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Raising the CPF Ceiling: Worth it to Lose S$200 Every Month in Exchange for S$60K More Retirement Savings?

All that glitters is gold. But can you touch it, though?

All that glitters is gold. But can you touch it, though?

While many of you were hoping that the Budget 2015 speech would be filled with SG50 style freebies, Mr Tharman instead announced that the CPF Salary Ceiling would be raised to $6,000, and that contribution rates would be going up. Just in case it’s not clear, that means even more of your salary will be going into your CPF. Yes, it might be exactly THE OPPOSITE of what most people were hoping for.


But before you burst into tears of anger and resentment – Let’s break down what it actually means for you as a CPF member and then we can all commiserate over milk and cookies if need be.


What is the CPF Salary Ceiling?

First, let’s look at what the CPF Salary Ceiling actually is. This is the maximum amount of monthly salary that determines CPF contribution. Right now, an employee’s CPF contribution is 20% of their salary and the CPF Salary Ceiling is $5,000.

That means if you earn $5,000 or less, your contribution is 20% of that. If you earn more than $5,000 your contribution is STILL 20% of $5,000, or $1,000.


So what’s going to happen to the CPF Salary Ceiling in 2016?

In 2016, the CPF Salary Ceiling will be raised to $6,000, the same amount it was before 2004. This means that any monthly salary of $6,000 or less requires a CPF contribution.

For example, in 2015, let’s say you earn a monthly salary of $6,000. With the current ceiling of $5,000, your contribution each month caps off at 20% of $5,000, or $1,000. You take home $5,000 (80% of $5,000 + additional $1,000 on top of the salary ceiling).

In 2016 however, the CPF Salary Ceiling will be raised to $6,000. That means if you earn $6,000 a month, your CPF contribution is now 20% of $6,000, or $1,200. You only take home $4,800.

Basically, if you earn $6,000 or more a month in 2016, the new CPF Salary Ceiling means you’re putting $200 MORE into your CPF each month.


What does this mean for our employers? (This part will bring a small smile back to your face )

Our employers have to contribute 17% of our wage to our CPF, up to 17% of the CPF Salary Ceiling.

In 2015, with a $6,000 monthly salary, the employer CPF contribution is 17% of $5,000 or $850.

In 2016, with that same $6,000 monthly salary, the employer CPF contribution is 17% of $6,000 or $1020.

That’s $170 more that your employer now has to put into your CPF each month. That’s $170 that employers might be (illegally, of course) now trying to deduct from your take-home pay. We’re kidding.

They shouldn’t be feeling too much of a pinch, though. Employers will continue to receive Temporary Employment Credit and Special Employment Credit to help them subsidise the increased CPF contributions.


Wah, so our take home pay is less, our employers have to pay more… IS THERE ANYTHING I CAN BE HAPPY ABOOUUUT?!

In 2015, if your salary is $6,000 a month, that means $1,850 a month in your CPF. That means you’re really “earning” a total of $6,850 a month gross.

In 2016, if your salary is $6,000 a month, that means $2,220 a month in your CPF. You’ll actually be “earning” a total of $7,020 a month, or $170 more than 2015.

We don’t need to elaborate on how having more CPF is a good thing – especially with financing your home loans. But let’s look at how much this “raise” of $170 is costing you. Yes, you’re taking home $200 less each month than before, but it is contributing to a retirement sum thats growing with interest.

Remember, this only affects someone who earns more than $5,000 a month. If you’re already bringing home $4,800 a month, it might not be too painful an increase.


What other CPF changes were mentioned in Budget 2015?

If you’re aged 50 and above, your CPF contribution will now be increased. Workers aged 50 to 55 will have an increase of 1% from employer and 1% from employee. This brings the total CPF contribution to 37%, or the same as younger workers.  Workers aged above 55 to 60, will have an increase of 1% employer CPF contribution and workers aged above 60 to 65 will have an increase of 0.5% employer CPF contribution.

What does this mean? Older workers will be receiving slightly more CPF contributions, starting in 2016, to help build up their retirement savings. However, this also means the cost of hiring an older worker is going to go up, which may lead to some other issues but let’s not go there for now.


If DPM Tharman’s calculations are correct…

In the Budget 2015 Speech, DPM Tharman suggested that someone aged 45 years old today who is earning $6,000 or more would save an additional $60,000 in his CPF by the time he reaches 65. (This calculation is based on contributions to CPF Special, Medisave and Retirement Accounts only. Ordinary Account has not been included as the CPF contributions can be withdrawn for housing needs.)

Many people are up in arms over the fact that they are going to lose an additional $200 in liquid cash every month. But the fact of the matter is that this will happen at a time when they are earning an assumedly steady income. And let’s be honest – $6,000 a month is not a small sum. The exchange for this is $60,000 (or more) to prepare for a point in your life when you won’t be earning money.

So is saving an additional $60,000, as has been estimated, worth losing $200 a month? Only you can decide. But regardless of your decision, the change is already going to take effect come 1 January 2016. Bring on the milk and cookies.



This commentary was written by Peter Lin and first published on MoneySmart.
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