IF YOU are 62 years old today, there is one chance in two that you will live beyond 85.
This will not be good news if your retirement savings dry up before then.
With Government data showing that 50 per cent of people here are likely to "outlive their retirement savings", there is no mystery behind the changes to the Central Provident Fund (CPF) scheme which, in Manpower Minister Ng Eng Hen's words, seek to "tilt the playing field" to benefit older Singaporeans.
Disclosing a slew of details yesterday, Dr Ng said that the 1-percentage-point increase in CPF interest rates, announced by Prime Minister Lee Hsien Loong on Sunday, would kick in from Jan 1 next year.
What is significant, though, is that the rates for the Special, Medisave and Retirement Accounts (SMRA) will no longer be pegged at 1.5 percentage points above the Ordinary Account (OA) interest rate. Rather, they will be re-pegged to an appropriate long-term bond rate from Jan 1.
This will expose the interest rates to market fluctuations. Currently, Singapore Government Bonds yield 3 to 4 per cent. And Dr Ng said, the new SMRA interest rates will be a "little lower" at the start.
But eventually, the new SMRA rates are expected to be better than the current 4-per-cent rate, making the future CPF returns "hard for the market to match", he said. The exact formula for calculating returns has already been devised but will only be revealed when Dr Ng delivers a ministerial statement in Parliament next month.
These measures are aimed at enlarging the nest-egg for each Singaporean, ensuring that they have at least a "subsistence level" income until death, even as they are encouraged to work longer.
In this vein, the additional 1-percentage-point of interest that CPF members will earn on the first $20,000 in their OA, come Jan 1, will be set aside for old age.
This additional interest earned will be transferred to their Special Account (SA).
Funds in the SA cannot be used for housing or education, but only for old age related purposes such as investing in approved low-risk, retirement-related financial products.
"That extra 1 percentage point interest is not to help you buy a bigger home", but to boost the retirement kitty, said Dr Ng. He also noted that the Government would not be drawing on its reserves to fund the interest rate hike.
The Minister also gave more details about the compulsory annuity scheme being considered for all Singaporeans currently aged 50 and under.
The CPF reforms, said Dr Ng, are necessary because of the cumulative impact of "three fundamental shifts" in Singapore: Falling fertility rates, increasing longevity and smaller family sizes.
Life expectancy was just 61 when the CPF was introduced in 1957, and today, it has shot up to 80.
In 1990, there were 23 economically active residents aged 15 to 64 to support each resident above the age of 65. Today, that ratio has fallen to 9-to-1 and by 2030, it will drop even further to 3-to-1.
What this means is that individuals can no longer rely on others to support them in their old age. That Singaporeans are living longer is "something to celebrate, but only if we plan properly", said Mr Ng. "Individuals have to rely on their own savings and for much longer to fund their retirement needs."
The trend is true not only in Singapore but all over developed countries in Europe. Dr Ng shared how Italy's state pension fund would have to pay retirees more than it receives in contributions. Recently, both Germany and Denmark announced that retirement age would go up from 65 to 67, while Spain is studying incentives to get people to work beyond the retirement age of 65.
Over the years, the Government has eased its restrictions on CPF funds, allowing more Singaporeans to dip into their accounts for housing and medical needs. Now, the focus appears to have shifted emphatically back to retirement financing.
Experts say this is because of the fast pace at which the population is ageing. Said Professor Phua Kai Hong from the Lee Kuan Yew School of Public Policy: "There is that greater sense of urgency now, for sure. And I'm glad there is this considered effort.
"With the higher CPF interest rates, more people will have more for their old age. The Government is being cautious in not allowing these extra returns to be consumed. They're not taking the risk of letting people squander this money."
The changes to the CPF interest rates will cost the Government $700 million a year initially. Meanwhile, the higher Workfare Income Supplement (WIS) tiered payout for those above 55 — an extra incentive for older Singaporeans to continue working — will cost $83 million more each year, raising the total WIS budget to $432 million.
THREE KEY CHANGES
• Interest rates of Special, Medisave, and Retirement Accounts will be re-pegged to a long-term bond rate from Jan 1, 2008. The new formula, to be announced later, should in the long run yield an interest rate higher than 4 per cent
• The additional 1-percentage-point of interest earned on the Ordinary Account goes into the Special Account
• All Singaporeans aged 50 or under will pay a basic premium from their CPF minimum sum into an annuity plan, which will start paying out a monthly sum of possibly $250-$300 once a member reaches the age of 85. If he or she dies before then, the money will go into the national pool, or for a higher premium, the sum can be marked for transfer to family members
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