SINGAPORE — At the National Day Rally on Sunday (Aug 18), Prime Minister Lee Hsien Loong announced that Central Provident Fund (CPF) contribution rates for workers aged between 55 and 70 will be raised.

The amounts by which these rates will be raised will differ according to age bands, and these increments will take place gradually over the years, with a target to complete these hikes by 2030. 

The changes were among a slew of recommendations made by a workgroup that had been tasked to look into the issue of how to better support Singapore’s older workers as Singaporeans are living much longer lives.

In his English speech on Sunday, Mr Lee said the Government is accepting all the workgroup’s recommendations.

TODAY takes a closer look at the new CPF contribution rates:

WHO WILL BENEFIT?

The CPF contribution rate for those aged between 55 and 60, which currently stands at 26 per cent, will be increased to the full rate of 37 per cent, on a par with that of younger workers. 

The rates for those aged 60 to 70 will also be raised, but not as much:

This means that when the new rates kick in, a worker will benefit from the same CPF contribution rate until he or she crosses 60 years old.

For example, let's say a worker has his birthday in the month of May. He will enjoy the full CPF contribution rate of 37 per cent all the way up until May in the year he turns 60, but the rate will drop to 26 per cent the following month.

WHEN WILL THESE NEW RATES APPLY?

The aim is to achieve these new rates by 2030 via gradual increments. 

The first hike should, however, be implemented as soon as possible to boost retirement adequacy for older workers, the workgroup recommended.

The workgroup also recommended that the first increase should be implemented by Jan 1, 2021, with employers increasing their contribution by 0.5 or 1 percentage point, depending on the age group, and for workers of all affected age groups to increase their contribution by 1 percentage point. 

The workgroup said that the total increase in the employer’s share would be generally lower than the employee’s share, as employers have borne a larger share in previous contribution rate increases. 

For example, when rates were last raised from 25 per cent to 26 per cent for those aged between 55 and 60 in 2015, the 1 percentage point increase was borne by the employers only. 

WHEN WILL EACH HIKE BE IMPLEMENTED?

This will depend on the economic situation over the years, Mr Lee said on Sunday.

From the employers’ perspective, a quicker pace — while would provide a bigger boost for workers — might mean difficulties in managing sudden cost increases, which may in turn affect the employability of older workers. 

Older workers may also see a reduction in their take-home pay if their wages do not rise at the same pace as the increase in their contribution rates. 

The tripartite workgroup did not make further timeline recommendations beyond 2021, saying that there is a need to monitor the outcomes of this first move before finalising subsequent increases.

However, it suggested that each subsequent increase in CPF contribution rates should not exceed 1 percentage point for either workers or employers, so as to minimise the impact on workers’ take-home pay and the companies’ business costs. 

While the aim is to achieve the target rate increases by 2030, the workgroup also recognised that there may be a need to defer the rate increases in some years, depending on the economic climate. 

The Government should therefore retain the flexibility to stretch the timeline beyond 2030 if necessary, it said.

WHY ARE THE RATES STILL LOWER FOR WORKERS ABOVE 60?

The workgroup decided to retain the policy of having lower CPF contribution rates for workers in older age bands, as they believe this will better protect their employability.

Equalising the contribution rates to 37 per cent for all age groups would raise business costs for the employer and affect the take-home pay of the worker, they said in a report on their recommendations.

“It will be more practical to maintain different rates for different age bands but start tapering CPF contribution rates at a later age than 55,” the report said. 

The rate increase for workers between 60 and 70 years old should be “smaller but meaningful”, so that it would lower the risk that they may be unemployable, it added.

The workgroup also decided that CPF contribution rates for those above 70 years old should remain unchanged as companies have no obligation to re-employ workers beyond that age. 

“Raising CPF contributions risks making these workers less employable with no significant gains in retirement adequacy,” the report said. 

Meanwhile, the workgroup said that the move is not expected to reduce the employability of workers between 55 and 60 years old as the employment rate for workers in this age group has “improved significantly”, from 64.2 per cent in 2008 to 72.7 per cent in 2018. 

WHICH CPF ACCOUNT WILL THE ADDITIONAL CONTRIBUTIONS GO TO?

The additional CPF contributions will all go into the Special Account (SA). 

“This will maximise the interest earned and provide a bigger boost to workers’ retirement incomes,” the workgroup said. 

This is because CPF savings in the SA can earn a base interest of 4 per cent every year, as compared with a base interest of 2.5 per cent in the Ordinary Account (OA).

For workers 55 years old and above, the SA can earn an interest of up to 6 per cent per year. 

So under the fully-raised CPF contribution rates, an older person with a monthly gross income of S$2,900 will be able to accumulate S$47,300 in his or her SA, after working for 10 years from age 55 to 65.

This is S$3,600 more than if the additional CPF contributions were to be allocated to the OA. 

The contribution rates for CPF members’ OA remain unchanged. Savings in the OA can be used to pay for housing, insurance, investment and education.