CPF: Important updates for 2021 you need to know

Before you know it, we have seen the last of 2020! And hopefully, with the rollout of the vaccines, it is beginning of the end of the worst of the COVID-19 pandemic. A new year also brings changes to the Central Provident Fund (CPF), which is the main source of retirement income and healthcare coverage for Singaporeans. What has changed since a year ago? Here are the important updates to the CPF for 2021 you need to know!

Increases in the Minimum Sums required for CPF members

Not a year goes by without an increase in the minimum sums of money which CPF members need to have upon reaching the ages of 55 and 65. These key sums are the Full Retirement Sum (FRS) in the Retirement Account (RA) required at age 55, and the Basic Healthcare Sum (BHS) in the Medisave Account (MA) required at age 65.

Increase in the CPF Minimum Sums over the years

	FRS	% Increase	BHS	% Increase
2019	$176,000		$57,200
2020	$181,000	+2.84%	$60,000	+4.90%
2021	$186,000	+2.76%	$63,000	+5.00%

As has been the case previously, the increase in BHS is higher than the increase in FRS. This is likely in light of the higher inflation of healthcare costs, and hence higher premiums for Medishield Life and Integrated Plans. But the purpose of these increases is not just for the sake of squirreling more money away. They ensure our ability to have retirement income and pay for healthcare remain intact in the face of inflation. So how will these schemes, CPF Life and Medishield Life, look like with these higher amounts?

CPF Life: Important updates for 2021

Let’s start with the important updates for CPF Life. Along with the 2.76% or $5,000 increase in the FRS, the Basic Retirement Sum (BRS) pegged at 50% of the FRS, and the Enhanced Retirement Sum (ERS) pegged at 150% of the FRS, have gone up as well. Has this been accompanied by an increase in the CPF Life benefits?

Well, we cannot say with 100% certainty, but looking at the projections the CPF Board makes for members turning 55 in 2021, it does look like the payments for CPF Life will go up. And as an added bonus, they go up by more than the increase in the FRS!

Projected CPF Life Standard Plan payouts for men turning 55

	Standard Plan Payout	% Increase	Life Expectancy	% Increase
2019	$1,549		27.7 years
2020	$1,594	+2.91%	27.9 years	+1.13%
2021	$1,640	+2.89%	28.1 years	+1.11%

Projected CPF Life Standard Plan payouts for women turning 55

	Standard Plan Payout	% Increase	Life Expectancy	% Increase
2019	$1,445		31.6 years
2020	$1,486	+2.84%	31.7 years	+0.46%
2021	$1,531	+3.03%	31.9 years	+0.92%

Furthermore, based on the latest life tables for Singapore, our valuation for the three different CPF Life Plans (Standard, Basic and Escalating) show that they are still fairly valued. You get back the expected value of the FRS put into your retirement account at age 55. This is the same conclusion which we get back in 2019 and in 2020. From the tables above, it appears that CPF Life is really a very good deal. While the FRS increased by around 2.8% every year, the payments will increase by 2.9%! And we are living longer, so we actually get an additional 1% more in payments as well.

CPF Life is still the best value-for-money annuity you can get in Singapore

Sadly, this is probably only an artefact of the mechanical way the payments are being estimated now. Once the CPF Board reviews the increasing longevity of Singaporeans in the future (see here for how it has gone up over time), the actual payments will probably fall short of these projections. But CPF Life will still remain value-for-money, as there is no other annuity which pays as well as it does.

Which to choose, the Standard, Basic, or Escalating Plan?

How should we choose the CPF Life Plan to take up when we are 65? CPF itself offers only general guidance that you should choose the Plan best suite for yourself.

While the Basic Plan has a slightly higher value compared to the other two, it pays out the least, i.e. only 75% of the FRS of $186,000 will get paid out as retirement income, compared to the 80% under the Escalating plan and the 84% under the Standard Plan. The rest of the value gets paid out as expected bequests. And since we are living longer and longer, we probably will live past the age when the bequest run out. So choosing the Standard or the Escalating Plan is safer.

Moreover, as our spending in retirement shifts to services like healthcare (as we show here), we should be more wary of future inflation. Services tend to go up in cost faster.

Spending in Retirement

In light of this, the Escalating Plan may actually be the best out of the three plans. While it starts off with a lower monthly payment, increasing by 2% every year, the expected value is similar to the other two plans. More critically, as anyone who has worked in finance and investments will know, generating a payment which rises every year forever is one of the hardest problems in investments ever.

Should I defer my CPF Life payments until age 70?

When CPF Life was first designed, monthly payments were to start from age 65, unless deferred. And he/she could do so until the age of 70, with the payments increasing by 7% per year deferred. Now, the monthly payments will start only at age 70, unless the CPF member requests for them to start earlier, with the earliest age being 65.

But more importantly, is it worthwhile for the CPF member to defer his/her CPF life payments for any length of time, in order to get more in monthly payments? We first looked at this here, and the conclusion is that it is not worthwhile to defer the payments. The reason for this is that we will end up getting less in payments overall if we do so, even though the monthly payment amount is higher.

For 2021, we have recalculated the payments and our conclusions are unchanged. It is almost never worthwhile to defer the payments as you will end up getting less.

Proportion of FRS you will get in monthly payments by deferring your CPF Life

Age Payments Start	% of FRS paid out
65	84.4%
66	82.7%
67	81.0%
68	79.8%
69	77.1%
70	75.0%

Probably the only situation in which you may wish to defer the CPF Life payments, and for a year or two at most, is when you opt for the Escalating Plan. The monthly payments for the Escalating Plan start about 20% lower than the payments for the Standard Plan, so deferring the start for a year or two can help reduce some of that difference.

What about the Retirement Sum Scheme (RSS)?

The choice between the RSS and CPF Life is something which is only available for those either born before 1958, or those who have less then $60,000 in their RA before they turn 65. We have covered this issue earlier here, and conclude that it is almost always better to choose CPF Life. While the CPF Life under the Basic Plan are lower than our estimate of the RSS payments until age 90 at $1,444, the bequests amounts will be higher while they last, and more importantly, the payouts under CPF Life will last forever.

Comparing bequests under CPF Life Basic Plan and RSS

CPF Medisave and Medishield Life: Updates for 2021

Medisave is the other big component of our CPF accounts and will play a big role in our retirement. Specifically, it is the source for our Medishield Life premiums, and for outpatient expenses, co-payments and deductibles in our Medishield Life coverage. Now Medishield Life premiums are going up by a whopping 35%, while the minimum amount we need in our Medisave account (BHS) at the age of 65 has gone up by 5% to $63,000.

So, what are we getting for the increase in the BHS to $63,000? As we show here, the BHS is calibrated such that it will last someone who only uses Medishield Life, stays in B2 or C class wards in public hospitals until the age of 94. At this age, only 13% of the men will still be alive, as would 24% of the women. So, this is not perfect yet.

But this rather rosy view of the world relies on healthcare inflation being 5% a year or less. If healthcare inflation instead rose to 7% from now until forever, our Medisave can only last us until the age of 91 at most, which means that it will run out for 25% of the men and 40% of the women! Increasing the BHS to $63,000 will make it last a year or two longer, but we are not out of the woods yet. Clearly, the BHS needs to continue rising by 5% or more every year to tackle this problem.

The Basic Healthcare Sum in Medisave has to keep rising, and at a faster rate, in the future to meet higher healthcare cost inflation

This situation is worse for those who have purchased and intend to keep an Integrated Plan which will cover their healthcare costs at B1 and A class wards in public hospitals, and at private hospitals. With higher healthcare cost inflation, the BHS of $63,000 will likely run out by the time they are 88. That is, for a third of the men and half the women. So please do some financial planning and projections before committing to an Integrated Plan now. If you are not going to be able to keep up with the payments, especially the part which is to be paid in cash in the future, it might be better to downgrade your plan now.

*For those who have an Integrated Plan for private healthcare, here’s a look at the economics of Integrated Plans which might be of interest and here is a follow up on that post with even more details!

Careshield Life: CPF Updates for 2021

The final piece in the CPF puzzle is the newly introduced Careshield Life. The base plan itself is actually neutral on the Medisave account, because the premiums are payable only until age 67, and so will not affect the adequacy of BHS in retirement. But as we discuss here, this is not so for the Careshield Life Supplements offered by private insurers. Not only are they poorer value compared to the base Careshield Life plan, the premiums are also payable until your mid-80’s at the earliest. As a result, while we are allowed to use up to $600 annually from the Medisave account to pay these premiums, what it does is to run down the Medisave account in retirement even faster.

Our estimates show that for someone who has an Integrated Plan, and a Careshield Life supplement, the Medisave account will run dry by the age of 85 or 86. At that point, you have a 50-50 chance of still being alive, and will have to quickly come up with cash in hand to pay these premiums, plus other medical expenses. Hence, you need to think twice before committing to these plans today, when the use of Medisave makes it so easy to afford.

While the use of Medisave make Integrated Plans and Careshield Life Supplements affordable today, they will run down your Medisave BHS much faster in the future

Will the CPF Interest Rates be Reduced?

One question which has propagated by the CPF conspiracy theorists is when the CPF interest rates will be reduced. After all, in this low interest rate environment, the 2.5% interest on the Ordinary Account and the 4% interest rate on the Special, Retirement and Medisave Accounts seem too good to be true!

For a start, the 2.5% interest Ordinary Account rate is mandated by law and is very unlikely to be changed. However, the higher 4% interest rate on the other accounts is reviewed quarterly by the government, leading to some to place less reliance on the CPF as a means of retirement savings as you cannot be sure whether you can earn these higher interest rates forever.

However, once we look at the design of the various components of the CPF in totality, we see that the adequacy of these pieces depend critically on the 4% interest rate. For example, Medisave will run out a lot earlier if the Medisave account did not earn at least 4%. And the CPF payments will trend sharply lower if the interest rate on the Retirement Account dropped to 3.50% (as projected as the lower range of the payments now).

Hence, cutting the CPF interest rates can ease the pressure on Government finances at the moment (not that they are under any pressure at all!). But doing so merely creates pressure elsewhere in terms of retirement adequacy and healthcare financing. These will need to be resolved, e.g. by lowering payments, coverage, or delaying withdrawal. In this sense, it is easier to tackle them gradually over the years using the higher interest rates, than to try to use shock therapy which may be costly at the ballot box!

It is unlikely CPF interest rates will be cut, as so much of retirement adequacy designed in CPF Life and Medishield Life depend critically on the 4% interest rate paid on these accounts

Conclusions

This wraps up the important updates for CPF update for 2021. We may not pay too much attention to our CPF accounts when we are younger, as the monies are inaccessible. However, we need to them to work for us in the future when we are no longer earning and contributing. In particular, we need to be careful in committing to healthcare and long term care plans now when we are younger, as the Medisave monies may not be able to cover the premiums on these plans when we age.

Anyway, tune in next year for our 2022 CPF updates!

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