical expenses? Most people are not worried about the usual cough and cold. They worry about large hospitalisation bills and if they get major illnesses like cancer. They also worry about long-term care if they or their parents become disabled.
  7. How do we manage in Singapore? First, treatments in public hospitals are heavily subsidised. The part of the bill that is unsubsidised will be partially covered by MediShield Life, a universal basic healthcare insurance plan for all Singaporeans that protects against large hospital bills. We recently introduced CareShield Life, another universal insurance scheme to provide financial support for long-term care due to severe disability. The savings in your MediSave account will cover the MediShield Life and CareShield Life premiums and also out-of-pocket medical expenses that insurance does not cover. Anyone who has difficulty paying unsubsidised or uninsured portions can seek help through MediFund.
  8. Put simply, there is a system in place to help us take care of big healthcare expenses. This system is not static; it gets enhanced along the way.
  9. Having taken care of home and healthcare, what about spending money in retirement? Continuing my earlier example, by the age of 55, besides owning a home, you and your partner will each have accumulated around $210,000 in retirement savings. Each pot of retirement savings will go into CPF LIFE, which will then cater for an individual stream of monthly payouts for life after you turn 65 years old. However, whether the payout is enough for you will depend very much on your lifestyle needs, expectations and also if you have other forms of support in retirement.
  10. Regardless, there are ways to increase your CPF retirement payouts. This is as applicable now as to yourselves 30 or 40 years down the road, and even to your parents. Choosing a smaller flat can make a huge difference. For example, if you and your partner choose to buy a 3-room BTO in Punggol instead of a 4-room BTO, you would each have $340,000 in retirement savings instead of $210,000 – that is 60% more! Making regular top-ups to your CPF will help you maximise the CPF interest rates. Or, if you continue to work after reaching 65, you can postpone your CPF LIFE payouts till 70. Your payouts can increase by up to 7% permanently for every year of deferral.
  11. In other words, there are different ways you can take advantage of the CPF system to grow your retirement savings.
  12. To sum up, the CPF system works to help you:
  • Own a home
  • Pay for medical expenses
  • Have an income for life in retirement
  1. In fact, our system is quite unique in the world. Most other social security systems do not, for example, have an explicit goal of helping people achieve home ownership which removes one major worry in retirement i.e. having to pay rent. Some other systems do not provide medical coverage, which makes them less useful until later in life. It is also more fiscally sustainable than many other systems that have promised to pay benefits but not collected enough contributions, and so need to be paid for by heftier taxes.

Be Mindful of Risks

  1. This does not mean that the CPF system alone meets all our needs. In every society, there will be some who do not manage to earn much income or put aside enough savings. This is why we introduced the Workfare Income Supplement (WIS) and Silver Support schemes to better support those who earn low wages or could not build up much CPF throughout their working lives. Last year alone, the Government paid out about $660 million in Workfare to 400,000 workers and over $330 million in Silver Support to 150,000 Singaporeans. 
  2. With the CPF, you should be able to focus on the other things that matter in life. But I would be remiss if I do not also share with you some of the risks of your decisions.
  3. The first is that many of my counterparts who are Ministers of Labour or Social Security worry about citizens who participate in the gig economy. We all agree it is wonderful how many more opportunities for work there are through internet platforms. But some of these work arrangements make you more like a contractor than an employee and so do not come with CPF contributions. This may be ok for a short period of time. In fact, some people are attracted to being paid entirely in cash. But it can also mean you have nothing to fall back on when you want to buy a house, fall very sick, or have to retire without family support.
  4. Another worry is when people take risks with property purchases, either stretching their budgets to the limit or speculating in the hope of a big upside gain. 
  5. A third worry is when some members invest their CPF savings. The CPF Board currently pays 2.5% in the Ordinary Account, at least 4% in the MediSave and Special Accounts, and up to 6% on a part of older members’ savings. These are completely risk-free and certainly better than any fixed deposit rates. But when members put their hard-earned savings in investments they neither have the knowledge nor time to manage, the results are not always happy. There are risks and higher returns are not guaranteed.
  6. Remember that your CPF is really your nest egg for retirement. Most people are careful but occasionally, we receive letters scolding the CPF Board for not having stopped them from making a hasty investment decision.

Conclusion

  1. In conclusion, the CPF system is here to support you. It has helped the vast majority of Singaporeans to own the homes we live in and will do likewise for you. It helps us to take care of most of our big medical expenses. Our individual hard work, coupled with our employers’ contributions and the interest paid by the CPF Board on our savings, helps us build up a sizeable nest egg and a retirement income for life. 
  2. It pays to learn more about the CPF system and how it can work better for you. Our choices regarding work, home purchases and investments, make a big difference. But as long as we are reasonably careful, we can have the peace of mind to pursue our life goals. I have shared a lot about the CPF in my speech today. Some may wonder, if the CPF is for my retirement, isn’t it too early to talk about it now? The reality is life creeps up on us without us even realising it. CPF Board has just launched their public education campaign “The Future is Closer Than You Think. Be Ready with CPF”. Being young means you have a longer runway so I urge all of you to start planning for your future early.
  3. My best wishes to you all!