Is trapping retirement funds of Singaporeans the new purpose and intent of CPF?

It appears that the Singapore government is firmly proceeding with the removal of the Special Account (SA) for CPF Members, as announced by Deputy Prime Minister Lawrence Wong in his Budget announcement last month.

From 2025, individuals aged 55 and above will no longer have a Special Account. The funds from this account will be transferred to the Retirement Account up to their Full Retirement Sum (FRS), with any excess being moved to their Ordinary Account.

This action is described as part of a broader effort “to rationalize the CPF system.”

In response to the public outcry over the SA’s removal for those above 55, DPM Wong, in a panel hosted by Channel News Asia on 21 February, stated that the introduced measures are “very much in line with the purpose and intent of the CPF.”

Mr Wong, also serving as Finance Minister, addressed the decision to discontinue the CPF Special Account and the online reactions it sparked.

The Ordinary Account, which can be used for housing withdrawals, offers short-term interest rates at 2.5%, whereas the Special Account, intended for long-term savings, accrues a higher interest rate of 4.08%.

“Of course, at age 55, you also have a Retirement Account. So, instead of having both a Special Account and a Retirement Account, we are consolidating them into just one, the Retirement Account, aimed for long-term, retirement needs,” DPM Wong elaborated.

The Ministry of Finance has been quoted as saying that savings in the SA, which can be withdrawn at any time for members aged 55 and older and achieved an Full Retirement Sum (FRS) of S$205,800 in their CPF account, should not earn a higher interest rate.

“The principle is that only savings that cannot be withdrawn on demand should earn the long-term interest rate, while savings that can be withdrawn on demand should earn the short-term interest rate,” stated the ministry.

Following the removal of SA, the Enhanced Retirement Sum will increase to four times the Basic Retirement Sum of S$106,500, reaching S$426,000, which is up from the current three times.

This led to Manpower Minister Tan See Leng indicating that only 1% of CPF members will not be able to transfer their funds into the higher-interest RA, implicitly suggesting that 99% of CPF members over 55 by 2025 will have savings below the FRS and thus be unaffected.

Similar to the SimplyGo controversy, the government has implemented a measure perceived as adding minimal value to people’s lives and addressing a non-issue. Unlike previous instances, the government is not reversing its decision on the SA removal despite public dissent, insisting on its necessity, much like with the GST hikes.

However, the ministers’ comments on the changes merely reiterate the known fact of the RA’s higher interest compared to the OA.

The public’s concern lies in the SA’s removal due to its equivalent high interest to the RA but with the added flexibility for CPF members to withdraw funds post-retirement, a contrast to the RA’s drip-feed withdrawal process through CPF Life at the age of 65.

While the larger sums in the RA could translate to higher retiree payouts, it’s essential to acknowledge that many CPF members may not fully utilize their accumulated savings during their lifetimes.

According to Singaporean statistics, the most common causes of death in 2022 were cancer (23.9%), pneumonia (20.0%), and ischaemic heart disease (19.7%), and this ranking has remained stable for the past three years.

Examining the median age of death in 2022 —by which half of the specific group of individuals has passed away—within the Singaporean population for the top three causes of death, it’s observed that minorities, particularly Malays and Indians, have a relatively shorter lifespan.

For example, the median age at death for Malays with cancer is 67.6 years, and for Indians, it is 69.1 years.

Despite the fact that the life expectancy in Singapore was 83 in 2022, the statistics suggest that, with the bulk of their retirement funds being distributed as drip-feed payments from CPF Life, some individuals will likely not live to withdraw the full sum of their savings.

Furthermore, despite CPF Members being able to pass their savings to beneficiaries, it’s notable that some would prefer to spend their funds personally, and an increasing number of CPF members lack direct heirs for their hard-earned money.

According to the 2020 census, 147,523 individuals were single at the age of 55 and above—assuming no one died or married after the age of 50. This number is likely to increase as more Singaporeans choose to stay single or remain unwed.

To further complicate matters, the fourfold Enhanced Retirement Sum has been promoted as an option for CPF members without highlighting that under the CPF Life default standard plan, all interest from age 65 will be absorbed into the fund upon death.

This method is justified by the premiums being risk-pooled—a key principle of annuity schemes designed to provide members with regular lifetime payouts, even if they outlive their expected lifespan.

However, from a mathematical standpoint, to be better off, one must live long enough for the total monthly payouts to surpass the Retirement Account balance at age 65, plus the accumulated interest.

Despite Dr Tan’s assertion that the reform is not about retaining CPF members’ funds or saving interest monies for the CPF board, the inevitable conclusion is that members wishing to secure the 4.08% interest rate must transfer their funds to the Retirement Account (RA) upon reaching 55, instead of opting for the Ordinary Account (OA) which offers a 2.5% interest rate. This effectively locks their funds within the CPF system for an extended period.

This situation might arguably explain why DPM Wong stated that the change is ‘very much in line with the purpose and intent of the CPF’.

The necessity of the changes to maintain the CPF system’s financial viability or to enhance CPF members’ financial health largely hinges on the verbal narrative of ministers and the CPF board.

Without access to the CPF Life actuarial report, which details how the annuity scheme is calculated and its assumptions, the financial implications for both the CPF board and CPF members from the pension system remain unclear.

It is also uncertain whether the system is accumulating funds at relatively low-interest rates for Sovereign Wealth Funds like GIC, particularly since Dr Tan refuted proposals from Workers’ Party Member of Parliament Louis Chua regarding the possibility of Singaporeans co-investing CPF savings in GIC for higher interest rates which boasts a 20-year annualized nominal rate of return of 6.9%.