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Income Ceiling Bump from 5k to 6k might put $94,000 at age 65

The Singapore Budget 2015 was announced this afternoon and there are much things talked about but I find the CPF ceiling bumped up to be interesting. Singapore middle income are getting richer but they are getting squeeze so one of the move is to increase the CPF ceiling from $5,000 to $6,000.

The CPF Ceiling to put it simply affects your employer’s contribution to your CPF. If you earn $10,000 per month, under the existing 5k ceiling, only the first 5k your employers need to contribute the 17% to your CPF, the second $5k they do not have to pay it. This would also mean that the second $5k you do not need to contribute your 20% CPF employee contribution.

With the bump up to $6k, that would mean employers need to contribute more for the additional $1000 per month now. Higher middle income earners would have slightly less take home pay but more contributions towards their retirement and medical fund.

But how much more?  It seems for older workers, employers would need to contribute even more:

From Jan 1, CPF contribution rates for workers aged 50 to 55 will match the level of those younger than them – due to a 1 percentage point raise in both employer and employee contribution rates. Employer contribution rates for those aged 55 to 60 will also be 1 percentage point higher, while those aged 60 to 65 will be 0.5 percentage points higher.

The increase in employer contributions will go to the Special Account, while the increase in employee contribution will go to the Ordinary Account.

I tried to work out the future value of this bump up.  A hypothetical person would be some of my friends who is already earing more than $6,000 at the age of 35 years old, who have 30 years to 65 years old retirement. Each year now, an additional $12,000 will be subjected to CPF contribution.

The average interest that you can earn is assume to be 3% since 62% of it is made up of ordinary account (2.5%) and 38% is made up of special account and medisave (4%)

After 31 years, the cumulative future value ends up as $93,954.42. This is assuming you work for 12 months (highly possible) and it may be further bump up if you earn consistent 2 month bonus.

Not too shabby a sum of money! Although technically you can say 3% just barely keep up with inflation.

Why do I get a feeling this $93k is almost going to make up 20% of your future minimum sum.

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bookworm

Saturday 28th of February 2015

I read this as government pre-empting mortgage interest rate hike that will certainly affect middle income group. Pass the burden to employer.

Kyith

Sunday 1st of March 2015

hi bookworm, how would interest rate hike help the situation. it will make the currency strong, people going to flood the SGD, and its going to make the currency less competitive. all these are business killing.

Mickey J

Wednesday 25th of February 2015

Hi Kyith, you are absolutely spot on in these few points:

1) The bump up in CPF salary ceiling will definitely increase the retirement account exponentially in your later years. 2) 93k may well be only 20% of your future minimum sum.

I did some calculations based on my personal information (younger age with a 6k salary and not working after 50) in my blog and I found that the bump up of $370 per month could potentially increase my Retirement Sum by $120,000.

If we take the recent CPF recommendations from the CPF Advisory Panel where they propose to raise Basic Retirement Sum by 3% each year, the projection for my Basic Retirement Sum will be $308,492.60. Doubling that amount for Full Retirement Sum scares me a lot!

I feel the hit here because my salary right now is exactly $6,000 and that means next year I take home $200 lesser each month. I will have to adjust my spending accordingly. The move for the government to force workers to save more each month is necessary because the Basic Retirement Sum will move higher each year and the existing CPF contribution amounts won't be adequate.

A question I would like to ask is why do you use 17% as the calculation for your illustration? Shouldn't it be 37% (20% employee and 17% employer)?

Kyith

Wednesday 25th of February 2015

its more like the 20% belongs to you already, so the upside for you is to get that 17% provided by the employer. congrats for getting a sizable salary for a young age.

the full CPF minimum sum should at least be 550k by 30 years later.

Dowz

Tuesday 24th of February 2015

I can only think it means less take home pay for me!

Kyith

Wednesday 25th of February 2015

yes that is right dowz

gks

Tuesday 24th of February 2015

Stock Picker, Yes, I think you are right. However, note that nothing has been said about increasing the annual limit of cpf contribution which is currently $31,450. For a person who earns $5000 and gets 4 months bonus annually, his cpf contribution is already very close to this limit. So he might not be able to reap the full benefit of this change.

Kyith

Wednesday 25th of February 2015

likely technically he wont be able to reap unless the17 month limit changes accordingly

Stock Picker Singapore

Tuesday 24th of February 2015

I'm going to ask a very silly question. Does this mean that if I already make more than 6k per month, i now get a pay raise (due to employer contribution) but at the same time my disposable income falls?

Kyith

Wednesday 25th of February 2015

your disposable income will fall, but you will get an employer match.

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