Increase in CPF Contribution rates from January 2023

[PNGMK]

No one is going to crater the SS system in the USA without some sort of catastrophic force majeure event occurring (nuclear war for example). I know it runs at a deficit (well two out of three parts do) but as a sovereign issuer of currency the USA can print money to keep it afloat. Same as the Australian pension or even Singapore CPF system. The US under the esteemed honorable Pres. Biden is closing the tax gap deficit rapidly as well and I see both Australia and Singapore doing the same. In addition Biden is working hard to close the medicare cost escalation issue (drug price caps and probably some form of cost schedule for medical payments).

When you say SS is failing or will fail you're doing a great disservice by discouraging people from contributing the max to SS, CPF etc. I've counseled younger engineers before to contribute the max to CPF or EPF (and to participate in SRS) and just recently two of them reached out after a decade to thank me for that. "Old wives tales" and "urban myths" about CPF abound and frankly they're mostly shite. In the case of the SRS one of my former colleagues rang up in tears at the beginning of the year to confess he had missed the SRS cut off date for last year and was annoyed at the tax impact it would have - I told him to remember it by paying it on his birthday (which is what I do - frankly it doesn't matter is your birthday is early or late given interest rates and returns).

[malcontent]

I don’t know who came up with the benchmark or the formulas behind it, but SS targets to cover 40% of a retiree’s income needs.

For my retired parents it actually covers 100% of their income needs — but they are frugal, own their home and live in a very low cost area. For wants like vacations, they have to dip into their RMD or other savings. I believe they have more retirement assets now than when they first retired 30 years ago.

[PNGMK]

I don’t know who came up with the benchmark or the formulas behind it, but SS targets to cover 40% of a retiree’s income needs.

For my retired parents it actually covers 100% of their income needs — but they are frugal, own their home and live in a very low cost area. For wants like vacations, they have to dip into their RMD or other savings. I believe they have more retirement assets now than when they first retired 30 years ago.

My wife's retired sister and husband life off and support a massive family all on two SS payments. In floverville Kansas admittedly.

[NYY1]

No one is going to crater the SS system in the USA without some sort of catastrophic force majeure event occurring (nuclear war for example). I know it runs at a deficit (well two out of three parts do) but as a sovereign issuer of currency the USA can print money to keep it afloat. Same as the Australian pension or even Singapore CPF system. The US under the esteemed honorable Pres. Biden is closing the tax gap deficit rapidly as well and I see both Australia and Singapore doing the same. In addition Biden is working hard to close the medicare cost escalation issue (drug price caps and probably some form of cost schedule for medical payments).

When you say SS is failing or will fail you're doing a great disservice by discouraging people from contributing the max to SS, CPF etc. I've counseled younger engineers before to contribute the max to CPF or EPF (and to participate in SRS) and just recently two of them reached out after a decade to thank me for that. "Old wives tales" and "urban myths" about CPF abound and frankly they're mostly shite. In the case of the SRS one of my former colleagues rang up in tears at the beginning of the year to confess he had missed the SRS cut off date for last year and was annoyed at the tax impact it would have - I told him to remember it by paying it on his birthday (which is what I do - frankly it doesn't matter is your birthday is early or late given interest rates and returns).

Please re-read my posts. I've never once discouraged people from contributing (the max) to either system or saving more beyond this enforced amount. I've also never said anything about the system that isn't publicly known; It's a fact, written by their own administrators, that current benefits cannot be sustained without some of the changes I've listed.

The mistake some of you are making is that you think:
$1 in gov't system + $1 in another account with some special name + $1 in own name

is different from

$1 in gov't system + $2 in own name

In both cases each person has $3 and it came from saving a portion of his or her earnings (excluding matches). In both cases $1 was enforced savings and $2 was voluntary savings.

Regardless, everyone can do as they please, subject to the system they are required to participate in. Have a nice day.

[NYY1]

For the record, here is the official report with a lot of figures, tables, and charts. I don't think any of my statements about the funding position (collections vs payments) were incorrect.

https://www.ssa.gov/oact/TRSUM/

[NYY1]

When you say SS is failing or will fail you're doing a great disservice by discouraging people from contributing the max to SS, CPF etc. I've counseled younger engineers before to contribute the max to CPF or EPF (and to participate in SRS) and just recently two of them reached out after a decade to thank me for that. "Old wives tales" and "urban myths" about CPF abound and frankly they're mostly shite. In the case of the SRS one of my former colleagues rang up in tears at the beginning of the year to confess he had missed the SRS cut off date for last year and was annoyed at the tax impact it would have - I told him to remember it by paying it on his birthday (which is what I do - frankly it doesn't matter is your birthday is early or late given interest rates and returns).

To specifically address what was said above, please see the following statements that I made:

Wed, 29 June at 3:38 PM:
For the more fortunate or high earners, I think maxing out CPF as a baseline and then saving/investing other ways is also fine.

Thurs, 30 June at 8:54 AM:
#4. You are correct that the system will not fail. The options are:

[NYY1]

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.

Haha, I finally found someone that knows what is going on here. Now, look up the life expectancy at 65 and you can do some other fun calculations if you haven't already.

Of course, it's not just a calculation. There is some form or risk sharing because we can't know for sure what will happen in the future.

As for bequest (or survivor benefits) or inflation indexing, both could be done but you need to start with lower payment amounts or collect more. There is no free lunch; any system needs to collect, earn, and then payout. And you can only payout what you collected and earned. That is the fundamental issue with a system that promises a lot but is unfunded.

Obviously you understand some math going on here. Just think about the above (underlined part) a bit more before only comparing stated benefits.

[malcontent]

There is no free lunch; any system needs to collect, earn, and then payout. And you can only payout what you collected and earned. That is the fundamental issue with a system that promises a lot but is unfunded.

Obviously you understand some math going on here. Just think about the above (underlined part) a bit more before only comparing stated benefits.

Unfortunately I know a little too much. Once I found out my wife will be forced into CPF Life, I spent months and months doing a serious deep dive into the inner workings and the math. I effectively reverse engineered the whole thing in a spreadsheet and have calculated the IRR by age for each plan & payout combination.

My conclusion is that CPF Life payouts are highly conservative, and, assuming the math is fair, they must be baking in some very optimistic assumptions about future increases in longevity in the population. If those assumptions prove too optimistic (and I believe they will), I have to wonder what will be done with the surplus.

I also concluded that it is best for my wife to choose Basic so that the IRR is maximized over a greater range of ages. For females, because the longevity assumption is even greater, they have to live well into their 90’s before the IRR under Standard or Escalating starts beating Basic. And even when they beat Basic, it’s honestly not a big win.

[malcontent]

For those who are interested, IRR is simple calculation - money out versus money in, over a time series. It’s not a perfect measure of value, but it’s the best one to compare the value CPF Life against a simple interest bearing account.

For Standard and Escalating, the IRR is 0% for around the first 15 years. This is because the bequest is equal to the starting amount less any payments made (i.e. return of principle, and all interest earned goes to the pool and is used to keep payments going after all the principle is exhausted).

Once you pass this roughly 15 year period your principle is finally exhausted, and your payments are then drawn from the pool. Once this occurs the IRR slowly starts to tick up from 0%, but doesn’t tick past 4% until around your late 80’s or early 90’s (assuming you start payments at 65) and varies on male/female, and what year you retire, etc.

All of my math is based on the exact figures provided by the CPF website. I’ve gone over the math many times and even bounced it off the experts just to be sure. Unfortunately if you try and search the web for IRR figures, there is a lot of garbage and misinformation out there, so be skeptical.

[Lisafuller]

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.

Don’t agree with the caps either. I believe that people should be allowed to save as much as possible, but I do think that imposing a cat does encourage more people to contribute the maximum amount, when they might not do so if there wasn’t a cap in place.

[Lisafuller]

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.

That does make sense. By 50, chances are you will no longer have a mortgage to pay off or kids to send college.

[Lisafuller]

For those who are interested, IRR is simple calculation - money out versus money in, over a time series. It’s not a perfect measure of value, but it’s the best one to compare the value CPF Life against a simple interest bearing account.

For Standard and Escalating, the IRR is 0% for around the first 15 years. This is because the bequest is equal to the starting amount less any payments made (i.e. return of principle, and all interest earned goes to the pool and is used to keep payments going after all the principle is exhausted).

Once you pass this roughly 15 year period your principle is finally exhausted, and your payments are then drawn from the pool. Once this occurs the IRR slowly starts to tick up from 0%, but doesn’t tick past 4% until around your late 80’s or early 90’s (assuming you start payments at 65) and varies on male/female, and what year you retire, etc.

All of my math is based on the exact figures provided by the CPF website. I’ve gone over the math many times and even bounced it off the experts just to be sure. Unfortunately if you try and search the web for IRR figures, there is a lot of garbage and misinformation out there, so be skeptical.

Mal, you never cease to amaze me. I’ve always been good with words but numbers make my head spin.

[Lisafuller]

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.

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.

Fully agree. Payout should always be proportionate to the contribution.

[Lisafuller]

I don’t know who came up with the benchmark or the formulas behind it, but SS targets to cover 40% of a retiree’s income needs.

For my retired parents it actually covers 100% of their income needs — but they are frugal, own their home and live in a very low cost area. For wants like vacations, they have to dip into their RMD or other savings. I believe they have more retirement assets now than when they first retired 30 years ago.

My wife's retired sister and husband life off and support a massive family all on two SS payments. In floverville Kansas admittedly.

We’ve got family in the US living off their pension and Social Security checks, have been doing so for over 20 years. Located in Miami, FL so not a very low cost area at all.

[NYY1]

I don’t know who came up with the benchmark or the formulas behind it, but SS targets to cover 40% of a retiree’s income needs.

For my retired parents it actually covers 100% of their income needs — but they are frugal, own their home and live in a very low cost area. For wants like vacations, they have to dip into their RMD or other savings. I believe they have more retirement assets now than when they first retired 30 years ago.

My wife's retired sister and husband life off and support a massive family all on two SS payments. In floverville Kansas admittedly.

We’ve got family in the US living off their pension and Social Security checks, have been doing so for over 20 years. Located in Miami, FL so not a very low cost area at all.

The people complaining about the caps being too low are high earners in a high cost area. Neither of the govt forced savings programmes were meant to fully solve this problem. As can be seen above, the programmes work differently for more moderate earners or low spenders.

As it relates to percentages or caps, I think it is important to differentiate between "forced savings" (SS, CPF) and voluntary savings (401k, IRA, SRS) schemes.

We could have an enforced savings scheme that mandates everyone save 50% of their income with no cap. Good news is this would go a long way to making a larger portion of the population self sufficient until they fall over. The bad news is a lot of money would be locked up at what could be described as adequate but not the best rates of return.

The problem is anytime the enforced savings do not cover all of one's future needs, there will be some people that don't save anything else. In any system, these people will then become a public liability, either directly or indirectly.

On balance, a system that doesn't fully cover the needs of high earners has a benefit that while these people may not have enough saved to continue their high spending lifestyle, when they are forced to cut back they won't be starving. Unhappy yes, but still able to eat.