There are quite a few changes happening to the CPF system in 2023 and I know you will be equally curious to know what they are. That is because CPF affects all Singaporeans and Permanent Residents and is therefore, a topic close to the heart of plenty of us here. Some of these changes are a result of policy changes announced during Budget 2023, while some are due to periodic reviews and updates announced during the later part of the year. Not to worry, I have summarised the key changes so that you can just refer to this article going forward. Without further ado, let’s find out the CPF changes in 2023 and why you must take note of them.
1) Increase in CPF Ordinary Wage Ceiling
During Budget 2023, it was announced that the CPF Ordinary Wage (‘OW’) ceiling will be raised from $6,000 to $8,000 by 2026. For readers who are not aware, the CPF OW Ceiling limits the amount of a CPF member’s monthly salary that will attract CPF contribution in a calendar month. To put it in simpler English, it will reduce the take-home pay or the nett salary that the CPF member brings home. To mitigate the impact, the increase in CPF OW ceiling will be implemented in phases over 4 years as shown in Diagram 1.
As shown in Diagram 1, a CPF member who earns $8,000 per month in Year 2026 will find that his monthly take-home pay has reduced from $6,800 to $6,400. Not to worry, this $400 is not missing but in fact has been deposited into the member’s CPF account.
In the context of a CPF employee who earns $8,000, I reckon that a $400 reduction is not going to dramatically alter the household’s budgeting but it is significant enough to be felt, especially during a period of persistent inflation. The government explained that the increase in CPF OW ceiling is to allow middle-income CPF members to reach retirement adequacy faster especially since we are now living longer.
To look on the brighter side, CPF employees benefit from this change as their employers will have to contribute more to their CPF accounts as a result of the higher CPF OW ceiling. Let’s look at Diagram 2 to understand how much more contributions salaried-workers can look forward to.
Once again, assuming that the gross pay of the CPF employee is $8,000 per month, CPF contribution by the employer will increase from $1,020 at the start of 2023 to $1,360 by 2026. As a result, total CPF contribution per month increases from $2,220 to $2,960. An additional $740 per month certainly allows more CPF members to start dreaming of achieving Enhanced Retirement Sum (“ERS”).
However, there is NO change to the CPF annual salary ceiling of $102,000 (derived from 17 months of OW ceiling). This limits the maximum wages (both OW and additional wages) that would attract CPF contributions. Likewise, the CPF Annual Limit remains at $37,740.
Therefore, if you are earning more than $6,000 per month and if your total wages (including performance bonus) for the year exceed $102,000, this change does not affect you significantly as shown in Diagram 3.
With reference to Diagram 3, your monthly disposable income (denoted by d) will see a reduction from $6,800 to $6,400. The rationale has already explained in the preceding paragraph. On the other hand, because the AW ceiling remains unchanged, the proportion of AW that attracts CPF contribution has also decreased (denoted by j and k). Therefore, your total annual CPF contribution (denoted by l) as well as your total disposable income (denoted by m) remains unchanged.
That is the effect of not changing the CPF annual salary ceiling nor the CPF Annual Limit, which is something that really surprised me. Maybe not raising the CPF annual salary ceiling will help cushion rising business costs for companies.
2) Increase in CPF Interest Rate
A year ago, I wrote a blogpost to explain how the interest rates of CPF Ordinary Account (‘OA’), Special Account (‘SA’) and MediSave (‘MA’) are calculated. Based on the methodology, I concluded that an increase in interest rate for CPF SA and MA is plausible while the same situation for CPF OA is near impossible. Well, good news for all CPF members as the interest rate for CPF SA and MA rose to 4.01% p.a. from 4.00% at the latest review. For those who have not reached the CPF SA account ceiling or Basic Healthcare Sum, pause any thoughts of liquidating your investments and topping up more cash into your CPF SA or MA just yet. That is because for someone who meets the Full Retirement Sum of $198,800 in 2023, this is just an additional $19.88 in your CPF accounts.
While an increase of 0.01% is insignificant in absolute terms, the gesture itself is symbolic. It shows that the formula is working as 10-Yr Singapore Government Securities have trended up from a period of high interest rates. In addition, it is possible that the interest rate may increase at the next review from the graph in Diagram 4.
However, I still hold the belief that the CPF OA formula needs tweaking as affixing it against the board rates of the local banks does not work in the current macro-environment. Base rates of the local banks are losing their relevance as they run attractive promotions that are significantly higher than their board rates to attract depositors’ savings almost all the time.
3) Increase in CPF Contribution Rates for Senior Workers
As in 2022 and 2023, Year 2024 will see another increase in CPF contribution rates for senior workers as shown in Diagram 5.
The intention is to help senior workers accumulate more funds more their retirement as the incremental amount will be fully allocated to their SA. My parents are senior workers who fall into the 60 to 65 age band with my mum reaching the withdrawal age next year. I appreciate this increment as it meant that their employers will be contributing more to their CPF accounts as well. Together with schemes such as the CPF Matched Retirement Savings Scheme, this will help both of them reach Basic Retirement Sum earlier.
Ever since I became better versed in financial literacy, I have been fighting tooth and nail to ensure that they will have decent retirement payouts from their CPF accounts when they eventually retire. Therefore, every bit of help, whether it is from me, themselves, their employer or the government, goes a long way in achieving this goal.
This article is published on 2 July 2023
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