The Merdeka Generation’s Guide to How to Make Sure Your Medisave Does Not Run Out

lifefinance
November 21, 2020
13
CPF, Insurance, Saving, Spending, Withdrawal

Our Merdeka Generation are already embarking on their next lap in after a lifetime of helping to build the nation. Retirement. With increasing lifespans, retirement can be a time of anxiety whether our resources can outlast us, rather than a well deserved reward for a lifetime’s work. But there are many tools to help us along the way. CPF Life for one, ensures that retirement income can keep pace with inflation and never runs out. But healthcare, Medishield Life and Medisave are a different matter, as payments still need to be made from Medisave. How do we make sure our Medisave does not run out in retirement?

Readers of this blog will know that we have done several tear-downs of the retirement plans from the CPF. Overall, we find that they are surprisingly good value-for-money and sound tools for retirement. In fact, much better than anything which private insurers can offer.

More broadly, we have written a series of guides to help figure out a path (for ourselves) through retirement.

As we know only too well in 2020, healthcare is going to be a huge part of retirement. And healthcare costs have been going up relentlessly. How do we know if we have prepared enough for our healthcare spending in retirement?

Illness is not the only threat to your healthcare spending in retirement

What is in Medisave and what is it be used for?

For most of us, our main savings for retirement healthcare will be in our CPF Medisave Account. For someone retiring today, the Basic Healthcare Sum (BHS) is pegged at $60,000, and this is expected to go up in line with inflation over time. We pay for our Medishield Life premiums from this, as well as the deductibles (which can range from $1,500 to $3,000) and copayments (from 10% down to 3%). Is this $60,000 really enough to last us through our retirement? Especially now that Medishield Life premiums are about to be hiked by 35%?

Or is it true that:

“One can die, but cannot fall ill”

Back when Medishield was last reviewed (in 2015), a projection by the Singapore Actuarial Society showed that Medisave will be sufficient to cover basic medical needs (in B2 and C wards at public hospitals) until age 93. But that was before the recent increases in the Medishield premiums and and the realisation that medical cost inflation has been higher than expected. Is that finding still valid today? Let’s find out!

Can Medisave last us for life?

So let’s start off our investigation into Medisave by taking the perspective of a person who is 65 years old, retired, and has the Basic Healthcare Sum of $60,000 in the CPF Medisave Account. From 2021, the Medishield Life premium payable will start at $1,100 per year, increasing with age. We assume that this gets reviewed every 5 years and will be hiked by 25% each time to reflect a 5% rate of medical cost inflation.

All this will be payable from the Medisave Account of course, so there is no further cash outlay. Medisave also pays for the outpatient costs, which we assume starts at $250 per year and increases by 7% a year until it maxes out at the Medisave limit of $500 at the age of 75, and stays at that level thereafter. Finally, all deductibles and co-payments for hospital bills will be fully covered by Medisave.

Basic assumptions about Medisave

Assumption	Value
Starting Medisave balance	$60,000
Starting Medishield Life premium	$1,100 per year
Outpatient fees paid from Medisave	$250 to $500 per year
Medical cost inflation	5% per year
Medisave interest rate	6% for first $30K 5% for next $30K 4% for the rest

Source: CPF Board except for medical cost inflation assumption

To work out what the typical hospital or day surgery bill is like for our retiree, we base it on the figures released by the Ministry of Health for 2018/19. Using only bills for common procedures (more than 30 data points) to avoid biasing towards uncommon procedures, we get:

Hospital Bills for 2018/19

Type	Average Stay	Median Bill
Ward C	2.4 days	$3,311
Ward B2/B2+	2.4 days	$3,340
Ward B1	1.9 days	$5,860
Ward A	2.3 days	$6,149
Day surgery (subsidised)	1 day	$3,842
Day surgery (unsubsidised)	1 day	$3,853

Source: Ministry of Health

These hospital bills are from 2018/19, and are 2 years out of date. For our modelling, we will assume that they have increased by 5% per year. We first assume our retiree stays in B2 or C wards with equal likelihood, and also uses subsidised day surgery. The deductibles (shown below), as well as the 3% to 10% co-payment, can be fully paid using Medisave.

Deductibles for Medishield Life (as proposed in October 2020)

Type	Deductible (age 80 and below)	Deductible (age 81 and above)
Ward C	$1,500	$2,000
Ward B2/B2+	$2,000	$3,000
Ward B1	$2,000	$3,000
Ward A	$3,500	$3,500
Day surgery	$1,500	$2,000 (proposed)

Source: Ministry of Health

Finally, we assume that the chance of hospitalisation increases with age, as shown previously based on Ministry of Health information.

Hospitalisation rates in Singapore — *Source: Straits Times*

Case 1: The Ward B2/C user with no Integrated Plan, and no Careshield Life Supplement

Let’s look at the results for the base case – a retiree who stays in Wards B2 or C, does not have an Integrated Plan, nor a Careshield Life Supplement Plan.

Male retiree without an Integrated Plan, staying in Wards B2 or C

Female retiree without an Integrated Plan, staying in Wards B2 or C

In the two charts above, the green line shows the trajectory of the Medisave balances. The red bars denote the premiums payable for Medishield Life (which increase with both age and inflation over time). And the blue bars show the payments from Medisave for outpatient fees and for deductibles and co-payments. While hospitalisation episodes are infrequent in nature, what we do here is to compute the expected value of these hospitalisation costs per year, by multiplying the chance of hospitalisation with the hospital bill payable.

In these projections, the Medisave balances run out at age 95 for the men (when only 10% of the original retirees will still be alive), and at age 97 for the women (when only 13% will be alive). Note that Medishield Life is designed to cover only 9 out of 10 hospital bills, so there will be another group of retirees who may run out of Medisave before the end of their retirement.

So relying solely on Medisave for our Merdeka Generation retirees is not 100% foolproof. There is still a risk that it will run out. But these projections are before any additional subsidies the Government may give (from the large Merdeka Generation Fund), so it is very unlikely that they will actually face such a tragic outcome before the end of their retirement.

But just to be safe, the charts also tell us that to make sure that you are still on track to have your Medisave last you through retirement, you need to keep an eye on the balance. The balance in the Medisave Acocunt should rise from age 65 to 80, as you earn more from interest than you pay out in premiums and bills, and then start depleting thereafter.

To make sure your Medisave does not run out, see that your Medisave Account balance keeps rising until you reach the age of 80

Case 2: The Ward A user, with an Integrated Plan, but no Careshield Life Supplement

So, our Merdeka Generation look safe as Medisave will be able to cover their medical costs. But they are actually in the minority, as two thirds of the people in Singapore have some kind of an Integrated Plan for hospitalisation expenses, bought from a commercial insurer. Presumably, these are the ones who will stay in Ward A (although the hospitals do not have enough Ward A or private beds to accommodate them all). To pay for their Integrated Plan, they can use their Medisave up to a limit of $600 a year, over and above the cost of the basic Medishield Life premiums. How will they fare?

Male retiree with an Integrated Plan, staying in Ward A

Female retiree with an Integrated Plan, staying in Ward A

In this set of projections, again, the green line shows the trajectory of the Medisave balances. The red bars denote the premiums payable for Medishield Life (which increase with both age and inflation over time). And the blue bars show the payments from Medisave for outpatient fees and for deductibles and co-payments.

Retirees with an Integrated Plan and staying in Ward A will see their Medisave balances remain fairly constant for the first 10 years of retirement before starting to get depleted, and finally run out by the age of 90 for the men, and 92 for the women. At that point, 27% of the men and 33% of the women will likely still be alive, and while they may get further subsidies as part of the Merdeka Generation, they are very likely to be forking out a fair sum out of their retirement funds for healthcare costs.

Of course, these retirees can prolong their Medisave balances by downgrading from their Integrated Plans, but that seems a difficult choice, because that would be when exactly when they are most likely to be hospitalised. Which means that all the earlier premiums paid for the Integrated Plan are essentially wasted.

Up to a third of retirees who have an Integrated Plan face the prospect of their Medisave running out, and needing to make healthcare payments by cash

Case 2: The Ward A user, with an Integrated Plan, and a Careshield Life Supplement Plan

Finally, we get to the big healthcare spenders, those who would like to stay Ward A or better, have an Integrated Plan as well as a Careshield Life Supplement Plan, for which they can use an additional $600 per year from their Medisave Accounts to pay for. How will they fare?

Male retiree with an Integrated Plan and a Careshield Life Supplement Plan, staying in Ward A

Female retiree with an Integrated Plan and a Careshield Life Supplement Plan, staying in Ward A

From this final set of projections, retirees with an Integrated Plan, a Careshield Life Supplement, and staying in Ward A will see their Medisave balances start depleting almost straightaway, and run out by the age of 87 for the men, and 88 for the women. At that point, 40% of the men and 50% of the women will likely still be alive. Hopefully, they also have a couple of million in their kitty for retirement. Otherwise they could face real difficulties financially in meeting their healthcare needs.

At this point, we have to wonder. Have the commercial insurance companies who have been selling Integrated Plans and Careshield Life Supplement Plans made their customers aware of the potential financial commitments which they have down the road? Are the customers aware of what they may getting themselves into, and are they prepared financially for retirement? And this does not even consider the part of the Integrated Plan premiums which have to be paid by cash! With increasing longevity, not only are we certain to run out of Medisave, we are also likely to run of cash!

Up to half of retirees who have an Integrated Plan and a Careshield Life Supplement will have their Medisave run out, and will need to make all their healthcare payments in cash

Other scenarios to consider in retirement

The scenarios which are run here are fairly reasonable, pegging medical cost inflation at 5% a year, despite the reported healthcare inflation being higher in recent years (see here and here). Also we assume that the current CPF interest rates will remain unchanged forever. What if these assumptions do not hold?

An increase in healthcare cost inflation by 2% to 7% per year will result in the retiree’s Medisave running out 2 to 4 years earlier. A drop of the CPF interest rate to 3% from the current 4% will have roughly the same effect as well. Given these rather unpleasant projections, it seems unlikely that we will have a fall in the CPF interest rates, as there is too much at stake. But healthcare inflation is anyone’s guess, and the likelihood of it being higher than 5% a year is not small!

Scenarios for the age at which Medisave runs out for the Men

Scenario	Only Medishield Life	IP and CSL Supplement
Base Case	95	87
Inflation at 7%	91	85
CPF Interest 3%	92	85
Worst Case	89	83

But what does it mean to run of Medisave? How much will a retiree then expect to pay for healthcare costs if there is no more Medisave to rely on? Well, the annual Integrated Plan premiums, deductibles, co-payments and outpatient costs can be from $20,000 per year for someone in their 80’s to more than $30,000 per year for someone in their 90’s, payable in cash. Unless our retirees plan for an increasing amount of income over time in retirement, they might end up spending 50% to 80% of the retirement income on healthcare alone!

*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, wait, there is more, here is a follow up on the first post with even more details!

Because of the high interest rate, Medisave is very useful for covering rising healthcare costs in retirement. Once it runs out, retirees may end up spending virtually all the income they have on healthcare

Conclusions: How to make sure your Medisave does not run out

Medisave and Medishield Life appear to be quite well thought out programs for taking care of the healthcare needs of retirees. Except that they only cover a minority of the retirees, since the majority have some sort of Integrated Plan, which may end up draining the Medisave Account monies faster than expected. And this means that a large portion of retirement income will need to go towards servicing these insurance plans in the future.

This leads us to feel that healthcare insurance in Singapore is anomalous in many aspects:

Twice as many people have coverage for private and A class hospital wards than there are beds to cater for them
Despite being so successful in selling Integrated Plans, the vast majority of the commercial insurers are finding these products unprofitable

There are of course other elephants in the room to deal with:

How can healthcare inflation be kept low, in a time when medical costs are rising worldwide?
How much more subsidies can the Government afford to give over the long term if the cost pressures cannot be abated?

Now that it is 2021, the Basic Healthcare Sum has gone up to $63,000 from $60,000 for CPF members turning 65 this year. Find out our latest projections on the adequacy of your Medisave for retirement healthcare needs!

*Here’s an update on how Integrated Plan insurance is provided, and how you should choose your Integrated Plan insurer!