Monday 2 February 2015

CPF Panel: Allow partial lump sum withdrawals and voluntary Minimum Sum top-ups

By Toh Yong Chuan, Manpower Correspondent, The Sunday Times, 1 Feb 2015

A government-appointed panel reviewing the Central Provident Fund (CPF) is expected to recommend allowing people to make one partial lump sum withdrawal from their retirement account at age 65.

It will also ask the Government to allow those who want to put in more savings for retirement in order to enjoy higher monthly payouts later to do so.

While the panel will not call for the Minimum Sum to be adjusted upwards, it pointed out that the amount members must leave in the CPF at age 55 will continue to rise.

This is because savings for retirement need to keep pace with rising prices and standards of living so that payouts are adequate, panel chief Tan Chorh Chuan said at a media briefing last Friday.

"But the rate at which it will go up will not be as high as what we've seen in the preceding 10 years," he said.

Giving a preview of recommendations it will be submitting to the Government this week, Professor Tan said his team had three main factors to consider - adequacy of savings for retirement, flexibility of withdrawing the savings and whether it would be simple enough for people to understand.

"The (whole CPF) system really is not very easy to understand," he said.

CPF members must meet a Minimum Sum when they turn 55. This amount is locked away until they turn 65, when they start receiving monthly payouts.

The first set of recommendations from the panel will focus on the Minimum Sum and lump sum withdrawals.

The panel is not expecting the Minimum Sum to stay at $161,000 - the amount set for those turning 55 from July this year.

It will have to go up to adjust for inflation, and he hopes the Government will use longer-term inflation rates to reduce short-term fluctuations, so that people will know earlier what their Minimum Sum will be, and plan for it.

Prof Tan also revealed that the panel will ask the Government to allow people to top up their CPF savings beyond the Minimum Sum in order to enjoy higher payouts. "It's an option to put in more money if you want to. But if you don't want to, you don't have to."

Some have called for flexibility to withdraw more from their retirement accounts.

The panel is in favour of allowing CPF members to withdraw a lump sum of about 20 per cent of their retirement savings at age 65, even if they do not meet the Minimum Sum at age 55.

Prime Minister Lee Hsien Loong suggested that 20 per cent withdrawal cap at last year's National Day Rally when he said the Government was considering whether to allow CPF members to make lump sum withdrawals when they retire.

The panel also has suggestions on ways to help CPF members who do not meet the Minimum Sum, as well as freelance workers and housewives with lower CPF savings.

Prof Tan thanked the 400-odd Singaporeans who attended 10 focus group discussions as well as bodies such as the National Trades Union Congress and Singapore Actuarial Society for giving their views.

The 13-member panel was formed last September to review aspects of the CPF system, such as the Minimum Sum, withdrawals, payouts and boosting returns.

He is confident the Government would "seriously consider" all of the panel's recommendations.

A second set of recommendations on CPF payouts and returns will be submitted to the Government in the middle of the year, he said.

CPF advisory panel to submit ideas on flexibility and more
By Joanna Seow, The Sunday Times, 1 Feb 2015

The panel tasked with studying ways to make the Central Provident Fund (CPF) system more flexible will not only submit its official recommendations on flexibility this week, but also give ideas on other areas of concern, said its chairman Tan Chorh Chuan.

"In the spirit of looking at this in a somewhat broader way, we will make some suggestions and proposals on these (areas) as well," he said in an interview last Friday.

These could include ideas to help people who do not accumulate enough to meet the Minimum Sum in their CPF accounts, such as housewives.

Helping CPF members to collect enough savings is also something that the labour movement is concerned about.

Two weeks ago, the National Trades Union Congress (NTUC) released a list of 15 suggestions on the CPF, the national savings plan.

On ways to help CPF members accumulate savings, the NTUC had suggested ideas such as raising CPF rates and allowing more workers to benefit from the Workfare Income Supplement Scheme.

Commenting on the NTUC suggestions for the first time, Professor Tan called them "very comprehensive and well thought through".

Of the NTUC proposals which fell within the panel's scope, many were fairly well aligned with the panel's discussions and public feedback at focus group discussions, he added.

"We've looked at the recommendations quite carefully together with the other feedback we've got and they have contributed to helping us shape our recommendations on the first two (terms of reference)," he said.

He was referring to the first two of four issues that the panel has been assigned to tackle.

The first two are how to adjust the Minimum Sum for future retirees, and the amount and conditions for lump-sum withdrawals at the draw-down age.

Besides the NTUC and members of the public, the panel also received feedback from two groups of risk assessment and investment management professionals. These were the Singapore Actuarial Society (SAS) and the Investment Management Association of Singapore.

When contacted, the SAS did not provide details about its paper, which it submitted to the panel last December. Members of its council plan to meet the panel to discuss the proposals.

While the panel will give broader suggestions, Prof Tan stressed that its official recommendations have to be within the scope of what it was tasked to study. "It's not a panel to review the entire CPF," he said.

"There are many, many potential things you could look at within the CPF, but (creating greater flexibility in the system) was one of the major elements that there was a lot of public interest in which the panel is working to try to help address."

Observers welcome plan for more CPF flexibility
By Xue Jianyue, TODAY, 3 Feb 2015

While most observers whom TODAY spoke to welcomed the proposal to give Central Provident Fund (CPF) members the flexibility to put in more savings in order to enjoy a higher monthly payout later, they cautioned that it could end up benefitting the well-off more if safeguards are not put in place.

Observers pointed to the tax relief that CPF members currently enjoy under the CPF Minimum Sum Topping-Up Scheme if they top up their Retirement Account or Special Account, and noted that those who are cash rich will be able to park more money with the CPF Board and earn the risk-free interest. Abolishing the tax deductions and putting a cap on the top-ups are some of the possible safeguards, they suggested, speaking on the proposal recently mooted by a government-appointed review panel.

On top of these, Nanyang Technological University economist Walter Theseira also suggested that the Government supports the top-ups with its own contributions to the members’ accounts. “We must fix the tax deductibility problem and look at how to make it better for middle-income people,” he said.

West Coast GRC Member of Parliament Foo Mee Har proposed that the CPF monthly payouts be pegged to the median salary of Singaporeans. For example, an ideal amount allowed beyond the Minimum Sum could be derived from a monthly payout that is 70 per cent of the median salary — an amount that she felt was roughly enough for people to get by comfortably for the rest of their lives.

Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy said he was in favour of allowing top-ups beyond the Minimum Sum as the Government is bearing the investment risks on behalf of the citizens.

Ang Mo Kio GRC MP Seng Han Thong reiterated that the CPF provides a safe investment option for senior citizens.

“There are many seniors, who have extra cash, trying to invest in some areas but (end up) being cheated. So that’s one way to help them save money in a safer place,” Mr Seng said.

He added: “On the other hand, there are also old folks who find it difficult to meet the Minimum Sum. Flexibility should be extended to both sides.”

Mr Alfred Chia, chief executive officer of financial advisory firm SingCapital, said the 4 per cent interest per annum for monies in the Retirement Account would be attractive for CPF members to put in more money with the CPF Board.

“The question is whether the CPF Board will be able to deliver. (It) must be able to earn the returns. In order to earn the returns, they have to invest the money more prudently,” he said.

At a media briefing on Friday, Professor Tan Chorh Chuan, who heads the review panel, said it will ask the Government to allow CPF members to put in more savings for retirement so as to enjoy a higher payout later.

The panel will submit its first set of recommendations to the Government this week. It is also expected to recommend allowing CPF members to make a partial lump sum withdrawal from their Retirement Account when they turn 65.

Assoc Prof Hui, however, was concerned that a partial lump sum withdrawal will lead to lower monthly payouts later, and members could experience difficulties paying for retirement needs. Nevertheless, most of the observers supported the idea, citing the fact that Singaporeans should be allowed the option in order to meet emergency needs or fulfil certain aspirations. Dr Theseira noted the additional support that would be provided by the Government through measures such as the Silver Support Scheme, which disburse annual payouts to needy elderly Singaporeans from the age of 65 to help them with living expenses.

Prof Tan had also reiterated the need for retirement savings to keep pace with inflation and rising standards of living.

Ms Foo felt that more transparency in the calculation of the Minimum Sum would be helpful for Singaporeans. Dr Theseira said that future increases in the Minimum Sum can be moderated through social support policies. “If you assume (government) support for medical care for the aged is going up ... then you can afford to reduce the amount you need to set aside for these purposes,” he said.

CPF reforms: To be or not to be (more flexible, that is)
By Walter E. Theseira, Published The Straits Times, 4 Feb 2015

THE Central Provident Fund Advisory Panel is due to announce recommendations on enhancing flexibility in CPF withdrawals. But how will flexibility affect CPF members and Singaporeans as a whole?

The CPF is a "commitment savings device" - a way of locking up savings for the future that cannot be touched in the present. Many of us have the desire to save for our old age, but lack the willpower to set aside money consistently for that purpose. Commitment savings policies like CPF protect us from our own tendency to put short-term desires ahead of long-term needs.

Why is CPF participation mandatory? Unfortunately, some who refuse to commit to save will become destitute in old age, by accident or design. Mandated savings mean that those who were prudent do not have to pay for the retirement of others who were profligate.

Singapore is hardly unique in adopting a mandatory savings policy. Mandatory savings schemes are the second most common form of old-age provision worldwide, after "pay-as-you-go" pension schemes where retirees are funded from general taxes. No government-run pension schemes anywhere in the world allow individuals to opt out, for similar reasons.

But a commitment savings policy requires an equally strong commitment from the Government, as the guarantor of the CPF. Here, the Government faces a policy dilemma. Revisions to the CPF scheme are needed to meet new challenges for retirement. Yet revisions also may weaken trust in the Government's commitment to provide a stable set of rules for the CPF system.

Much of the present debate surrounding the CPF scheme originates in the introduction of the Minimum Sum scheme in 1987, and subsequent revisions both to the Minimum Sum and the CPF drawdown age. These revisions were crucial to enhance retirement adequacy, given dramatic improvements in life expectancy in Singapore. At independence, Singaporeans could expect to live only to 67 - barely a dozen years after the CPF withdrawal age of 55. Today, Singaporeans look forward to living to over 80.

Even though the CPF drawdown age has risen, the number of years people can expect to live after drawdown has actually increased. But these revisions understandably disappointed CPF members expecting to withdraw their savings in full at age 55. Critics are still aggrieved by their inability to withdraw CPF in full at age 55, although most CPF members approaching retirement age today were young in 1987, and so should have adjusted their expectations by now.

Enhancing flexibility also presents a policy dilemma. Enhancing flexibility will weaken CPF as a commitment savings device and could hurt retirement adequacy among those who will rely on their CPF the most. After all, CPF members who lack other savings at retirement are the most likely to need flexibility to cash out their CPF.

Even better-off CPF members can be harmed by cashing out their CPF. National University of Singapore economists Sumit Agarwal, Jessica Pan and Wenlan Qian found in a recent study that members withdrawing their CPF balances at age 55 tended to simply leave large portions in their bank accounts, which pay negligible interest. Their findings are ironic in the light of calls to raise the rate of return on CPF funds, to better ensure retirement adequacy.

One way of managing these problems is to design a CPF lump-sum withdrawal mechanism that places funds by default into more productive (but safe) investments than ordinary bank accounts. For example, lump-sum withdrawals may be placed by default into fixed deposits that return higher rates than ordinary bank accounts. These changes would give CPF members the satisfaction of withdrawing their capital, yet prevent members from losing too much ground in terms of retirement adequacy.

However, we must also accept that many CPF members wish to use their lump-sum withdrawals to realise lifelong dreams or ambitions. The reality is that many lower-income CPF members will face great difficulty maintaining an adequate standard of living in retirement from CPF savings alone. While flexibility may worsen their situation somewhat in the long run, refusing to grant flexibility, by itself, does not address their basic problem of inadequate lifetime savings.

The more appropriate way of addressing retirement adequacy among lower-income Singaporeans is for the more fortunate to help shoulder that burden by guaranteeing all Singaporeans a minimum standard of living in retirement.

Although the upcoming Silver Support Scheme to help needy Singaporeans aged 65 and above with living expenses through an annual bonus payout represents a welcome step in this direction, social provisions for old-age security are currently fragmented between different agencies, and retirees can fall through the cracks.

Many countries guarantee a minimum basic pension to all citizens, or at least to all workers with a good record of contributions to their retirement accounts. Reforms that will strengthen CPF in the long run should both help younger workers build up their savings for retirement, and guarantee contributing workers the prospect of an adequate retirement.

The writer is Assistant Professor of Economics, Nanyang Technological University.

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