CPF LIFE: Some surprising changes for 2022
Happy New Year 2022! One year ago, in this post on the changes in CPF for 2021, we said: “… hopefully, with the rollout of the vaccines, it is beginning of the end of the worst of the COVID-19 pandemic“. Not surprisingly, that has to be the worst forecast made in that post! Thankfully, some of the other observations made seem to be closer on the mark. So what are the surprising changes and expected updates to CPF LIFE for 2022?
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|
As has been the case previously, the increase in BHS is higher than the increase in FRS. This is prudent in light of the higher inflation of healthcare costs, and higher premiums for Medishield Life and Integrated Plans (also here and here). And also the introduction of new ways to drain your Medisave account faster, such as CareShield LIFE, and CareShield Life Supplements. 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.
Surprise 1: Changes to the projected CPF LIFE payouts
With the increase in the Full Retirement Sum (FRS), CPF members turning 55 this year should be able to look forward to higher CPF LIFE payouts when they turn 65, right? Well, here’s the first surprise – they are not! Now, the information on the CPF LIFE estimator webpage, has undergone some changes and it is no longer directly comparable to the information we had in previous years. But assuming that the projected payout is now the average or mid-point of the high and low estimates previously projected, we see that the projected payouts are now lower than what they were a year ago!
CPF LIFE: Projected payouts for males (Standard Plan) at age 65 compared to previous years
|Year||FRS||% Change||Payout (Male)||% Change|
CPF LIFE: Projected payouts for females (Standard Plan) at age 65 compared to previous years
|Year||FRS||% Change||Payout (Female)||% Change|
Although this will seem like a disappointment to the CPF members turning 55 this year, rest assured that the previous cohorts have not been spared either! A check on the CPF LIFE estimator for the older cohorts show that the projected payouts have been cut across the board:
CPF LIFE: Revised projected payouts (Standard Plan) at age 65 compared to previous years
|Age this year||FRS||Revised Payout (Male)||Revised Payout (Female)|
A quick check across the three tables above will suffice to confirm that all previous cohorts of CPF members aged above 55 should recheck their retirement sums and plans to make sure that the revised projected payouts are enough. Moreover, this revision applies to all three CPF LIFE plans as well – Standard, Basic and Escalating, by roughly the same degree.
Why have the CPF LIFE payouts been revised downwards?
While the cuts in the projected CPF LIFE payouts may be disappointing, they are not unexpected. Remember what we said a year ago?
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.
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, the actual payments will probably fall short of these projections.– Life Finance
Simply put, the Full Retirement Sum needs to go up by about 3% every single year from now until eternity because:
- Inflation is around 2% a year, meaning that prices of everything goes up by 2% a year
- We are living longer, to the tune of about 1% longer with every passing year (see here for details)
So even if the Full Retirement Sum rises to the mind-boggling sum of $347,000 in the year 2042, in reality, the CPF LIFE payouts of around $2,800 a month for that future cohort of 55 year olds will only give them a basic standard of living of the mid 2010s. Quite a scary thought, isn’t it? Imagine being 65 years old in 2052, and surviving at the same standard of living as what your father did 30 years ago! Not anyone’s idea of social mobility across generations!
In fact, despite the Full Retirement Sum going up by about 3% every single year, the projected CPF LIFE payouts can only go up by around 2% every year (since we are living 1% longer). And this is where the decreases in the CPF LIFE payouts are necessary. Looking at the tables above, it is quite clear that some CPF staffer has been mindlessly increasing the projected CPF LIFE payouts by roughly the same amount as the FRS has been increasing at, only to realise this time round that it has been error! Oh well …
Surprise 2: The CPF LIFE website has less information than before
CPF LIFE has actually been around for quite a long while, although only the first few cohorts who turned 55 ten years or more ago are finally starting to get their monthly payouts. However, what has been unchanged over all this time is the general public’s understanding of what CPF LIFE is all about. Every single year, we read social media posts on people turning 55 going down to the local CPF office to find out more about CPF LIFE, and coming away just as confused (maybe even more) than they were.
And it appears that to address this, the CPF Board has decided to … share even less information on their website! No, this is true! Here’s the second one of the surprising changes to CPF LIFE for 2022. Take a look at the screenshots below:
Estimating your monthly payouts from CPF LIFE
Estimating your monthly payouts from CPF LIFE if you choose to defer the start of the payments
Estimating your monthly payouts from CPF LIFE for the Escalating Plan
Those among us who are familiar with the previous formats of the CPF LIFE estimator and website will quickly see that there are two pieces of information missing now:
- The high and low range of CPF LIFE payouts (which correspond to investment returns of 4% and 3.5% respectively. Now this has been replaced by an average payout amount
- The projected bequest amounts at every age, which served as a source of information many used to choose between the Basic Plan and and Standard Plan. No projections are provided now
In fact, if you go through their new website, you will hardly find any mention about the key difference between the Standard Plan (higher payouts, lower bequest) and the Basic Plan (lower payouts, higher bequest). All you see is this:
The 3 CPF LIFE Plans
In reality, the actual amount of bequest projected at each age is not very important, and not just because most people choosing the Standard plan will outlive the bequests, or because the people choosing the Basic Plan will live to an age when the bequest amounts to very little. Rather, it is more useful to think go the Standard Plan as an annuity that is guaranteed to pay out for at least 15 years (whether you survive that long or not) and the Basic Plan as one which is guaranteed to pay out for at least 25 years.
But the lack of details and the arbitrary way in which all this information has been removed is irksome, to say the least.
Surprise 3: Special Account (SA) shielding got a little bit harder
The idea of “SA Shielding” has gained a bit of currency in recent years. Basically, the idea is to move as much of your SA balances into investments around the age of 55 when the retirement Account(RA) is formed from the balances in the Special Account and Ordinary Account (in that order), and then return the funds to the SA once the RA transfer is complete. The gist behind this is to ensure that the SA balances continue to earn the higher interest rate of 4% while the lower interest earning balances in the Ordinary Account are transferred into the RA instead.
Whatever the merits of this act of “SA Shielding”, the assumption has always been that there is only one transfer made to the RA at the age of 55, and none thereafter. But clearly, this left several questions unanswered. For example, what happens to the CPF members who do not have enough balances remaining in the OA and SA (which could be due to this “SA Shielding” process) to meet the Full Retirement Sum requirement (which is transferred to the RA) at the age of 55? After all, earlier cohorts turning 55 have only around 50% of the CPF members being able to meet half the FRS requirement.
Now, the recent changes in the CPF Act, contained in the CPF (Amendments) Bill of November 2021 (reproduced below) have answered this. It turns out that there will be a second transfer of the SA and OA balances to the RA at the age when the CPF member chooses to start the CPF LIFE payouts. This can be as early as the age of 65, or as late as the age of 70.
Legislative changes to the CPF Act in November 2021
Clearly, this does not affect most people, especially those who:
- Have transferred the full sum of the FRS to their RA at the age of 55
- Do not have any balances remaining in their OA or SA at the age of 65 to speak of
- Have pledged their property to the CPF at the age of 55 and hence are only required to transfer half the FRS to their RA
But for a small subset of financially savvy CPF members, who have believed that they will be able to continue to earn the higher interest rate in their SA despite not meeting the FRS at the age of 55, they will now have to top up their RA when their start receiving their CPF LIFE payments. This is not meant to be a significant impediment to earning more interest – as the RA continue to earn 4% in interest yearly, as long as these CPF members have 67% of the FRS transferred to the RA at the age of 55, the earned interest in the intervening year will help them achieve this.
Is CPF LIFE still good?
In addition to these 3 surprising changes to CPF LIFE for 2022, there are a number of interesting informational tid-bits contained in the updates to the CPF LIFE website, for example:
- The balances in the RA will continue to earn interest at a rate of 4% between the age of 55 to 65, instead of the higher 4.25% assumed previously (from the extra 2% on the first $30,000 balance and the extra 1% on the next $30,000). This could account for the lowering of the projected payouts in the future as well
- Deferring the start of the payouts beyond the age of 65 does not exactly increase the payouts by 7% per year. The increase varies by the number of years, and by different plans, but in general, it is slightly less than 7% and works best with the Escalating Plan
- The projected CPF LIFE payouts start at roughly 6.5% of the accumulated principle in the RA at the age of 65 for the men and 6.1% for women. If this is deferred to age of 70, the payout rates are 7.1% and 6.6% respectively. Compared to true annuities in other countries, this is a very high payout rate. For example, commercial annuities in the US (which has a slightly lower life expectancy) payout only 6.7% and 6.4% for a 70 year old man and woman respectively. Hence CPF LIFE is a really good deal as it also saves on the 7% of fees which commercial insurers charge as well
So what does all this tell us about whether CPF LIFE is still good? There is no doubt that CPF LIFE is still the best value annuity anyone can get. After all, it has single-handedly eviscerated the entire commercial annuity business in Singapore since its introduction. And as we show above, both the payout rates and the returns on the underlying funds are best-in-class.
But it is important to note that we cannot rely on CPF LIFE alone. After all, it will only give you a bare subsistence standard of living, based on what life was like in the 2010s. Its true value is as a hedge against longevity, hence it should be part of the retirement portfolio, rather than the only product in it. With an annuity, especially one which adjusts for inflation, we are freed up from the endless hand-wringing about the safe withdrawal rates and 4 percent rules, because we are able to hedge and reduce the likelihood of running out of money.
And don’t for a moment believe that you can construct an equivalent annuity using other investments for yourself. Without longevity risk pooling, it is impossible to achieve anything like the high 6.5% to 7% payout levels. Hence, despite the changes in CPF LIFE for 2022, it is still the best there is. Even with the cuts in the payouts.