Addressing Retirement Adequacy under a work-based, define contribution social security structure

One of the issues of the work-based defined contribution system under the Central Provident Fund (CPF) system is retirement adequacy. This is especially so for low-wage workers with irregular employment over the work cycle and hence have lower retirement savings. In Budget 2020, the government announced the implementation of the Matched Retirement Savings Scheme (MRSS) in 2021. MRRS will help senior Singaporeans to build up their CPF retirement savings to boost their monthly payouts in retirement. The MRSS targets at CPF members aged 55 to 70 whose retirement account savings is less than the prevailing Basic Retirement Sum (BRS). Their average monthly income is not more than $4,000, living in HDB flats and not owning more than one property.

Under MRSS, the Government will match every dollar of cash top-ups made to the retirement account (RA), up to an annual cap of $600, starting from 1 January 2021. For a start the scheme will be for five years, i.e. ending in 2025. The matching grant for a given year will be automatically credited into the members Retirement Account by the first quarter of the following year. The cash top-up and matching grant enjoy CPF interest rates of up to 6% per annum. Interest is monthly compounded.

In this exercise, we will consider a CPF member who is eligible for MRSS. Mr Tan turned 55 years old on 1 January 2021; and has a net balance of $50,000 in his basic retirement account. Mr Tan will thus earn up to 6% interest on the first $30,000 of his CPF balances and up to 5% on the next $30,000. His son, Michael Tan wants to take advantage of the scheme to boost his fathers CPF account while getting an income tax relief for topping up his fathers account.[1] Additionally, Mr Tan has decided to retire due to ill-health.

[1] Michael wants to do a cash top-up of $600 into his fathers retirement account as birthday gift on 1 January 2021 and will continue to do so till 2025.

a. How much more additional CPF savings would Mr Tan accumulate by age 65 because of Michaels cash top-up and the governments matching? You may assume that the matched savings will be credited into Mr Tans account on the 1 January of the following year.

b. How would this scheme enhance Mr Tans monthly retirement income?

(Hint: You may estimate by how much this additional savings would boost Mr Tans monthly payouts, using the same formula used to calculate Johns monthly term annuity and life annuity in Part I, assuming 3.5% annual interest rate)

[2] Suppose Mr Tan is of the view that there is no hurry for Michael to top up his RA account when he is 55. He suggests that Michael could top up his RA account when he becomes 57 years old. Michael is of the view that his father will lose out if his father delays participating in the MRSS. Do you agree with Michael?