Speech at NUS Faculty of Arts and Social Sciences 90th Anniversary Gala Dinner
Mrs Josephine Teo, Minister for Manpower, Carlton Hotel
Good evening. Thank you for inviting me.
Congratulations on your 90th anniversary!
FASS has come a long way. From its humble beginnings with just four subjects in Raffles College in 1929, FASS today has 16 departments with over 400 faculty and more than 6,500 students. You offer some of the most sought-after courses in NUS and attract some of its best students.
It’s an honour for me to be here as a former student. I was enrolled in the Faculty from 1987 to 1991. My main interest was Economics. The structure back then required another major. I chose Statistics. For the minor, I chose Political Science, with no idea whatsoever how my life would turn out.
For my Academic Exercise in the Honours Year, I decided to research the CPF Approved Investment Scheme, now simply known as the CPF Investment Scheme. Professor Saw Swee Hock tutored me. I did not expect that my work would one day heavily involve CPF either.
The value of research on retirement
For tonight, with your indulgence, I would like to speak more about CPF and how it is evolving to meet the needs of an ageing society. Let me explain why.
With the exception of the African continent, the entire world is ageing. By 2030, the number of people aged 60 and over globally will be about the same as China’s population today, about 1.4 billion. Most Asian countries will have elderly populations of 20% or more. Adding to this, birth rates and working-age populations are declining. More than half of the world’s population today live in countries that have total fertility rates below replacement level.
One important issue for ageing societies is retirement adequacy. The key question is how to care for people when they are no longer in active employment.
A report launched by the Group of Thirty just yesterday highlights that there will be a shortfall between what the world needs to fund individuals’ retirement, and the resources that are actually available. Based on the 21 countries analysed, the shortfall will be around US$15.8 trillion in the year 2050.
This is therefore an important area for social science research.
Unlike many other pension systems that are at great risk of insolvency, our system is fiscally sound. Nonetheless, as a policymaker, I believe we can be better informed through the objective analyses, comparative studies with other systems, and constructive proposals of academic researchers.
For example, the OECD publishes recommendations for pension policy reform in different countries, and even works with governments to implement them.
- In Singapore too, our academic community has made important contributions to CPF policy.
In 2007, Professor Lim Pin chaired the National Longevity Insurance Committee (NLIC). Its recommendations resulted in the implementation of CPF LIFE, which provides lifelong monthly payouts.
- From 2014 to 2016, Professor Tan Chorh Chuan chaired the CPF Advisory Panel. his led to a revamp of the system. The Minimum Sum became the Retirement Sums to better focus on payouts, and CPF LIFE provided an Escalating Plan.
Associate Professor Chia Ngee Choon from the Department of Economics collaborated with MOM on an Occasional Paper on the adequacy of CPF payouts. She even authored a book on the CPF!
- I have some suggestions on further research questions that are worth exploring, which I will share later.
Three questions on retirement adequacy in Singapore
- For now, I hope to address three common questions about retirement adequacy in Singapore.
- Do people have enough to retire on?
- Why do some members get such low payouts?
- How do we boost CPF payouts, in particular, help those with less?
- First question: do people have enough to retire on?
- The answer is yes, most people do. CPF payouts provide an indication. The Basic Retirement Sum (BRS) is designed to provide members with monthly payouts to cover basic living expenses in retirement. This usually does not include rental expenses, because most Singaporeans own the homes they live in.
- Over the last decade, the proportion of active CPF members who met their BRS at age 55 has improved, from 38% to 62%. This is even as the BRS has been gradually raised to keep pace with inflation and improvements in standard of living.
- Labour force participation has risen, and so have incomes. In future, we can expect more members to have reached BRS before retirement.
- A recent study by the Ministry of Finance affirms this belief. Singaporeans born in the 1950s had a median CPF balance in the Ordinary and Special Accounts of $36,000 in their 40s. In comparison, those born in the 1970s had a median balance that was three times higher, at around $110,000.
- Is it the case that everyone without the BRS does not have enough for retirement?
- The answer is no. Most people have different sources of income in retirement. Besides CPF payouts, they may have private savings or receive help from family.
- Older generations of retirees tend to have more children. Younger generations are more likely to have other assets. In the last decade or so, government transfers to seniors have also increased. They include permanent schemes like GST Vouchers and Silver Support. Cohort-based schemes like the Pioneer Generation and Merdeka Generation Packages also help.
- However, with rising aspirations, retirement adequacy is not just a matter of meeting basic expenses. Growing numbers may want more than BRS payouts. How can we help?
- I will say more about this later.
- Let me turn now to the second question: if retirement adequacy is improving, why do some members have such low payouts?
- The main reason is that older members may not have been able to save much in the CPF. Housewives and odd-job labourers were more common in the past. They have had shorter runways to benefit from measures such as Workfare and the Progressive Wage Model.
- Another important reason is that withdrawal rules for older members allowed their CPF to be largely depleted at age 55. They could withdraw most or all of their CPF savings then in a lump sum, if they owned a property. Very little or nothing would be left for monthly payouts.
- The third question then is, how do we boost CPF payouts, in particular, how do we help those with less?
- There are two parts to the answer. The first is to help Singaporeans earn more through work. This involves ensuring good job opportunities are available for all. We prepare Singaporeans to take on these jobs through SkillsFuture and our Adapt and Grow programmes.
- Meanwhile, we have a vision of “productive longevity”, to enable our people to contribute meaningfully as long as they wish. Employment rates of older workers have risen considerably and compare well with leading OECD countries. We recently announced the raising of the minimum retirement age from 62 to 65 as well as re-employment age from 67 to 70, by 2030.
- Besides helping Singaporeans earn more, it is equally important to help them save more. Over the next decade, we will gradually raise the CPF contribution rates for older workers. Progressive CPF interest rates of up to 6% per year benefit all members, especially those with lower balances. We provide tax reliefs to people who top up their own retirement savings or that of their loved ones.
- Let me say something how we provide targeted help to those with less.
- Workfare provides lower-income individuals not just with cash supplements, but also CPF top-ups to boost their retirement savings.
- A 35-year-old today who earns $1,300 a month will get a boost of over 30% in his CPF balances by age 65, solely from Workfare payouts. This will boost his CPF LIFE payouts by 30% as well, or $200 more every month for as long as he lives.
- Seniors who had low incomes through life and now have little or no family support get payouts from Silver Support.
- Together, Workfare and Silver Support benefit over half a million Singaporeans each year, with payouts close to $1 billion last year.
Possible research areas
- I mentioned earlier that I have some suggestions for research questions.
Yesterday’s savings, tomorrow’s spending
- One factor affecting retirement adequacy is inflation.
- When savings and monthly payouts are fixed, their real value erodes over time. For example, when the Minimum Sum was first introduced in 1987, $30,000 provided about $300 in monthly payouts for 20 years. The same payout may have felt alright when the payouts first started but fast forward to today, that same payout feels inadequate.
- We introduced the CPF LIFE Escalating Plan as an option for members who are concerned about inflation risk. Under this plan, instead of fixed payouts for life, the payouts grow at 2% every year, for as long as the member lives. This helps preserve the purchasing power of payouts. But for the same amount of savings set aside, the starting payout must be lower than that of the default Standard Plan, by about 20%.
- Members have shown clearly a lack of enthusiasm for such an arrangement, even if it is a good hedge against inflation. Can behavioural research suggest better ways to persuade them?
- We also want to ensure that the Basic Retirement Sum (BRS) is properly set. Recall that the BRS is fixed for members in the year they turn 55, and does not change for the cohort as they get older. But the payouts don’t start until at least 10 years later, when members turn 65.
- Following the recommendations of the CPF Advisory Panel, the BRS up to 2020 had been decided and announced in 2015. A member turning 55 in 2020 who sets aside his BRS of $90,500 will get $740 to $800 in lifelong monthly payouts from age 65 in 2030.
- BRS for future cohorts should be regularly adjusted, so that payouts remain relevant to members. How can we be better assured that the BRS will produce adequate payouts 10 years down the road, and throughout retirement? How can we ensure that the BRS is set so that payouts continue to cover basic expenses in the future?
Unlocking the value of our housing assets
- Another opportunity for research is on unlocking the value of members’ homes to support their retirement.
- 90% of Singaporeans own their homes, thanks to a combination of public housing subsidies, grants and use of CPF to pay off the mortgage. The vast majority do not pay rent in their retirement years, which frees up their savings for other uses.
- The home itself is also a store of value that can potentially supplement members’ retirement incomes. Some rent out rooms or the entire home. Others right-size and move to a smaller home, possibly after their children have married and moved out. We have introduced schemes like the Lease Buyback Scheme (LBS) and Silver Housing Bonus for HDB flat owners, to give more options to unlock housing value.
- How can we increase understanding and promote take-up of such measures?
- Here, my observation as an MP is that it goes beyond economic incentives. We also need to consider mindsets, behaviours and family relationships. This is, therefore, quite a rich area for multi-disciplinary research within social sciences.
- For example, some seniors prefer to leave behind their homes for their children, even when their children already own homes or have expressly declined their parents’ offers. A better understanding of these dynamics behind seniors’ decisions will be helpful to shaping policies as well as policy communications.
- The final research question I have relates to longevity.
- With people living to 100 or beyond, patterns of working life and retirement will change. We already see evidence of this. More people change careers or re-skill later in life. They may not always be employees, but can choose to be self-employed for a while. They take breaks mid-career, but can continue working into their 70s.
- The CPF will need to evolve to keep pace with these changes.
- For example, how can we better encourage self-employed members to make voluntary CPF contributions beyond the MediSave, so they are better prepared for retirement?
- With people retiring later, how can we incentivise older workers to start their payouts later, so that they will have higher payouts when they eventually retire?
- In summary, retirement adequacy in Singapore is improving.
- We have a system that works well. It is neither insolvent nor exacting a toll on younger generations. This is non-trivial.
- We can make our system better through constantly looking over the horizon and planning ahead. In that sense, the CPF must remain a “live system”, always evolving and ever-responsive to emerging needs.
- We hope that the academic and social science research community can join us on this journey to make it better.
- We look forward to your continued contributions, well beyond your 90th anniversary! Thank you once again for having me.