Wednesday, 9 July 2014

Debunking CPF Minimum Sum myths





Many views about Minimum Sum are 'misguided'
Manpower Minister sets out to 'dispel misconceptions, myths that have surfaced in recent public discussion'
By Janice Heng, The Straits Times, 9 Jul 2014

TALK about the Central Provident Fund (CPF) scheme has been rife in recent months and yesterday, Manpower Minister Tan Chuan-Jin sought to set the record straight about the Minimum Sum.

This is the amount a CPF member must set aside in his Retirement Account (RA) on turning 55 to get a steady stream of income later.



"Some are unhappy when the Minimum Sum increases with every cohort that turns 55," he noted. "Some see it as a shifting goalpost that locks up more and more of their CPF savings."

But many of the views are misguided, Mr Tan indicated as he prefaced his reply to CPF questions from eight members of the House by setting out "to dispel misconceptions and myths that have surfaced in the recent public discussion".
- First, the Minimum Sum does not change once it is set for a specific cohort. For instance, those turning 55 from July 2014 to June 2015 must set aside $155,000.
This is more than the $148,000 required of the previous cohort. But the sum for this earlier group remains unchanged.
- Second, the increases are part of a planned, gradual adjustment which began in 2004, to bring the sum up to the required amount for retirement, as the cost of living rises.
For instance, $155,000 is the amount needed for a monthly payout of about $1,200 when the cohort turns 65 in 10 years' time.

The Minimum Sum is worked out based on the Government's estimate of what a lower-middle income household spends for daily living during retirement.
- Third, a member who does not meet his Minimum Sum at 55 does not need to top up the shortfall in cash. Also, he does not need to sell his property to make up for the shortfall.
- Fourth, only half the Minimum Sum needs to be in cash from the member's Ordinary or Special Account. The other half can be in the form of a pledge of the property the member owns.
What is left in the OA can be used to finance property purchases, or withdrawn by the member.

Last year, about 15 per cent of active CPF members used their properties to help meet up to half of the Minimum Sum, Mr Tan said, in response to Mr Gan Thiam Poh (Pasir Ris-Punggol GRC).

While some are unhappy their savings are locked up, others have voluntarily left their savings untouched. "One reason they do so is to continue to earn the risk-free returns on their CPF savings.''

Mr Tan added that as of December 2013, about 20 per cent of members who turned 55 in that year had balances above the Minimum Sum that were not withdrawn.

He acknowledged that the CPF system could be hard to understand, as different rules may apply to different cohorts.

The reason for keeping old rules, he said, was to avoid disrupting older cohorts' plans midway through retirement.

"But it would not be responsible of this Government to leave unchanged the CPF rules for those who are younger, when the situation around us has changed dramatically," he added.

He also told MPs like Ms Tin Pei Ling (Marine Parade GRC) that despite the continual rise in the Minimum Sum, more members in each cohort can meet it.


The group that worries the Government is current retirees, who may not have enough CPF balances owing to past low wages and more liberal withdrawal rules.

Still, most have fully paid their home loans, and there are schemes to help them tap their property for income.

Replying to Non-Constituency MP Lina Chiam, he said 23 per cent of those who turned 55 last year were inactive members who are less likely to meet the Minimum Sum and must rely on family and other social safety nets.

Following his speech, Ms Lee Bee Wah (Nee Soon GRC) suggested letting people take out the full amount in their Minimum Sum at an age "five to seven years" before the average life expectancy.

Mr Tan was cool to the idea, saying: "The more you take out, the more you reduce the monthly payout that you have available."











Govt has been flexible on CPF use for housing
By Janice Heng, The Straits Times, 9 Jul 2014

ONLY one in 10 people aged 55 and older is still using his Central Provident Fund (CPF) savings to pay the monthly instalment for his home, said Manpower Minister Tan Chuan-Jin.

And only one in 20 may have to top up his monthly instalment with cash out of his pocket.

For this small group of people, he assured the House the Government has been flexible, "where a case merits it", in letting them use the savings in their CPF Retirement Account to make their mortgage payments.

Mr Tan was replying to two MPs who wanted those with low savings to have greater flexibility in using CPF savings for housing.

Under the CPF rules, members turning 55 must put at least half of the specified Minimum Sum into their Retirement Account (RA), before any remaining savings in their Ordinary Account can be used to repay housing loans.


About two-thirds of these are approved, said Mr Tan.

"For cases that are not approved, we work closely with HDB to explore alternative financing or housing options for the CPF member," he added.

Replying to Mr Seng Han Thong (Ang Mo Kio GRC), he said: "I'd like to reassure Mr Seng that we are ready to exercise flexibility in the use of CPF for housing after 55, because we recognise that helping members maintain a roof over their heads is an important part of our overall retirement adequacy goals."

But it would not be desirable, he added, to make it automatic for those with less than half the Minimum Sum to continue using their CPF for housing, as Ms Irene Ng (Tampines GRC) had suggested.

The reason is that some members are able to pay their housing loans with cash instead of drawing on their RA savings, a move that would lower their future monthly payouts.

"We also do not want to encourage rash and imprudent housing purchases by members who think they can automatically draw down fully on their Retirement Account funds to service their loans," he added.

Mr Tan also said members receive reminders to plan ahead for their housing loans after 55.

Since January, the Housing Board has been sending letters to households with outstanding loans and at least one lessee aged 50 to 54, so that they can plan for the eventual transfer of savings to their RA.

But more can be done and the Government will look into this, Mr Tan said in his reply to Mr Ang Wei Neng's (Jurong GRC) suggestion of a reminder at age 54.




UNWISE TO POSTPONE NEEDED CHANGES

I am aware that some members may find the CPF system difficult to understand because policy changes over the years mean that different rules may apply for different cohorts.

This practice of grandfathering old rules for older members is precisely to minimise adjustments to those members who already passed age 55. This was necessary so as not to disrupt the plans of older members midway through their retirement.

But it would not be responsible of this Government to leave unchanged the CPF rules for those who are younger, when the situation around us has changed dramatically.

Singaporeans are living longer - that is a reality. The things that retired households spend on have also risen in quality - that is also a fact. The more we postpone the needed changes, the more disruptive the changes will be when they are forced on us in future.

- Manpower Minister Tan Chuan-Jin









More S’poreans able to meet Minimum Sum: Tan Chuan-Jin
Situation expected to continue especially for younger workers as wages and labour participation rates rise
By Joy Fang, TODAY, 9 Jul 2014

More members in each cohort reaching the age of 55 have been able to meet the Central Provident Fund (CPF) Minimum Sum despite the amount rising over the years and the situation is expected to continue especially for younger workers as wages and labour participation rates rise.

For younger workers, we are even more optimistic about their ability to attain the Minimum Sum,” said Manpower Minister Tan Chuan-Jin in Parliament yesterday, as he spent more than 20 minutes on a speech explaining the Minimum Sum scheme in order to dispel “misconceptions and myths” that had surfaced in the recent public discussion.



The CPF Board’s annual report last year showed that among the 36,698 active CPF members who turned 55 last year, 49.4 per cent were able to set aside the full Minimum Sum, either fully in cash, or partly in cash and via a property pledge.

The corresponding figures were 48.7 per cent and 45 per cent of active CPF members who turned 55 in 2012 and 2011 respectively.

Mr Tan attributed the trend partly to enhancements to the CPF system to help members grow their savings, such as raising CPF contribution rates for older workers and the Workfare Income Supplement scheme for lower-income workers.

Citing a 2012 Ministry of Manpower-commissioned study conducted by independent National University of Singapore researchers, Mr Tan noted that about 70 per cent to 80 per cent of new entrants to the workforce would be able to meet the Minimum Sum for their cohort fully in cash. Only half of the Minimum Sum needs to be set aside in cash and members can withdraw the rest of their CPF savings through pledging their properties.

He explained that once the Minimum Sum is set for a particular cohort, it does not change. The sum for each successive cohort over the past decade is also part of a “major, planned, gradual adjustment”, beginning in 2004, to catch up with what a lower-middle-income household would need in retirement, he said.

For CPF members turning 55 years old between this month and June next year, the Minimum Sum is S$155,000, which allows each member to get a monthly payout of about S$1,200 when they reach 65 years old.

Nominated Member of Parliament Laurence Lien asked if the payout is sufficient. In response, Mr Tan said the amount is what the authorities deem will be enough to meet basic needs. Adding that CPF members do not survive on the monthly payouts alone, he noted that many continue to work beyond 55 years of age and receive CPF contributions.

Also, for those who do not meet the Minimum Sum, a majority have a property they used their CPF savings to pay for, Mr Tan said. Some would also have spouses with higher CPF balances who can provide for them.

“It certainly does not mean that 50 per cent of the cohort will be inadequately prepared for their retirement,” he said.

Mr Tan noted that while some CPF members are unhappy that their CPF savings are locked up under the Minimum Sum scheme, there are people who have voluntarily left their CPF savings in their accounts even though they could withdraw the funds in excess of the Minimum Sum.

As of last December, about 20 per cent of the cohort who turned 55 last year had balances above the Minimum Sum that were not withdrawn, Mr Tan said.

He also pointed out that if someone does not meet the Minimum Sum, there is no need to top up the shortfall in cash or to sell his or her property to make up for it. What it means is the CPF member will receive a smaller monthly payout instead, he said.

Mr Tan stressed that the Minimum Sum scheme has been in place for about 30 years. It was introduced to ensure CPF savings can be taken out every month to meet living expenses. When CPF was first introduced in 1955 by the British colonial government, members could withdraw a lump sum at 55, but that was because, back then, one could expect to live only another six to seven years after that, he explained.

The situation is different today, when one can expect to live a further 30 years or more, he said. “To blindly keep to the earlier model of full withdrawal at age 55, which made sense then, I think would be wrong and ... irresponsible,” he added.

Mr Tan said the Government is most concerned about the seniors, who may have low CPF balances because of lower wages in the past and the more liberal CPF withdrawal rules then — calibrated for shorter lifespans — may have led to depletion of their CPF savings.

He noted that the majority of seniors have fully paid their housing loans and those who take advantage of programmes such as the Lease Buyback Scheme and the Silver Housing Bonus typically get enough from sale proceeds to top up their CPF accounts to reach the Minimum Sum, with cash to spare.

“While the CPF system is not perfect — it is not going to cater to every single person’s individual specific needs — as a system, it has provided (for) us well,” he said.

“By not being prudent, by not keeping it sustainable, we are going to ship that risk and that burden to our children’s generation.”



Four facts about the Minimum Sum

- The Minimum Sum quantum is cohort-specific. Once it is set for a particular cohort, it does not change.

- Increases to the Minimum Sum for each successive cohort over the past decade are part of a major, planned and gradual adjustment starting in 2004 to catch up with what a lower-middle-income household would need in retirement.

- If a CPF member does not meet the Minimum Sum at 55 years of age, he does not need to top up the shortfall in cash or sell his property to make up the shortfall.

- Only half of the Minimum Sum needs to be set aside in cash. The savings above that amount can be used to finance housing purchases or withdrawn through a property pledge.





MPs seek clarifications on CPF scheme
By Monica Kotwani, Channel NewsAsia, 8 Jul 2014

Seven Members of Parliament sought clarifications on the Central Provident Fund (CPF) from Manpower Minister Tan Chuan-Jin in Parliament on Tuesday (July 8). Here’s a summary of the issues discussed:



Can there be more flexibility for CPF withdrawals?

Mr Ang Wei Neng, the MP for Jurong GRC, asked if Singaporeans aged 55 could be allowed to choose withdrawing S$10,000, S$5,000, or nothing at all. Those who choose not to withdraw sums at age 55 could be rewarded in the form of top-ups to their Medisave accounts, he suggested.

The House was told that the CPF lump-sum withdrawal was pegged to age 55 many years ago because the life expectancy then was five to seven years beyond that age.



Is it possible to change the age for lump-sum CPF withdrawal?

Ms Lee Bee Wah, the MP for Nee Soon GRC, asked if the withdrawal age could be tweaked. If the life expectancy is 82 years now, for example, can Singaporeans be given the option of withdrawing their lump sums five to seven years before they turn 82, she suggested, so they can manage their money?

Mr Tan replied that “we don't know how long each individual will live, but as a whole, individuals will live longer. The more you take out, the more you reduce that monthly payout you have available. Are you able to stretch that for a long period?"



Can low-income workers be given more flexibility for their CPF monies?

MP for Tampines GRC Irene Ng asked for greater flexibility for low-income workers caught out by the policy to lock their funds in retirement accounts at age 55.

To this, Mr Tan said the number of people who face difficulties with their mortgage loan as a result of turning 55 years is low - about 500 appeals a year are received on this issue a year. Of these, two-thirds are approved.

He also pointed out other avenues for help, such as housing counsellors in HDB branches to assist with financial counselling, and tailoring solutions to help individuals with mortgage arrears.

HDB also works out ways of reducing or deferring mortgage instalments. Other solutions include referring them to Community Development Councils for financial or employment assistance.



Are the monthly payouts and the Minimum Sum adequate?

Nominated MP Laurence Lien asked how the Government assessed the adequacy of the Minimum Sum, and whether the monthly payout of S$1,200 was enough. "The concern is that for those where the Minimum Sum is adequate, they do not accumulate enough to have the Minimum Sum at 55. For those who meet the Minimum Sum, (the monthly payout) is not adequate."

Mr Tan responded that for families that were slightly below the middle-income level, “from a monthly payout basis, that is what we feel will meet their basic needs. Does it mean that individuals survive solely on their minimum sum in itself? No. For many of us, we do have other forms of savings. Many Singaporeans own their housing, which is why housing remains a very important part of retirement adequacy".

Those who do not meet their Minimum Sum do not need to top it up, the minister added. “What it means is that their monthly payout will be less,” he said. In such cases, they might be able to manage on that payout, supplemented by other available schemes. “If they do have challenges, that is where the state would come in through the social safety net, to augment and provide for other needs."



How to better communicate CPF schemes?

Mr Seng Han Thong, MP for Ang Mo Kio GRC, said the CPF scheme was a complicated one, and asked if its communication on the ground could be enhanced.

Mr Tan said the CPF Board is always seeking ways of communicating the scheme in a simpler way. It is also looking at improving the CPF website, by adding videos and infographics of policies, and pushing out more information on mainstream media.

"The CPF is a very significant and important pillar,” he said. “It is important to have debates and discussions based on facts, based on what it is and what it is not, and not on speculation for whatever reasons that individuals choose to distort this and create fear and anxiety."

Mr Tan said while the system will not cater to every person's individual needs, it has provided for Singaporeans well.





Debunking CPF Minimum Sum myths
Rather than a "shifting goalpost", Manpower Minister Tan Chuan-Jin said CPF Minimum Sum increases have been "planned and gradual" adjustments to catch up with rising living costs.
By Tan Qiuyi, Channel NewsAsia, 8 Jul 2014

Seeking to address concerns over the Central Provident Fund (CPF) Minimum Sum in Parliament on Tuesday (July 8), Manpower Minister Tan Chuan-Jin said that increases to the Minimum Sum for each cohort of 55-year-olds over the past 10 years have been a "major, planned, and gradual adjustment" that aim to ensure payouts are enough for a lower-middle income household's basic needs when they retire.

"Some are unhappy when the Minimum Sum increases for every cohort that turns 55. Some see it as a shifting of the goalpost, that locks up more and more of their CPF savings. Others do not know how much savings they must set aside at 55," he said.

Mr Tan then sought to dispel what he called myths and misconceptions about the scheme. He also posted a summary on Facebook.

The idea behind the CPF Minimum Sum is to be able to stream out the savings every month, as opposed to withdrawing it all in one go, he said. It is a minimum amount for retirement expenses, and savings above that can be withdrawn.

Once the Minimum Sum has been set for a specific cohort, it does not change. For instance, for someone who turns 55 this year, the sum is S$155,000. This is up from S$148,000, the sum for someone who turned 55 in 2013, or the S$117,000 for someone who is five years older.

Minimum Sum increases, Mr Tan said, are a planned and gradual adjustment to catch up with rising living costs. Why S$155,000 for the 2014 cohort? This is the amount needed to get a monthly payout of about S$1,200 in 10 years' time, when these Singaporeans turn 65. S$1,200 is what the authorities estimate a lower-middle-income household would need for daily life a decade from now.

"If you do not meet your Minimum Sum at 55, you do not need to top up the shortfall in cash, nor do you need to sell your property to make up that shortfall. What it means is that with a smaller amount, your monthly stream-out would be correspondingly less, and that is all," said Mr Tan.

Only half the Minimum Sum needs to be set aside in cash - that means S$77,500 for someone who turns 55 this year. Savings above this can be used to finance housing purchases, or withdrawn if you pledge a property.

Mr Tan acknowledged that policy changes over the years have made the CPF system hard to understand, especially when different rules apply to different age groups. However, not changing CPF rules would be irresponsible of the government. "Singaporeans are living longer, that is a reality. The things that retired households spend on have also risen in quality," he said.

"The more we postpone the needed changes, the more disruptive the changes will be when it is forced on us in future. Many governments do not embark on these changes and reforms because they may be unpopular, but it is not the right thing to do. We believe that it is our responsibility to make these changes, when we can."

More Singaporeans have been able to reach their Minimum Sum over the years, Mr Tan said. For CPF members who turned 55 last year, about half had their Minimum Sum in cash plus property. Authorities are optimistic that the majority of younger Singaporeans will be able to do this, even as the Minimum Sum increases, because of growing wages.





5 CPF myths busted
By Janice Heng, The Straits Times, 9 Jul 2014

Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam and Manpower Minister Tan Chuan-Jin tackled some common myths and misconceptions about the Central Provident Fund system during Tuesday's Parliament session.



MYTH NO. 1 - Your Minimum Sum keeps going up

Once the Minimum Sum is set for a particular cohort, it does not change. Rather, it has been going up for each new cohort.

For example, someone who turns 55 between July 2014 and June 2015 will need to set aside $155,000. This is more than for the previous cohort, which had to set aside $148,000, but this older cohort's own Minimum Sum has not gone up.

Similarly, for someone who turned 55 five years ago, the Minimum Sum was $117,000 and has not changed.

The Minimum Sum has been rising from cohort to cohort over the last decade in order to catch up with what a lower-middle income household would need in their retirement years, taking inflation into account.


MYTH NO. 2 - If you don't meet the Minimum Sum, you must top up the difference

If you do not meet your Minimum Sum at age 55, you do not need to top up the shortfall in cash. Nor do you need to sell your property to make up the shortfall.

Having less than the Minimum Sum in your CPF account just means that you will receive smaller monthly payouts when you reach the draw-down age of 65.


MYTH NO. 3 - The Minimum Sum must be set aside fully in cash

Only half of the Minimum Sum needs to be set aside in cash. Ordinary Account savings above that amount can be used to finance housing purchases, or be withdrawn if you pledge your property.

This means that a member turning 55 this year only needs to set aside $77,500 in cash. The rest can be withdrawn if they pledge their property. This cash amount of $77,500 will translate to a CPF Life payout of about $600 per month in retirement.


MYTH NO. 4 - CPF monies are managed by Temasek Holdings

Temasek Holdings does not manage any CPF monies.

CPF members' savings are invested in Special Singapore Government Securities. These are special non-tradable bonds issued by the Government to the CPF Board.

The Government takes the proceeds from issuing these bonds, and pools them together with other funds, such as proceeds from the tradable Singapore Government Securities, government surpluses and proceeds from land sales.

These pooled funds are first deposited with the Monetary Authority of Singapore as government deposits. MAS converts these funds into foreign assets through the foreign exchange market. But a major portion of these assets are of a longer term nature, and are hence transferred to be managed by GIC.

As shown above, no funds from the CPF are passed to Temasek for management.


MYTH NO. 5 - GIC should manage the CPF monies separately

If the GIC had to manage a separate fund to provide backing for CPF liabilities, it would not be able to earn as much.

CPF monies are pooled with the Government's other assets. Because the Government has built up significant net assets - that is, what it owns minus what it owes - including unencumbered assets, which are surpluses from land sales proceeds, government surpluses, and investment returns from those proceeds, these can act as a buffer.

When the market is weak and GIC's returns fall below the CPF interest rates, the Government can still pay the interest on CPF monies thanks to the net assets.

By pooling CPF monies with all these other assets, it also lets the GIC aim for higher long-term returns by investing in riskier assets such as equities and real estate. It can take losses when the markets are down, with the knowledge that it stands to gain when the markets go up again later.

A standalone fund for CPF monies would have to be managed much more conservatively, to avoid the risk of not meeting CPF obligations. Instead of accepting risks that allow for good long-term returns, the fund would just aim to avoid short-term shortfalls.



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