The proposed changes to the Central Provident Fund (CPF) to help Singaporeans meet their retirement needs are sustainable and will not draw on past reserves, said Second Finance Minister Tharman Shanmugaratnam.Speaking in Parliament on Tuesday, Mr Tharman also explained the rationale of pegging the interest rate for the Special, Medisave and Retirement Accounts (SMRA) to long-term bond rates.
Tweaking the CPF scheme is aimed at helping Singaporeans save for old age.
One way is to pay 1 percentage point more in interest on the first S$60,000 of their CPF balances – a move that will cost the government S$700 million a year.
This has prompted many Members of Parliament to ask how this scheme would be funded and whether the government could give more or even co-share the cost of providing for retirement and old age.
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CPF changes will not draw on past reserves: Tharman
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CPF Reforms will not draw on Govt's reserves
Second Finance Minister Tharman Shanmugaratnam today assured Parliament that the CPF reforms are sustainable and will not draw on the Government's reserves.
He attempted to clear the air over issues on affordability and whether or not Singaporeans will be worst off with a fluctuating interest rate for the Special, Medisave, and Retirement Accounts (SMRA).
Over 15 MPs joined in the debate on CPF changes today.
Josephine Teo, MP of Bishan-Toa Payoh GRC, said: "With this generous interest rate hike, and considering all the other major investments in education and medical infrastructure, are we possibly setting ourselves up for higher GST or other taxes in the future?
"I would like the minister to please give the assurance that we have done the sums and are confident that the new interests in its current proposal are affordable before we consider the suggestions to do even more."
Replying, Mr Tharman said the CPF board would pay for this through the interest it receives on government bonds.
This will raise the government's debt-servicing cost, which will be financed by returns on investing CPF monies.
He said: "This is why we must avoid paying above market rates for CPF interest. Paying market rates will be the only way in which we ensure that the CPF is sustainable, not just for the next few years but for the very long term. It should never become a draw on past reserves."
Mr Tharman also noted MP Heng Chee How's suggestion to credit the earnings from the increase in the interest rate into a separate CPF account.
Mr Heng said the government could create a separate sub-account in the CPF and put this additional interest earning into that account.
The CPF member can use that money at age 55 to help pay the premium for his Long Life Annuity, fully or partially, and excess amounts can flow back into the Ordinary Account.
Mr Tharman said the CPF reform is reasonable and justified, including the pegging of the SMRA to the yield of 10-year Singapore Government Securities, plus one percentage point.
This, he said, should offer better returns, taking into account future market uncertainties.
The SMRA rate will be kept at 4 percent for the first two years when it is implemented next January.
Some MPs have asked for this to be extended, but Mr Tharman said this may be unsustainable in the long run and that the CPF should not be an interest rate subsidy scheme.
Mr Tharman said: "What is absolutely critical in all of this is the culture that underpins this economic strategy. A culture that comprises an ethic of self-reliance, where every Singaporean knows and understands that he has to save for his future needs. This is why the approach that we have taken through all our subsidies, is to use subsidies to give Singaporeans the incentive to work and save on their own. If you work and save, we will help you by topping up your savings."
Other measures to help Singaporeans include HDB housing grants and Workfare Income Supplements.
Day Two of the debate saw many MPs raising concerns about the CPF changes.
Michael Palmer, MP of Pasir Ris-Punggol GRC, said: "I would be interested to know what measures the minister has in mind which would educate and hopefully convince all Singaporeans that the changes to the CPF scheme and other changes to legislation are indeed necessary to provide for our fast ageing population."
Lily Neo, MP of Jalan Besar GRC, said: "How viable is it for CPF investments to be hedged with other vehicles which yield higher returns, and 100 percent capital preservation? Could the CPF board consider working with GIC and perhaps peg the interest rates at 2 percentage points below GIC's returns?"
Apart from CPF reforms, MPs also debated on issues such as helping Singaporeans work longer. - CNA/so
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