How CPF came about
The CPF was introduced at the time when most employees in Singapore, except those working in the civil service or in some of the larger companies, were not provided with any form of retirement benefits from their employers. As a result, these workers had to depend on their personal savings or on their children after retirement, which reduced their post-retirement financial security. In January 1951, the Singapore Progressive Party completed a draft bill proposing the establishment of a Central Provident Fund to ensure retirement benefits for workers. The bill was tabled in the Legislative Council on 22 May 1951 before being sent to a Colony Select Committee and finally introduced formally on 1 July 1955, even before the independence of Singapore.
The CPF Rules
The Minimum Sum Scheme (MSS) was introduced in January 1987 to help CPF members set aside sufficient savings to support a basic standard of living during retirement. When the scheme was first started, members were required to set aside a sum of $30,000 in their Retirement Account when they turned 55 years old. By 2014, the minimum sum has increased to $155,000. This minimum sum is meant to be drawn out monthly when the CPF member reaches its retirement age (or drawn down age, which is different for each cohort as it gets revised each time).
Whether or not CPF members has any money left to withdraw at the age of 55 for their “retirement”, it is expected that the CPF member continues to work until the drawn down age. At that time, the minimum sum plus interests will be returned to the member in monthly pay-outs or to its nominated beneficiaries in the case of death anytime from 55 years old onwards.
The CPF Life is an revision of the original Minimum Sum Scheme. Its objective is to provide annuity pay-outs after the retirement age (drawn down age) until the death of the CPF member. It acheives this by creating an annuity premium scheme from the existing retirement account in the minimum sum scheme.
According to latest available CPF published statistics, the number of CPF members who were able to meet the minimum sum had been falling from about 57% in 1996 to lowest 36% in 2008 before climbing up again to 45% by 2011. This number is expected to grow as the later cohorts have better education and jobs. However, there is no need to meet the minimum sum (i.e. it can also be call the maximum-confiscate-sum scheme), and whatever amount locked in the Retirement Account (RA) will still be eventually returned to the CPF member from drawn down age onwards. The story painted by the statistics only serves to show that most Singaporeans from the past did not have enough income to build their retirement nests to maintain the living demands calculated by the government.
Analysis of Returns
According to the CPF Life Calculator, for a Retirement Account of $155,000, CPF pays an average of $1,171.50 monthly or $14,058 annually until the member dies. This means that:
- If this amount of $155,000 was fully drawn out at 55 and kept under the pillow, it will last slightly more than 11 years, until age 66.
- If there was no Retirement Account and it continues to live in Ordinary Account at 2.5%, then the monthly withdrawal of $1,171.50 will last slightly more than 14 years from age 55 until age 69.
- If we keep the money in Ordinary Account at 2.5% and let it grow between age 55 to 65, it will then last 17 years from age 65 onwards until 82.
For a Retirement Account of $40,000 at age 55 (the amount that will force you to join CPF Life automatically), CPF pays an average of $377 monthly or $4,525 annually. This means that:
- If $40,000 was fully drawn out at 55, it will last at most 9 years.
- If it lives in Ordinary Account at 2.5% and disciplined enough to withdraw only $377 monthly, it will last at most 10 years until age 65.
- If it lives in Ordinary Account until age 65 before it is withdrawn, it will last 13 years until age 78.
It appears that the poorer you are (in CPF at least), the more you benefit from the scheme assuming that you cannot get a 2.5% rate of return anywhere else with the same peace of mind. However, what happens to the pledged property when you die, I have no idea as of now.
Comparing other Countries
International studies such as OECD’s Pensions at a Glance and Mercer’s Melbourne Mercer Global Pension Index provide a good basis for international comparisons of pension systems. However, these studies tend to use a standardised methodology across countries to maintain comparability, and are hence unable to fully take into account some of each country’s unique characteristics.
Here are some situations where one can become unhappy with the CPF policies. Knowing these beforehand will not change the world, but it may prepare you for the moment so that you can be less agitated.