Wednesday, June 26, 2019

Raise CPF contribution rates for older workers to be on a par with younger workers: Study

By Faris Mokhtar

26 June, 2019

SINGAPORE — Central Provident Fund (CPF) contribution rates for older workers in Singapore should be raised so that they are on a par with the rates for younger workers, a new local study published on Wednesday (June 26) has recommended.

The aim of the move — lifting both employee and employer contribution rates — would be to encourage older workers to remain employed and to lift their savings for retirement, said the study from local think-tank, the Institute of Policy Studies (IPS).

The question of contribution rates for older workers has been in the spotlight this year, with the Manpower Ministry set to unveil details of a review of raising the retirement and re-employment ages as well as the contribution rates in September.

With the raise proposed by the IPS researchers, the total contribution rate for workers aged above 55 to 65 would be 37 per cent, the rate currently enjoyed by those aged 55 and below.

For workers aged above 55 to 60, there would be an 11 percentage point hike in the total contribution rate to 37 per cent from the current 26 per cent. Workers aged above 60 to 65 would get a heftier increase of 20.5 percentage points from the current 16.5 per cent total contribution rate.

With such an increase, the study showed that a 55-year-old in 2018 could save between S$31,000 and S$145,000 more within a 10-year timeframe from the age of 55 to 64.

This would more than double their CPF Life payouts, an annuity scheme which provides Singaporeans or permanent residents aged 65 and above with lifelong monthly payouts from their CPF retirement accounts.

Contribution rates for older workers were lowered in the 1980s and 1990s in the hope that making these workers cheaper than younger workers would encourage hiring of them.
The proposal to lift rates again was made in the report ‘Improving Retirement Adequacy by Restoring Older Worker CPF Rates’, written by researchers Damien Huang and Christopher Gee of IPS.

But raising the total contribution rates for older workers is not without its pros and cons, said the researchers. One argument for higher CPF contribution rates is that it could encourage older workers to remain employed, especially in light of the tight labour market.
[Sure. The reason older workers are not employed is because they are too lazy to work. A higher CPF would make them want to work. Are these policy makers or policy dreamers?]
Employers, however, might see a downside since higher CPF contribution rates mean higher wage costs, they noted.

Notwithstanding this, the researchers argued: “Downsides should also be weighed against the future cost of providing for inadequate pensions as well as the fact that they are only being restored to previous rates, not raised.”

[Okay. Question answered. Policy idiots.]
Here are the report’s key findings:


For workers aged 55 and below, the current CPF contribution by an employer is 17 per cent, while the employee contributes 20 per cent — making a total CPF contribution rate of 37 per cent.

While the rates for workers aged above 55 to 65 should go up, the rates for those above 65 should remain unchanged, the report recommended.

Speaking to TODAY, Mr Gee said that researchers could have proposed similar increments in the total contribution rate for those aged above 65, but focused on the two other age brackets as increased contribution rates have the effect of more than doubling CPF Life payouts from age 65.

“But in principle, there’s nothing to stop the policymakers from also raising rates for workers aged 65 and above too,” he added.

So, what are the proposed increases?

For workers above 55 to 60:

- The employer contribution rate should go up by 4 percentage points – from the current 13 per cent to 17 per cent.

- The employee contribution rate should be increased by 7 percentage points – from 13 to 20 per cent.

For workers aged 60 to 65:

- The employer contribution rate should be raised by 8 percentage points – from the current 9 per cent to 17 per cent.

- The employee contribution rate should go up by 12.5 percentage points – from 7.5 per cent to 20 per cent.

How much savings workers would get:

Workers above 55 to 65 and earning S$1,424 a month, for instance, would get S$25,610 under their current CPF contribution rates. But the amount of savings in their CPF would significantly grow under the proposed increase in rates to S$66,524. The growth in savings: a hefty S$40,914 more.

They would also get higher CPF Life payouts. Using the same income example, workers would get S$248 more in payouts – from S$166 under current rates to S$414 under the proposed rates.


As with any policy recommendations, there are pros and cons, said the researchers.

The good: The previous argument was that cutting the contribution rates for workers above the age of 55, carried out in 1988, 1993 and 1999, would make older workers more attractive to employers.

But the researchers pointed out that raising the rates may encourage such workers to remain employed.

They said this was especially relevant when the labour market has remained tight in recent years, with employers “forced to turn to older workers”.

The bad: For workers, higher rates mean lower disposable incomes, while for employers, it means higher wage costs, noted the researchers.
Mr Gee, a senior research fellow at IPS, told TODAY that though workers might “feel some pain” in the short run as their disposable income will be reduced with higher contribution rates, they stand to gain in the long run.

[Let me translate: The policy wonks like their "solution" so much, that they gave lip service to the problem with their solution (making older workers more expensive to employ), and just said, "it is still  the best solution we can think of."]
For one thing, they would get higher payouts later on and could live comfortably in their retirement years. He and his colleague also noted in the study that with longer housing loan tenures, higher contribution rates mean that homeowners who are over 55 and still paying their mortgages do not have to pay additional out-of-pocket cash.

The higher wage costs for employers could also be mitigated through “phased-in increases or phased-out subsidies” similar to the Temporary Employment Credit, which was introduced in 2015 – and lasting till 2017 – to help employers cope with the 1 percentage point increase in the CPF contribution rates to the Medisave account that year.


Restoring the CPF contribution rates to those on a par with younger workers would not be unprecedented.

CPF contribution rates for older workers were last increased in 2015, where the contribution rate of those in the above 50 to 55 age group was also raised, in line with that of their younger counterparts. The rate for that group went up by 2 percentage points to 37 per cent.

And the IPS study could fuel further discussion on the need to raise CPF contribution rates for older workers, adding to calls that have been made earlier this year.

In January, the People’s Action Party Seniors Group (PAP.SG) – an advocacy group in the ruling party that seeks to represent the interests of the elderly here – also proposed raising the total contribution rates for workers aged 55 and above so that they can retire with enough savings.

Asked why they had decided to put out the study now, Mr Gee told TODAY that amid the broader discussion on the issue, there is a need to put “some numbers out there” such as the projections of higher savings workers stand to gain.

[Sure. It is not some concerted campaign to astro-turf support for raising CPF rates and make it seem like a grassroots initiative, backed by academia/policy wonks/intelligentsia. ]
This could allow lawmakers and Singaporeans to “work out the figures on their own” and also understand the implications of implementing such a proposal, especially since the Ministry of Manpower is set to share more details in September on its review on raising the retirement and re-employment ages as well as the contribution rates, he added.

The review was announced by Manpower Minister Josephine Teo during the debate on her ministry’s budget in Parliament in March.

Mr Gee said that the study is also an “important step” to signal to older workers that “they are not necessarily less productive once they hit the age of 55”. He added: “And we also want to tell them that because you’re getting older, you need more protection.”

[Sure. And right after you signal that, their employers signal to them that they are too expensive to hire and... "let them go". Guess which signal they will get loud and clear?]
IPS is an autonomous research centre of the Lee Kuan Yew School of Public Policy at the National University of Singapore.

[CPF rates were lowered to make older workers less expensive to employ. Currently, older workers are having difficulty getting jobs already. 

The problem is that CPF for retirement needs to be saved throughout one's working life. This "last minute try to save more money for retirement" is... natural but ultimately counter-productive. 
A dollar saved at 25 will be more (because of compounding) than a dollar saved at 55. 

The problem is also the withdrawal of that dollar (saved at 25) at 35 to buy a home. And further withdrawal at 45 to... "invest" in property.

The availability of CPF savings to buy (or rather "invest" in) property is two-edged problem. One, it depletes savings for retirement (which is the raison d'etre for CPF), and Two, it inflates property prices making homes more and more expensive.

On the plus side, property agents can make a pretty good living... in boom times.

Here's a better solution:


Here's a summary:

1) Provide matching top-up grants to help CPF members fund their retirement.
2) To fund this, impose a less than 1% tax for top 23 percentile of high income earners TO BE PAID BY THE EMPLOYERS (a high income payroll tax). The estimated revenue would be about $370m a year (in 2017 estimates). To keep to this fund limit, top-ups to CPF members could be capped at say, $20k per CPF member at 55.

How is the CPF top-up better than the IPS proposal? 

The IPS proposal will be GREAT! ***IF*** The older worker is employed or remains employed. It is also likely that some older workers currently employed, would lose their jobs because they have become too expensive. So overall, the IPS proposal will be better ONLY if the older workers can be employed or remain employed. 

The CPF Retirement Fund Top-Up matching grant will be available to ANYONE who wants to top up their retirement fund.]

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