Increase in CPF Contribution rates from January 2023

[NYY1]

NYY1 - most of here earn well above the cap on CPF (if not in salary then from investments and businesses). It's very annoying. I'd happily put in 100k a year into CPF if I could.

I see. I thought based on the median household income there would likely be a reasonable number of people below the cap. But yes, if well educated and in some professional field or have your own business it is not that difficult to exceed the cap relatively early in one's working career.

I guess my general point was the increasing $ contributions work well as long as one continues on an upward tend with no bumps. But that isn't such a safe path these days.

You hit the contribution limits at 6k per month. That's the salary a young engineer makes after a few years. It is WAY too low.

Here is the way I look at it. Below the cap CPF is a wonderful vehicle to make sure people build up some nest egg ("enforced savings"). It is definitely preferable to letting a large portion of your population not save a penny while you run an unfunded ponzi scheme (most other public retirement vehicles).

For the more fortunate or high earners, I think maxing out CPF as a baseline and then saving/investing other ways is also fine. This takes self discipline and if that (or the guaranteed returns) is your claim it is one I can't really argue against.

[malcontent]

I used to think the same way - Social Security is shaky at best and not worth my participation. However, my employer requires all US citizens employed in Singapore to participate in Social Security, even local hires on local payroll like myself. After all these years of participation, I have come to realize that the program is far better than I originally imagined.

While the Social Security trust fund is at risk moving forward, that can be resolved through either increased immigration or an increase in SS contributions which is quite low at just 6.2% for employee and 6.2% for employer. Either way, it won’t be allowed to fail - that would be political suicide.

The older I get, the more I appreciate SS. Not only does it pay more than CPF LIFE, it adjusts with inflation and also includes disability and survivor benefits. Unlike CPF LIFE, my wife can get my full SS retirement benefits for the rest of her life if anything happens to me.

[PNGMK]

Agreed Mal.

One point though that CPF does have a type of survivor benefit in that you can pass it on.

[NYY1]

I think you guys have gone around in circles. First, the CPF contribution amounts are too low. Now, 12.4% of $150,000 is so much better? If you do the math, the actual dollar amounts at the cap are about the same (in one currency).

The answer is that no matter what the government programme is, one has always needed additional savings to fund a beyond basics retirement. Whether that is CPF+investments or SS+401k I don't really see how one (the additional savings beyond the gov't program) is superior or inferior. Future payouts aren't made up out of thin air; someone has to set aside money and earn a return. But because 401k is associated with "retirement" you guys want to combine SS+401k and compare it to just CPF. That's not an apples to apples comparison, as 401k is not an "enforced savings," it is entirely voluntary.

Yes, 401k limits go up but there is no limit on "own investments" above the CPF cap. I guess if your SS cap is going up with inflation but the CPF cap has not, that is a difference in favor of SS in the "enforced savings" plans. The offset is that the SS benefits cannot be paid on current terms.

[malcontent]

Agreed Mal.

One point though that CPF does have a type of survivor benefit in that you can pass it on.

CPF LIFE has a bequest, provided you don’t outlive it. After about 15 years in, the bequest is reduced to nothing, and the spouse is left with no bequest. That is probably one of the biggest shortcomings of CPF LIFE… with inflation indexing being the second biggest.

[malcontent]

I think you guys have gone around in circles. First, the CPF contribution amounts are too low. Now, 12.4% of $150,000 is so much better? If you do the math, the actual dollar amounts at the cap are about the same (in one currency).

The answer is that no matter what the government programme is, one has always needed additional savings to fund a beyond basics retirement. Whether that is CPF+investments or SS+401k I don't really see how one (the additional savings beyond the gov't program) is superior or inferior. Future payouts aren't made up out of thin air; someone has to set aside money and earn a return. But because 401k is associated with "retirement" you guys want to combine SS+401k and compare it to just CPF. That's not an apples to apples comparison, as 401k is not an "enforced savings," it is entirely voluntary.

Yes, 401k limits go up but there is no limit on "own investments" above the CPF cap. I guess if your SS cap is going up with inflation but the CPF cap has not, that is a difference in favor of SS in the "enforced savings" plans. The offset is that the SS benefits cannot be paid on current terms.

Don’t get me wrong, CPF is a valuable scheme. However, there are some real shortcomings. The US schemes are not without shortcomings either; you pointed out a few important ones.

In my case, my spouse has CPF and I have a combination of SS+IRA+SRS. Since I’ve spent virtually all of my working career in SG, I have no 401(k) or HSA.

Assuming my spouse maxes out to ERS for CPF LIFE, her future payment (estimated to be around US$2k per month) will be about half of my SS payment when we reach retirement age. It isn’t nothing… but it’s not great.

[Lisafuller]

It actually makes a lot more sense to have smaller CPF contributions at younger ages and larger contributions when older.

In the US, those under 50 can contribute a maximum of $20,500 to a 401(k) in 2022. Those age 50 and older can add an extra $6,500 per year in "catch-up" contributions, bringing total 401(k) contributions for 2022 to $27,000. These contributions are usually matched by the employer to various extents.

On top of that, each working adult can contribute up to $6,000 ($7,000 if over 50) to an IRA. Both the 401(k) and IRA have far better investment options than you could ever dream of compared to CPFIS or SRS.

This is one thing I’ve really missed out on versus my US counterparts.

I do see the benefit of contributing more later on when the ceiling is higher but I believe if you were contributing a lot when you were at the prime of your career you wouldn’t need to make catch-up contributions.

[Lisafuller]

It actually makes a lot more sense to have smaller CPF contributions at younger ages and larger contributions when older.

#1. That assumes everyone continues on an upward earnings trajectory for 30-40 years but unfortunately not everyone does. Further, once you have some type of lifestyle set (mortgage, etc) it is difficult to change so much. Hence, earning less in the later years often equates to saving less as some costs are viewed as "fixed" (even though they aren't truly fixed). If people don't save or don't save enough when they can, then either directly or indirectly they become a public liability.

#2. The CPF contributions are %, not fixed dollar amounts. Hence, for the first decade or two most will be saving more over time just as the wage base increases (if not already at the cap). In the outer years, if you are fortunate, the declining % will be counterbalanced by an increasing wage base. If you are not as fortunate, I guess you are still putting something aside while having a bit more breathing room to try and make everything tie out at the end of the month.

My thoughts exactly! Most people tend to hit the prime of their careers when they’re in their late 40s-50s. After that, they slow down a little and their salary would go down accordingly. So it wouldn’t exactly make sense for everyone to contribute more when they were older because not everyone would be making more.

[Lisafuller]

NYY1 - most of here earn well above the cap on CPF (if not in salary then from investments and businesses). It's very annoying. I'd happily put in 100k a year into CPF if I could.

Lisa... how could refer to our old asses? Man I am so offended

Hahaha, you know I wasn’t referring to you guys.

[Lisafuller]

NYY1 - most of here earn well above the cap on CPF (if not in salary then from investments and businesses). It's very annoying. I'd happily put in 100k a year into CPF if I could.

I see. I thought based on the median household income there would likely be a reasonable number of people below the cap. But yes, if well educated and in some professional field or have your own business it is not that difficult to exceed the cap relatively early in one's working career.

I guess my general point was the increasing $ contributions work well as long as one continues on an upward tend with no bumps. But that isn't such a safe path these days.

Like you, I’m also thinking about those who aren’t high income earners. The assumption that wages increase over time doesn’t apply to everybody.

[Lisafuller]

I used to think the same way - Social Security is shaky at best and not worth my participation. However, my employer requires all US citizens employed in Singapore to participate in Social Security, even local hires on local payroll like myself. After all these years of participation, I have come to realize that the program is far better than I originally imagined.

While the Social Security trust fund is at risk moving forward, that can be resolved through either increased immigration or an increase in SS contributions which is quite low at just 6.2% for employee and 6.2% for employer. Either way, it won’t be allowed to fail - that would be political suicide.

The older I get, the more I appreciate SS. Not only does it pay more than CPF LIFE, it adjusts with inflation and also includes disability and survivor benefits. Unlike CPF LIFE, my wife can get my full SS retirement benefits for the rest of her life if anything happens to me.

It’s easy to scoff at Social Security and CPA, but at some point most of us tend to realize the value of forced savings. It’ll be nice when you retire and realize you can afford to live a good life.

[Lisafuller]

I would suggest you take a look at what portion of the population can save (and does save) those amounts. If you are above those levels you don't have a problem; just save/invest in any account.

It's enforced savings. By not adjusting it upwards regularly against inflation the entire country goes into risk.

What do salaries increase at the same rate? If not, the take-home pay will get lower and lower each time, which is what hurts.

[PNGMK]

What I don't understand is caps on CPF, Super (Australia), SS (USA), Kiwisavings (NZ). I understand it's capped because there is some sort of subsidization via tax benefits taking place but frankly there should not be a cap because inflation and lifestyles render caps too low for true retirement savings.

Without forced savings most people I know save NOTHING. In fact they usually go backwards it seems.

[malcontent]

I think the reason for the higher contribution limits in the US after age 50 is not because people are earning more, but because they can afford to save more. Those over age 50 are typically more established financially and less indebted too.

[NYY1]

Don’t get me wrong, CPF is a valuable scheme. However, there are some real shortcomings. The US schemes are not without shortcomings either; you pointed out a few important ones.

In my case, my spouse has CPF and I have a combination of SS+IRA+SRS. Since I’ve spent virtually all of my working career in SG, I have no 401(k) or HSA.

Assuming my spouse maxes out to ERS for CPF LIFE, her future payment (estimated to be around US$2k per month) will be about half of my SS payment when we reach retirement age. It isn’t nothing… but it’s not great.

Here are some other thoughts.

#1. If your wife has contributed the max to CPF for decades, she should have well in excess of the ERS. I.e. again not apples to apples to compare CPF Life from ERS (a portion of CPF) to all of SS.

#2. Things like disability and survivor benefits are really some form of catastrophe insurance, the cost of which is born by society. Not necessarily a bad thing. But this is really a separate issue from individual retirement savings. Either way, catastrophe benefits are not free either and they have to be funded from collections/contributions too.

#3. SS sounds good to you because you paid in at X% and want to be cashed out by someone else paying in at (X+Y)%. Not blaming you and it is possible to bridge the gap. But this highlights the major difference in the two schemes; enforced savings in one's own name or enforced savings that go into some magic black box with someone determining what comes out the other side years later.

A sustainable system is one where what one receives is proportional to what one pays in. No system can promise more and more benefits without collecting the money from somewhere. The fact that the system requires more workers or higher tax rates on the next guy to sustain stated benefits is the issue.

#4. You are correct that the system will not fail. The options are:

a) Cut benefits by 20% across the board
b) Raise payroll taxes by about 25%, which is about a 3% higher rate on the wage base
c) Raise payroll taxes by less than 3% on everyone and increase the rate on some (by removing the cap but not increasing benefits for high earners).
d) Cut benefits for some

a) is not politically feasible so the real fight will be over b), c), or d).

I would also suggest you do some more reading on the "Trust Fund." Depleting the Trust Fund is just a bunch of book entries. Truth is the system currently collects less than it pays out and this differential is about to explode. The actual cash sent to people every month has to come from either other government collections or borrowings. There is no magic trigger about the Trust Fund balance crossing $0. Instead, the real constraint is how to solve the collection vs. payments deficit and send people money every month.