SINGAPORE: In his Budget statement on Friday (Feb 16), Deputy Prime Minister and Finance Minister Lawrence Wong announced higher Central Provident Fund (CPF) contribution rates for those aged 55 to 65 years by 1.5 percentage points, beginning in 2025.

The current rates are 31 per cent for those aged 55 to 60 and 22 per cent for those aged 60 to 65.

This is among adjustments made since the last three annual Budgets to improve the retirement adequacy outcomes of Singaporeans.

This year’s Budget announcement of CPF contribution rates will mean that we are getting ever closer to long-term targets recommended in the 2019 Tripartite Workgroup on Older Workers report for strengthening older workers’ retirement adequacy.

The announced contribution rate increases can have incremental but meaningful effects on older workers’ retirement adequacy.

Assuming one works consistently from ages 55 to 65, that CPF member’s Retirement Account balance would be boosted by S$200 for every S$100 of wages earned over 10 years. This takes into account interest earned in the Retirement Account and would be capped at prevailing monthly CPF wage ceilings.

ENHANCED RETIREMENT SUM ANOTHER POTENTIAL BOOST

The CPF Enhanced Retirement Sum (ERS), the maximum amount that Singaporeans can place in their Retirement Accounts to secure the highest CPF Life payouts will also be increased to four times the Basic Retirement Sum (BRS), up from three times.

The effect of such a change is that a member with the higher ERS of S$426,000 from 2025 would be able to receive monthly payouts of S$3,330 as compared to S$2,530 if the member’s Retirement Account only had the current ERS of S$319,500.

With foreseeable higher cost of living in the future, this will help Singaporeans better meet their retirement needs and expenses in the future.

REMOVAL OF CPF SPECIAL ACCOUNTS CLOSES A LOOPHOLE

Bundled in the Budget 2024 announcements relating to CPF was the closure of the Special Account once members are 55 years of age and their CPF Retirement Account has been set up.

When implemented next year, this would resolve a long-standing anomaly whereby a CPF member aged 55 years and up would have two accounts that hold savings intended to provide retirement payouts: The Special Account and the Retirement Account.

Both these accounts earn the same long-term interest rate at 4.08 per cent for the current quarter.

However, while some Special Account savings of CPF members aged above 55 can be withdrawn on demand, savings in the Retirement Account are held to provide CPF Life payouts at the applicable CPF Life payout eligibility age (currently 65 for those born in 1954 or later).

Some savvy investors may be aware of this loophole that enables them to withdraw some of their Special Account funds out on demand after they hit 55 years of age, and still transfer it back as and when they wish. Thus, these funds should not earn the long-term interest rates that fund long-term retirement adequacy.

The continued existence of a member’s Special Account when the Retirement Account has taken over the role of holding long-term retirement savings is thus an anomaly that the CPF Board is now resolving.

 

Christopher Gee is Senior Research Fellow and Deputy Director at the Institute of Policy Studies, National University of Singapore.

This piece was first published in CNA on 16 February 2024.

Top photo from Unsplash.