SINGAPORE (Sept 10): It will be more than a decade from now before Tee, 43, can withdraw some cash from her Central Provident Fund (CPF) savings, but she has already made up her mind. Once she turns 55, the electrical engineer hopes to withdraw up to “tens of thousands” of dollars from her Ordinary Account (OA) and Special Account (SA) savings. This is the milestone age when the Retirement Account (RA) is created, and partial withdrawal from then on is allowed depending on one’s level of savings.

“I want to use the money in other areas such as investments or to start a [new venture],” she tells The Edge Singapore, while having lunch with her colleague at Toa Payoh Central. She has not settled on an investment plan yet, but she says, “ultimately, it is about having ownership over your own money. It is about having the option [to take out the money].”

Tee will be among the many Singaporeans who are choosing to tap their CPF early. Indeed, a report released by the CPF Board in August indicates that six in 10 members aged 55 to 70 have withdrawn cash from their CPF account since turning 55. The median amount and average amounts withdrawn were $9,000 and $33,000, respectively. This is based on the findings of the first two waves of the Retirement and Health Study, conducted in 2014 and 2016.

Present CPF rules allow some degree of early and varying access to retirement funds. Generally, those who are able to set aside the Full Retirement Sum (FRS) or the Basic Retirement Sum (BRS) with a sufficient CPF property charge or pledge in their RA can withdraw their remaining savings from 55. Members who are unable to set aside the FRS or BRS with a property pledge can withdraw up to $5,000.

But interestingly, the study found that 51% of residents who made the withdrawals kept the money in savings accounts in banks and finance companies, with no specific use for the cash (see chart). The median sum deposited in their savings accounts was $8,000. “For the older cohorts, this could indicate a desire for liquidity, since prior to 2014, members could only make one withdrawal a year,” says the CPF Trends report, although present arrangements allow greater flexibility in withdrawals.

Withdrawing a lump sum at 55 and leaving it in a bank account, experts say, would mean foregoing the high interest rates from their CPF. At present, members can earn up to 3.5% a year on their OA, and up to 5% a year on their SA, RA and Medisave account savings. Those aged 55 and above earn an additional 1% on the first $30,000 of their combined accounts (with up to $20,000 from the OA). This level of returns means it would make little financial sense for members to make early withdrawals without any pressing needs, say observers.

But for some CPF members, at the heart of the issue is a sense of uncertainty. Take Pereira, 59, who made a small withdrawal when he turned 55. “I made a token withdrawal to test if the system works. My greatest concern is that the funds will be locked up and be inaccessible to me in various government retirement and insurance schemes,” says the media executive.

Eugene Tan, associate professor of law at the Singapore Management University, distills the issue into how much trust the population has in the CPF system. “These older members seem to want to have direct control of their funds despite the money working harder for them if kept in their CPF accounts,” he explains.

 ‘Complacent savers’

The main drawback of large, early withdrawals is that retirees may not have adequate savings when they retire. As at 2017, about six in 10 CPF members meet the BRS when they reach 55. The figure is expected to rise to seven in 10 members by 2020. But the early withdrawal trend is a cause for concern as Singapore deals with a rapidly ageing population. By 2030, about 900,000, or one in four citizens, will be aged 65 or older.

“My concerns lie with the ‘complacent saver’ who takes money out of the CPF and places about $10,000 in a low-interest-accruing bank account for at least a year. These are individuals who leave their withdrawn money in their bank accounts without consuming or investing the funds in more effective savings vehicles,” says Sumit Agarwal, professor of finance, economics and real estate at the National University of Singapore (NUS).

What should policymakers do? Should they restrict CPF withdrawals as some observers would argue, or should they let people do what they please with what technically is their own savings?

Agarwal advocates further restrictions on CPF withdrawal. Members would only be allowed to withdraw $5,000 when they reach 55 years old, if he had his way. “I think at 55, [individuals] are still working and so they don’t have a need. They should only withdraw at 65 if they need to,” he says. “By providing the option [to withdraw CPF funds at 55], consumers then lose the potential gain on their savings by putting it in zero interest checking accounts.”

The government has generally discouraged large withdrawals at 55. In 2014, Prime Minister Lee Hsien Loong noted that the withdrawal age of 55 had been set more than 50 years ago, when Singaporeans lived to about 63 years old. Current life expectancy is 82 years old. “I feel you should try not to dip into your CPF savings if you can help it, and depend on your other savings first. Because CPF is meant to provide security during retirement,” Lee had then advised.

But studies also show that many members who withdrew from CPF at 55 are not reckless spenders. An NUS study which Agarwal co-wrote, Age of Decision: Pension Savings Withdrawal and Consumption and Debt Response, concludes that while some individuals might overspend their CPF money on consumer goods, the majority have better sense. “We find that providing some degree of access to pension savings may allow liquidity-constrained consumers to better smooth consumption,” adds the report published in April.

According to the study, many who keep their money in banks without investing may be waiting for the right investment opportunity or making durable purchases such as cars.

“These results suggest that consumers do not appear to be using the extra liquidity from pension savings access to primarily fund discretionary purchases,” says Daniel Goh, an associate professor at the department of sociology, NUS. He argues that people should be given more flexibility to withdraw more according to their needs and aspirations, as each cohort grows more financially savvy.

Liquidity anxiety

For some Singaporeans, the early CPF withdrawal is practical. Sixty-three-year-old Jaya, who worked contract jobs in a factory, did not have enough in her CPF account to meet the BRS with a sufficient CPF property charge or pledge. According to less stringent CPF withdrawal rules for her cohort, she could have taken out up to 30% of her OA and SA savings. But with her little savings, she only withdrew about $5,000 anyway, which she deposited in the bank. “I used it slowly for my everyday expenses. I didn’t make any big purchases,” she says.

As a part-time supermarket assistant now, she worries about making ends meet and having enough funds for retirement beyond her CPF savings. The additional liquidity in the bank is a source of comfort. Cases such as Jaya’s are not unique, says Lim Sia Hoe, executive director of the Centre for Seniors. This is especially so for those who retire at 62, and have to rely on limited personal savings until 65. Those in this situation worry that the government may eventually tighten early CPF withdrawal.

“With our increased life expectancy and costs of retirement, cold math suggests there will be perennial pressure to revise the milestone [age of 55] upward. Will we one day only be able to withdraw our CPF monies at the age of 70? Will the [BRS] be $300,000 then?” Lim questions.

Retirement sums will rise annually to account for inflation and a higher standard of living. The FRS and BRS for those turning 55 in 2020 are $181,000 and $90,500, respectively.

With the rising retirement sums and widening inequality, how can Singapore safeguard seniors who may not have enough to retire or, worse, make ends meet?

 More eggs than CPF

Ultimately, Singapore may need to prepare for a future where CPF is not the sole retirement nest egg, says SMU’s Tan. “Will the government be prepared to recalibrate the grand narrative of the CPF scheme? Singaporeans have come to believe that their CPF savings will see them through their retirement. With Singaporeans living longer and costs of living relatively high, CPF savings may not be adequate for some Singaporeans,” he says.

Other observers agree that CPF cannot be the fix to all Singaporeans’ retirement needs. They call for wider social safety nets and easier access to these programmes. To be fair, there is already a range of policies in place in areas such as housing, education and welfare.

“The thing to focus on is enhancing the employment security and mitigating the redundancy risk of the cohort of workers aged 55 to 65, which is the surest safeguard to help maintain sufficient CPF and personal savings,” says NUS’ Goh.

Joseph Cherian, director of the Centre for Asset Management Research and Investments at NUS, suggests that perhaps CPF should be restructured so the funds are solely for retirement, instead of allowing withdrawals for housing or children’s education. “I think the retirement fund and housing fund must be kept separate and managed by different authorities. When you put everything together, you are nudging people to spend more,” he says. “People do not have to contribute extra [from their income] and benefits can be the same, just with segregated [funds].”

“For the low to lower-middle income group, when one is struggling to make ends meet, and the government is holding [back their] money, that is a very tricky [situation],” he says. The government can also consider more CPF top-ups for the needy, he adds.

This story appears in The Edge Singapore (Issue 847, week of Sept 10) which is on sale now. Subscribe here