Ageing in Southeast and East Asia: Family, Social Protection, Policy Challenges

2. The Central Provident Fund and Financing Retirement Needs of Elderly Singaporeans

22 22 Chia Ngee Choon 2 THE CENTRAL PROVIDENT FUND AND FINANCING RETIREMENT NEEDS OF ELDERLY SINGAPOREANS Chia Ngee Choon INTRODUCTION Many Singaporeans depend exclusively on a fully funded mandatory defined contribution (DC) social security system. The system, which is based on individual accounts, is administered and managed by the Central Provident Fund (CPF) Board, a statutory board under the Ministry of Manpower. The advantage of a DC system is that it links benefits closely to contributions, hence minimizing the disincentive effects of evasion and early retirement. Not only does this explicit link make the social security system less sensitive to demographic changes, it also avoids the problems of sustainability and the political costs of unrealistic benefit promises. Besides, it ensures individual equity and avoids intergenerational inequity. While there are fiscal advantages, savings available for post-retirement consumption expenses depend on the total accumulated amount and its returns. Moreover, the absence of mandatory annuitization exposes the individual elderly to the risk of outliving resources due to longevity.This risk is exacerbated as savings are allowed to be withdrawn before retirement for housing finance and other investments. 22 02 Ageing_East Asia_Ch 2 1/10/08, 10:28 AM 22 23 Financing Retirement Needs of Elderly Singaporeans 23 To assess the adequacy of retirement savings, it is important to investigate the accumulation and de-cumulation mechanism of these mandatory savings under the Central Provident Fund System. In the next section, the main features of the CPF system are critically reviewed. Section 3 examines the adequacy of the accumulation of the mandatory savings to finance the retirement needs of the elderly.1 Instead of emphasizing the mechanism of accumulation, the expenditure side of the lifetime budget of the elderly is modeled and the retirement needs in terms of the present value of retirement consumption (PVRC) is estimated.The estimation is obtained by simulations through three major components: calibration of subsistence and medical expenses of the elderly; forecast of cohort survival probability by age and by sex; and generation of yield curves to discount future cash flows.The simulation study indicates that the existing CPF-decreed minimum sum is inadequate to meet the future consumption needs of the female elderly. The inadequacy becomes more severe at higher medical expense growth rates. The unique way of financing housing through the mandatory savings system in Singapore has created a class of “asset rich and cash poor” Singaporeans.The question that begs analysis is whether there is a mechanism to unlock housing equities. In section 4, we attempt to examine reverse mortgages (RM) as an alternative financing instrument.2 We will draw policy implications from simulation results in Chia and Tsui (2004), which show that RM instruments are likely to replace about 50 per cent of the median salary of 4-room public housing dwellers. However, the market may be missing from the supply side, thus suggesting a transformed role for the government from being a public housing provider to a RM supplier. SOME UNIQUE FEATURES OF CPF The CPF was instituted in 1955 as a mandatory retirement savings scheme for all employees, both public and private, in Singapore. It is mandatory for both employees and employers to make monthly contributions to the Fund.3 The contribution amount is set in proportion to the employees’ monthly wage, with lower rates for older workers.Table 2.1 shows the CPF contribution rates as of January 2005. The employers’ CPF contribution rate is currently set at 13 per cent of monthly salary for workers aged below 50, while rates for workers above 50 range from 3.5 per cent to 11 per cent. The employee’s contribution is set at 20 per cent of the monthly salary for workers below 50 years old and range from 5 per cent to 19 per cent for those above 50. Contributions by both the employers and employees are exempted from the employee’s personal income tax. The salary ceiling for CPF contributions 02 Ageing_East Asia_Ch 2 1/10/08, 10:28 AM 23 24 24 Chia Ngee Choon TABLE 2.1 Rates of Contribution and Allocation of Contribution as of January 2005 Contribution Contribution Credited Into Employee By By Total Ordinary Special Medisave Age Employer Employee Contribution Account Account Account (years) (% of wage) (% of wage) (% of wage) % % % 35 & below 13 20 33 22 5 6 35 – 45 13 20 33 20 6 7 45 – 50 13 20 33 18 7 8...