Budget for the future


Budget for the future

By Jill Lim & Sabrina Sia

As published in the Business Times on 24 February 2015 (Post 2015 Budget announcement)

One of the major themes of the 2015 Budget is to strengthen social support to ensure assurance in retirement and enhance support for middle-income families. Below are some of the key measures that were introduced to achieve the objectives.

Increasing CPF retirement savings

Much debate has centred on whether our Central Provident Fund (CPF) is sufficient to ensure retirement adequacy, especially as many Singaporeans are asset-rich by the homes that they own (largely funded by their CPF monies), but may not have enough cash on hand to see through their retirement.

In a bid to strengthen Singapore's social security system and also to help Singaporeans save more for their retirement, the 2015 Budget announced that the monthly CPF salary ceiling will be raised from S$5,000 to S$6,000 with effect from Jan 1, 2016. This will help those whose monthly salaries are already above the monthly CPF salary ceiling of S$5,000 to further build up their CPF nest.

Separately, the restoration of CPF contribution rates for workers who are 50 to 55 years old to the same level as those for younger workers meets a two-pronged objective. Firstly, it addresses the issue of retirement fund adequacy for older workers who are already nearing retirement age and who may not have enough working years left to benefit from the proposed CPF salary ceiling increase. Secondly, it recognises that older workers can still contribute as much to the workforce as younger workers and encourages them to seek employment beyond 50 years old.

In addition, to make the CPF system more progressive, it was announced that an additional one per cent of extra interest would be payable on the first S$30,000 of the CPF balances, on top of the current interest rate of 5 per cent for CPF members aged 55 and above. This also facilitates the build-up of the CPF nest for older Singaporeans with smaller CPF balances, so that they can have more funds for retirement. However, employers appear to have suffered another blow in trying to cope with rising business costs, with the proposed increase in CPF rates for older workers and also the proposed increase in the CPF salary ceiling. However, the proposed extension of the Temporary Employment Credit (TEC) should provide some relief to employers - at least for the coming three years.

Tax rebate

To help middle-income taxpayers, a one-off tax rebate of 50 per cent (capped at S$1,000) for the Year of Assessment (YA) 2015 (income year 2014) will be given.

While the government has announced tax rebates previously to share the country's good growth in prior years, it is interesting to note that the S$1,000 cap on the tax rebate is the lowest ever that has been announced. This appears to be in line with the government's aim to help the middle to upper middle-income groups with the rising cost of living in Singapore, and they will be the biggest beneficiaries of the proposed tax rebate.

Increase in top marginal tax rate

To address the growing income inequality between the low and high-income earners, one of the approaches that was previously adopted was to make our individual income tax regime more progressive. This was seen in the 2011 Budget with the changes in our individual tax rates and the introduction of more income tax bands to reduce the taxes paid by middle-income earners.

In a surprising move by the government, it was proposed that there will be an increase in the income tax rates for high-income earners with effect from YA 2017 (income year 2016). While mindful of the need to keep our tax rates competitive, the government has also recognised the need to keep our individual tax regime more progressive to reduce the widening gap in income inequality.

In addition, with the introduction of a number of upcoming programmes such as the Silver Support Scheme to enhance our social safety net, funding will be required to ensure their sustainability. It therefore appears that one of the ways the government hopes to achieve this is to have the high-income group assist those who may not be as well-off as them.

Going by the government's comments in the build-up to the announcement, the 2015 Budget was, in many ways, in line with what was expected. With a focus on providing support to the middle-income class and also addressing issues of retirement fund adequacy, the Budget met many anticipated needs, but it still managed to have its fair share of surprises.

The writers are respectively global employer services leader and director of taxes at Deloitte Singapore. The views expressed are their own.

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