Speech at Retirement Conference "Improving Retirement Security in Singapore"
Mr Tan Chuan-Jin, Minister of State (Manpower and National Development), Hilton Hotel
Mr Tan Hak-Leh, President, Life Insurance Association Singapore
Mr Richard Holloway, Vice President, Singapore Actuarial Society
Ladies and Gentlemen,
- Good morning. Being in this industry, I take it all of you have adequately prepared for retirement. It is an area of concern, because all of us will eventually age and retire. The question is: do we have enough? Lately, there has been a fair amount of discussion in the media on whether Singaporeans have enough for their retirement. So this Conference focusing on retirement is timely.
- A fundamental question is: "how much" should you save for retirement? However, in order to answer this question, we need to consider what kind of lifestyle you expect and more importantly, "how long" you expect to live, and how you need these savings to last. This is an issue that not just faces us in Singapore but many people around the world, especially in developed countries.
- Let us take a look at history. When CPF was introduced in 1955, Singaporeans, by and large, retired at the age of 55. In 1955 when you retire at about 55, which was also the point where you take out the CPF, you will live till about 62. The Minimum Sum Scheme (MSS) was introduced some time ago in 1987, and the life expectancy at that stage was about 75. So as you can see, this is increasing.
How Long Must Savings Last?
The Reality of Increasing Longevity
- With improvements in nutrition and access to quality healthcare, Singaporeans are living longer. When the Minimum Sum Scheme was introduced 25 years ago, not many people were expected to live past 851. However, life expectancy figures from the Department of Statistics (DOS) show that about 1 in 2 Singaporean residents aged 55 in 2010 (taking females and males together) will live to at least 85 years old, while 1 in 3 will live to 90 years or more. That is sobering, and we need to think about our retirement needs in a much more serious fashion.
- Singapore, in particular, has experienced significant improvements in mortality. Several decades ago, we lagged behind many developed countries in terms of life expectancies2. Today, we have one of the longest life expectancies in the world, ahead of many other developed countries such as the UK, US, Germany, Taiwan and South Korea, to name a few. We are also fast catching up with Japan which is traditionally seen as the world’s leader in longevity.
- However, those life expectancy figures from the Department of Statistics I mentioned earlier do not tell the full picture. They are based on current mortality rates assuming no improvements over time. As the actuarial experts in this room would know, such life expectancy figures generally tend to under-estimate how long each of us can expect to live. With increasing advances in technology and healthcare, mortality rates improve over time as younger cohorts are healthier and will live longer.
- Mortality improvements can add a substantial number of years to our lives. Take the UK for example, which publishes life expectancy data with mortality improvements built in. Taking into account mortality improvements, males in the UK aged 55 in 2013 can expect to live until 86 years old, while females in the same cohort can expect to live until 89 years old!3. Since we know that the life expectancies are longer in Singapore, we can expect that Singaporeans will live even longer.
- Some of you may find this hard to believe, but these are serious projections done by government statisticians in the world. In fact, it is well-known that people tend to underestimate their life expectancy – I had spoken about this last year at the Ee Peng Liang Memorial Fund Forum. We form a view of how long we will live based on our observations, for example by thinking about our own parents and grandparents or flipping through obituaries in the newspapers. Academics call this availability bias – our perceptions tend to be influenced by information that we can easily recall.
- What we may not realize is that we belong to a younger cohort that enjoys better health and nutrition, and therefore would live longer than the previous generations. We would thus also underestimate how long our savings need to last, and how much we should save for retirement.
CPF LIFE as an Improvement over MSS
- The increasing life expectancies mean that we need to change how we draw down on our savings in retirement.
- Today, most CPF members draw down on their savings via the Minimum Sum Scheme (MSS), which provides monthly payouts for about 20 years. While this has enabled many older CPF members to enjoy payouts for a good part of their retirement years, mortality improvements mean that a substantial proportion of members today and in the future are likely to outlive their CPF savings if they remain on the Minimum Sum Scheme. This will give you a payout for about 20 years. This is the reason why we introduced CPF LIFE – to ensure that members will get a monthly income in their retirement years for as long as they live.
- From 2013 onwards, all CPF members turning 55 with more than $40,000 in their Retirement Account will participate in CPF LIFE. As announced in Parliament by DPM Tharman last month, we are making it simpler for members to choose the LIFE plans that best meet their needs.
- Members will essentially get to choose between two plans, Standard and Basic. The Standard Plan is the default and will meet the needs of most members. It provides members with higher monthly payouts while preserving flexibility to use their Retirement Account (RA) monies for housing until 65 years old, and allowing members leave a bequest for their loved ones. The Basic Plan, on the other hand, is retained for members who prefer a higher bequest and lower monthly payouts. This plan also provides flexibility for members who wish to use their RA savings for housing even after 65 years old. So the CPF LIFE scheme is now simpler, yet members still have a meaningful choice of plans.
- Some members have voiced concerns that they will lose out under CPF LIFE as their payouts may be below what they would have received under the MSS. However, when comparing CPF LIFE payouts with MSS payouts, it is important to compare the total payout a member receives over his or her lifetime, not just the monthly payout. This is because CPF LIFE is an annuity, paying out for life, unlike MSS which will run out at some point.
- We expect a significant number of members to benefit from CPF LIFE in view of rising longevity. For instance, a female member with a balance of $90,000 at 55 and who outlives two-thirds of her group, will receive at least 30 per cent more in total under the Standard Plan, compared to what she would receive under the MSS.
- In contrast, a member who is under the MSS may well have to end up saving a portion of his monthly payouts, in case he lives beyond the point his CPF payouts run out. But with CPF LIFE, he can have peace of mind, as he will receive a payout for as long as he lives.
How Much Should One Set Aside for Retirement?
- So how much should one set aside for retirement? A lot depends on our own lifestyles, our own expectations. This is another issue we need to think about.
CPF provides for a basic standard of living in retirement
- The CPF provides for a basic retirement standard of living in retirement. What is this basic standard of living that we talk about? For a male member turning 55 this year who has set aside the full Minimum Sum, he can get about $1100 a month for as long as he lives if he joins CPF LIFE. This is sufficient to meet the typical expenditure needs of retiree households in the 20th to 40th percentile.
- In other words, the CPF system is designed to cater fully for the retirement needs of those who are below middle-income, while at the same time, cater significantly for the retirement needs of the middle income group.
Will Singaporeans have enough for retirement?
- Some people have expressed concern at the low Minimum Sum attainment rates of our current generation of older Singaporeans – for instance, only 45% of active CPF members turning 55 in 2011 actually met the Minimum Sum.
- This is because of a number of factors. First, this group of older Singaporeans had experienced relatively low wages in the early years of Singapore’s development, which means their CPF contributions were also quite significantly lower due to lower wages. In the case of women, it was also not uncommon for them to leave the workforce to concentrate their efforts on the home and their children; for them, there will be even less in their CPF to rely on for their retirement needs. Second, CPF rules which applied to them allowed them to withdraw more in cash when they reached age 55. Third, they were allowed to withdraw more to pay for housing, to help them own their homes.
- Many of our older Singaporeans fortunately also have other sources of income, such as allowances from family members. But for those that do not, the Government is quite aware of the challenges that will face them, and we have taken steps to provide them with options to boost their retirement savings.
- As mentioned earlier, many older Singaporeans had used their CPF savings to purchase a home. As a result, many older members have substantial assets in the form of their homes. At this point I think, it is quite important to highlight that the availability to use CPF to own your own home, we believe, is an important part to provide for part of your retirement needs. You have the option to own a home instead of rent, and should you need, you can look at the home as an asset in the home as well. Part of this wealth can be unlocked to supplement their retirement income if necessary. For example, older Singaporeans can sublet a room to supplement their income, or rent out the entire flat if they have alternative accommodation or move to a smaller flat.
- We recently announced the Silver Housing Bonus and the Enhanced Lease Buyback Scheme, to give Singaporeans even more options. The SHB gives a bonus to those moving to a smaller flat, to help them defray the costs associated with moving to a new home. Parents whose kids have grown up, may choose to decide that it makes more sense to move to a studio apartment. The Enhanced LBS provides options to those who find moving to a smaller flat not practical, by enabling them to sell off the tail end of the leases of their homes.
- For older Singaporeans who are still working, other recent changes will also help them save up more for retirement. One is the recent increase in CPF contribution rates for workers aged 50 and above, which was announced in this year’s Budget. We adjusted the CPF contribution rates for older workers a number of years back - this was largely to shape the behaviour in the market and to encourage employers to hire older workers. We have seen a pick up in the age at which Singaporeans can continue to work and that has allowed us the space to increase the CPF contribution rates somewhat. At the same time we have complemented this with the Special Employment Credit, which will help our workers stay employed even as they get older.
- How about our younger members? Many people are concerned that they may not be able to rely on family support in their retirement due to shrinking family sizes. Some are also concerned that the escalating property prices would reduce the amount that younger members can set aside for retirement.
- Fortunately, the higher educational profiles and higher expected lifetime incomes of our younger members mean that many of them are likely to have more savings for retirement. In fact, we expect the proportion of members who are able to meet the Minimum Sum to keep increasing, with some 70% to 80% of those working today meeting the inflation-adjusted Minimum Sum by the time they retire. And this is after paying for their homes.
- Moreover, efforts have been taken by the Government to make public housing affordable to all Singaporeans through generous housing grants and housing loans at reasonable interest rates will continue. We look at incomes closely to make sure that public housing is priced accordingly. At each income level, we will make sure there are affordable flats. By offering a wide range of public housing of different types and in different locations, the Government also helps younger Singaporeans to own a home that they can afford.
- Of course, members should be financially prudent and do their sums when they buy their homes. So long as we purchase within our means, owning a property actually forms an important part of our retirement savings as it represents a good hedge for inflation.
Collaboration between the Government and the Private Sector
- As longevity increases, it is important for Singaporeans to really think very hard about retirement. Singaporeans as individuals must also think about this, and this is where the private sector plays an important part in providing products to enhance retirement. There is room to do more to help Singaporeans plan early for their retirement. The Government and the financial industry can work closely on this.
- For instance, the advantage of buying an annuity may not be fully appreciated by many people. Financial advisors therefore play valuable roles in helping their clients appreciate how long they are likely to live, and in helping them appreciate the value of annuities, and the role that plays in their retirement plan. Some financial advisors have expressed that they will incorporate CPF LIFE as part of their financial advice to clients. CPF LIFE will be part of that landscape, but there is space for other products to be developed so more options are available for other Singaporeans. This is something we hope to see more of.
- The financial industry also has an important role to play in helping Singaporeans save outside of the CPF. We should not be just depending on CPF alone. As I mentioned, CPF savings should meet the retirement needs of the group below middle-income, and be an important part of retirement savings for the middle-income group. Individuals could look further at how they can supplement their retirement needs. Higher-income Singaporeans who expect higher expenditure in retirement may wish to save more. This group in particular would turn to the financial industry.
- The industry can support them by developing a wider range of retirement savings products to help Singaporean accumulate their private savings for retirement. Of course, it is important to pair such products with sound financial advice – financial advisors should help their clients purchase products that match their financial needs and risk appetite, and ensure that they are fully aware of the risks behind their investments.
- In this regard, I am encouraged that one of the key topics of this conference is the development of an active annuity market in Singapore.
- On its part, the Government will continue to help Singaporeans prepare for retirement through schemes such as the Special Employment Credit, CPF LIFE, the Silver Housing Bonus, and so on. The Government also continues to encourage family support, especially for Singaporeans in our older generations who are less prepared for retirement.
- The Minimum Sum Topping-Up (MSTU) Scheme, which provides tax relief for voluntary contributions to the CPF savings of our family members, was introduced precisely to help us contribute to the CPF savings of our loved ones, and especially to our parents and grandparents, who may not have saved enough for retirement. Members who wish to save more for their own retirement may also top up their own accounts to qualify for tax relief. Such top-ups, if made in cash, will qualify for tax relief of up to $7,000 for top-ups to family members, and tax relief of up to $14,000 if we sum up the top-ups to family members and to your own CPF account.
- In this regard, I am pleased to announce a further expansion of the Minimum Sum Topping-Up (MSTU) Scheme. Members can today top up the accounts of their parents, grandparents, spouse and siblings under MSTU. In response to public requests, we will extend top-ups under MSTU to parents-in-law and grandparents-in-law as well.
- We would need to amend the CPF Act and Income Tax Act later this year to effect this change, and should thereafter be able to effect this from 1 Jan 2013. With this enhancement, the MSTU becomes an even broader avenue to help CPF members boost retirement savings for themselves and their loved ones, and I hope Singaporeans will continue to take advantage of it.
- We have come a long way in our efforts to enhance retirement adequacy. In 1955, it was expected we would live till 62. Now we can expect to live to 85 and beyond. With that increased longevity, it behooves all of us individuals, government and the private sector, to consider how best to provide for retirement needs. As we continue to grow healthier and live longer, we will need to enhance retirement adequacy further still in the future. The Government welcomes the important role that the financial industry can play in this regard. I would like to invite the industry and private market players to continue its good work in helping Singaporeans save for retirement, and to endeavour to raise its game even further.
- This conference is an excellent platform to discuss this, and I wish you fruitful deliberations. Thank you.
1 Life expectancy at birth in 1987 was 75 years.
2 For example, in 1960, life expectancy at birth was 66 years for Singapore, but 71 for UK and 70 for US. (Source: World Bank Indicators).
3 Office of National Statistics, UK