Higher returns, later drawdown age will make retirement savings last longer
THE guaranteed interest rate under the CPF scheme will rise by one percentage point for amounts up to $60,000, in an effort by the government to make retirement savings last longer.
A secure retirement: Deferring the drawdown by a year will earn the account more interest, and make it last two more years till 82 In addition, the age at which drawdowns on the Minimum Sum can begin will be raised progressively so that the savings can stretch further.
The government will also legislate the re-employment of workers, to take effect from 2012. Initially companies will be required to re-employ workers up to age 65, and later up to 67.
For the CPF scheme, some form of annuity will be made compulsory for those below 50, said Prime Minister Lee Hsien Loong yesterday at his National Day rally speech.
Mr Lee said the CPF Board will pay one percentage point more on the first $20,000 of Ordinary Account balances, and on up to $60,000 on a member's combined accounts comprising the OA, Special, Medical and Retirement Accounts.
'When CPF started, life expectancy was 60, 61. Now it's 80 years old. So we need to make three changes: Firstly, improve the returns on the CPF savings; secondly, draw down the CPF savings later so that they will last longer; and thirdly, to cover the risk of living longer than expected.' - Mr Lee on the need to bring the CPF system up to date
'You cannot just suka-suka write any number; must be properly justified and must pass muster and inspection by the Elected President, which is the way we have done it.' - Mr Lee on the $700 million cost for the one-point CPF interest hike
'When people give me free things, I don't accept. Why, when I can afford to pay? But if they say, OK, you are a friend, we give you a discount, then I think 'OK, friends can accept kindness'.' - Mr Lee, quoting nanogenarian Lee Siew Lan
Mr Lee said: 'I think we must improve the returns on the CPF. And I think our main focus is to help the lower and middle income groups.' Half of active CPF accounts have less than $45,000. These are members who are working and contributing to their accounts.
With $45,000, Mr Lee said: '... you are not poor but I would not think it is wise to strongly encourage you to go and play the stock market. Why? First, you don't have enough savings. Secondly, you may not have the expertise. Thirdly, you should not expose yourself to excessive risks...'
The CPF Board will be taking the route of enhancing the existing risk-free framework. More than half of the active members will get one per cent more on all their balances.
The $60,000 of funds can still be used for housing and medical expenses. But it cannot be invested through the CPF Investment Scheme.
This is expected to cheer the majority of members, who appear to prefer the safety of the guarantee. Private sector investment fund managers and insurers, however, may be disappointed as a higher guaranteed rate raises the risk-free bar which their funds have to beat, even if it applies only to up to $60,000 of funds.
Investor education efforts to date have set out to encourage individuals to step out of the comfort zone of a guaranteed rate.
The concern has been that a relatively low guaranteed rate of 2.5 per cent may not keep pace with inflation or cover the risk of a shortfall in funds.
As at March 31 this year, a total of $25.9 billion OA funds, and $5.7 billion of SA funds were invested in a mixture of stocks, funds and insurance policies. There is still another $57 billion of OA funds and $23.8 billion of SA funds that are uninvested.
For amounts in excess of $60,000, members are still free to invest through CPFIS.
Mr Lee said a percentage point more in the annual interest rate will make a big difference. A young man who starts work at 21 earning $1,700 a month, and buys a four-room HDB flat, will earn about $20,000 more in interest by the age of 55.
The hike will cost the government $700 million initially. The cost will rise as members save more in the CPF. The cost, said Mr Lee, is equal to the entire government grant to the HDB every year of $750 million.
There will be no change to the concessionary HDB loan rate formula.
On drawdowns, members are currently required to set aside the Minimum Sum at the age of 55. This is drawn upon from the age of 62 in monthly payments. But if the account is drawn upon too early, a retiree may outlive his savings. Based on the current scheme earning 4 per cent in interest, the annual income from the Minimum Sum lasts 20 years, after which the account is depleted.
Deferring the drawdown by a year will earn the account more interest, and make it last two more years till 82. But more people will live past 82, in particular women, said Mr Lee.
As the government legislates re-employment until 65, the drawdown age must be raised progressively as well.
In 2012, the year when re-employment of workers will be required, the drawdown will begin to rise, and will reach 65 by 2018. Members who are currently 58 or older will not be affected. For those 53 and younger, the drawdown age will go up to 65.
Mr Lee said the move may not be popular. 'But we have no choice. People are living longer, we have to work longer, and we've got to start drawing on the reserves later. Therefore we have to start moving now.'
For older workers in their 50s who are affected by a later drawdown age, a one-off bonus interest will be paid to their Retirement Accounts. A bonus will also be paid to those who voluntarily defer their drawdowns, even if they are currently 58 and older.
Annuities are a solution to the need for an income in retirement, said Mr Lee. But few people opt to convert the Minimum Sum into an annuity as Singaporeans do not understand annuities.
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