Demographic changes: A pedestrian on Boat Quay in Singapore. The country’s ageing population and lower birthrate presents challenges for its pension fund. — Bloomberg
SINGAPORE: Singapore’s pension system has kept its top spot in Asia in an annual global index for the 16th consecutive year and achieved the second-highest grade of B+ for the second year in a row.
Despite its strong performance, the Republic will have to address challenges arising from its low birth rates and increasing life expectancies to ensure the long-term viability of the Central Provident Fund (CPF), said pension expert Mercer and other analysts.
In the 2024 Mercer CFA Institute Global Pension Index, CPF climbed two levels to fifth spot among the 48 retirement systems that were reviewed.
Singapore remained top in Asia, while the Netherlands took the overall No. 1 spot in the index, which has been tracking global pension systems since 2009.
On the sustainability sub-index, which measures if a nation’s pension system can keep delivering, CPF ranked sixth globally and top in Asia.
Chong Chee Loong, who heads Mercer’s wealth business in Singapore, said CPF has several strong features that position it close to an A-grade rating.
For instance, CPF scored well on the integrity sub-index, which is a measure of whether the pension system can be trusted.
Chong said: “Singapore has a strong regulatory framework in place to protect the interests of pension scheme members.”
He added that addressing Singapore’s demographic challenges will be crucial for maintaining CPF’s viability.
Singapore’s population is ageing at a faster pace compared with the last decade.
The Population in Brief 2024, an annual publication by the National Population and Talent Division and partner agencies, showed that the proportion of citizens aged 65 and above rose to 19.9% as of June 2024, from 19.1% in 2023 and 12.1% a decade ago.
By 2026, the republic is expected to become a super-aged society, with 21% or more of its population aged 65 and above.
Meanwhile, the number of citizens aged 80 and above jumped to 142,000 as at June 2024, an increase of 67% from 85,000 in 2014.
The population report also showed there were fewer citizen births in 2023 – 28,877 babies, or 5% fewer than the 30,429 births in 2022.
The old-age support ratio for Singapore residents – which refers to the number of working-age adults supporting each elderly person – dipped to 3.5 in June 2024 from 3.7 a year earlier, and is projected to fall further to 2.7 by 2030.
Marcus Kok, principal pension consultant at PwC Asia Actuarial Services, said the long-term financial sustainability of CPF may be at risk with fewer working-age individuals and a growing elderly population.
Contributions fall with the decreasing number of working adults, while payouts go up as there are more retirees drawing on the pension system.
Dr Joelle Fong, an assistant professor at the Lee Kuan Yew School of Public Policy, said that CPF is largely sustainable.
She noted that all CPF members are required to make monthly contributions to the fund.
“The money sits with our CPF, our future pensions are fully funded,” Fong said.
In contrast, the United States has a pay-as-you-go system, where today’s workers pay taxes to fund the retirement income of current retirees.
“Little money sits with US social security. Such systems face sustainability issues,” she added.
However, with Singapore residents living longer, CPF payouts will need to stretch over more years, Kok noted, adding that the system may not be able to provide enough for retirees.
One of the key elements of CPF is CPF Life, the national longevity insurance annuity scheme.
When Singapore residents turn 65 years old, they join the scheme that gives them a steady stream of monthly income throughout their life, even after the savings in their retirement accounts run out.
Fong said this lifelong feature guards against longevity risk, or the risk that one lives a long life.
An individual can choose to receive higher monthly payouts in retirement if he makes cash top-ups to his Special Account every year.
When he turns 55 and his Retirement Account (RA) is opened, he can also top up his RA to the Enhanced Retirement Sum (ERS).
From Jan 1, 2025, the ERS will be raised to S$426,000, or four times the Basic Retirement Sum (BRS). Currently, it is three times the BRS.
As the ERS is increased every January, an individual can continue to make top-ups to his RA.
There are other ways to boost one’s lifelong monthly payouts. One option would be to defer the start of the payouts till 70 years old, rather than at 65.
Those who do so can enjoy up to 35% more monthly payments. In the latest CPF trends report, the median monthly payout was S$680 if one chose to receive his payouts at 65. The amount rose to S$890 if one deferred payouts to age 70.
Lum Pooi Fun, director for retirement systems at the income security policy division at the Manpower Ministry, said the top ranking for Singapore reflects the republic’s continuous efforts to strengthen the CPF system to help Singaporeans set aside savings for their retirement, housing and healthcare needs.
Lum added that the ministry will continue to refine the system so that it remains effective as a key pillar of Singapore’s social-security system.
Mercer’s Chong proposed that Singapore could look into offering retirement benefits to those who stopped working to care for young children.
CPF members can already top up their spouses’ Special Accounts. They get a tax relief of up to S$8,000 for cash top-ups made to loved ones in each calendar year.
In 2023, 28,000 members made a top-up to their spouse’s CPF accounts.
Chong reiterated that Singapore can consider raising the age at which CPF members can take out any excess savings – from 55 years old to 60 years old – to “extend the longevity of retirement savings”.
Currently, if a CPF member has set aside the Full Retirement Sum (FRS) in his RA, he can withdraw the amount that exceeds the FRS when he turns 55.
The reliance on CPF to finance home ownership is another issue that could be looked into, said PwC’s Kok.
For instance, between April and June, S$12.5bil was received in CPF contributions, and S$3.4bil was withdrawn for public and private housing.
Kok noted that retirees may face financial strain as their CPF savings are tied up in their property, leading to insufficient funds for healthcare and daily expenses.
Fong, who did research on this issue in 2021, found that an average older Singaporean holds about 60% of total wealth in housing equity.
She noted that it was more worrying that most older Singaporeans do not know there are options to unlock their housing equity.
Kok acknowledged that while there are some concerns over the CPF system, they do not indicate imminent failure but point to the need for reforms.
He proposed that policymakers explore solutions beyond the CPF, such as encouraging companies to establish group corporate retirement plans.
“A lot of people do not want to set up corporate pension schemes because they are worried about longevity and investment risks,” Kok said. — The Straits Times/ANN
