Majority Will Gain From CPF Interest Rate Hike

Source : The Straits Times, 20 Aug 2007

1 percentage point hike to cost Govt $700m a year but will help many build bigger nest egg

The 1 percentage point hike in the CPF interest rate will benefit the majority of Singaporeans and translate to substantial gains for them, said Prime Minister Lee Hsien Loong yesterday.

A young person aged 21 and earning $1,700, for example, can expect to earn $20,000 more in interest by the time he hits age 55.

And although the higher rate applies up to a cap of $60,000, more than half of the population of active CPF members will earn 1 percentage point more on all their CPF savings, said Mr Lee yesterday.

This move will cost the Government about $700 million a year, he added, but this will help Singaporeans build a bigger retirement nest egg.

‘I think we must improve returns and our main focus is to help lower- and middle-income groups,’ he said.

He noted that half of those still working currently have $45,000 and below in their CPF accounts, which is ‘not huge’.

Detailing the change, Mr Lee said that the Government will now pay a higher 3.5 per cent interest on Ordinary Account (OA) balances and 5 per cent on the Special, Medisave and Retirement Account (SMRA) balances.

But the higher rate will be payable only on:

-the first $20,000 of a member’s OA balance, and

-the first $60,000 in all his CPF accounts combined.

Simply put, this means that someone with say $25,000 in his OA will earn 3.5 per cent interest on the first $20,000, and 2.5 per cent on the other $5,000.

He will then earn 5 per cent on the first $40,000 of his SMRA balances, instead of the usual 4 per cent.

If a CPF member has less than $20,000 in his OA, more of his SMRA balance will earn the higher 5 per cent rate. But the maximum amount in all accounts that qualifies for the extra 1 percentage point interest is $60,000.

CPF members will not be able to invest this $60,000 in stocks, unit trusts and other investments under the CPF Investment Scheme (CPFIS).

But they can still use the money for housing or medical expenses.

There will also be no change to the concessionary HDB loan rate formula, which is at 2.6 per cent, added Mr Lee.

Explaining these changes, Mr Lee said that there is a need to update the CPF system to better prepare Singaporeans for retirement.

Currently, the CPF is like a bank savings account, except that it pays a higher interest rate and is risk-free.

Those who want higher returns and can accept higher risks can invest their savings in shares or stocks, although many who have done so did not do well, said Mr Lee.
But the lower- to middle- income groups should not be exposed to unnecessary risks, as they do not have the expertise nor enough money to invest.

‘If all our CPF members were on the stock market, I think a lot of hearts will go ‘gedebook, gedebook’ every night,’ he said, thumping his chest to laughter from the audience.

This is why he has drawn the line at $60,000 in savings.

‘If you have more than $60,000…you should be able to look after yourself,’ quipped Mr Lee.

Turning to the rate increase, Mr Lee said that ‘1 percentage point may not sound like a lot of money, but it makes a big difference’.

To illustrate, he cited an example of a young man, aged 21, who earns $1,700 and buys a four-room flat over the course of his work-life.

By the time he retires at 55, he will have earned $20,000 more in interest, which is ‘a lot of money’, Mr Lee pointed out.

This will cost the Government $700 million in the first year, similar to the $750 million it pays out for the Housing Board building programme, he said, adding that the figure will likely go up in the future as people saved more in their CPF.

Mr Lee added that the Government had done its sums to make sure it could afford to pay the higher rate.

‘Because this is most important and you cannot suka suka write any number,’ he said, using the Malay term for ‘any-o-how’.

Financial analysts interviewed yesterday generally cheered the move, but Society of Financial Service Professionals president Leong Sze Hian thought the change might not amount to much for some of the low-income.

‘They use most of OA for their housing and get little in terms of their Special Account contributions,’ said Mr Leong.

Mr David Tan, 23, who is working as a sales executive earning about $2,000 a month said he was happy with the higher interest.

‘It’s good that they give more but I think I can probably get better returns if I invest the money elsewhere, which I won’t be able to,’ he said.