There were many announcements in Singapore Budget 2023, which set out the Singapore government’s policy priorities for the year ahead.
While short-term measures to help mitigate the steep increase in the cost of living understandably grabbed many headlines, tweaks to achieve important long-term objectives are no less important.
On the surface, one of the more consequential changes was to the CPF monthly wage ceiling, which will be raised progressively from $6,000 to $8,000, starting from 1 September 2023. Deputy Prime Minister Lawrence Wong said that this had to be done to avoid “storing up more problems for ourselves and for society” in time to come.
Here’s an in-depth analysis of this change and how it will impact CPF members’ retirement adequacy.
What Are the CPF Monthly (Ordinary Wage) and Annual (Additional Wage) Salary Ceilings
What we commonly refer to as CPF monthly salary ceiling is technically known as the CPF Ordinary Wage (OW) ceiling. This places a limit on how much of one’s monthly salary attracts CPF contributions.
Since 2016, the CPF OW ceiling has been set at $6,000. This means that mandatory CPF contributions (by both employer and employee) only need to be paid on the first $6,000 of one’s monthly salary.
In addition to the CPF monthly salary ceiling, there is also a CPF annual salary ceiling, which caps the total amount of CPF contributions payable for the entire year. This is known as the CPF Additional Wage (AW) ceiling. The reason why there is the annual AW ceiling is to ensure CPF contributions are paid on variable wages like bonuses.
The CPF AW ceiling is currently $102,000. This amount is 17 times the monthly salary ceiling, which means that bonuses equivalent to five months’ salary in a given year would still attract CPF contributions. This annual ceiling was unchanged in Budget 2023.
How Will The Increase CPF Monthly Contribution Ceiling Affect Your Salary?
The change will affect those who fortunate enough to be earning more than $6,000 a month – up to $8,000 of wages.
On one hand, they will see a reduction in take-home pay, since they will need to make CPF contributions on the part of their salaries between $6,000 to $8,000, subject to the prevailing age-denominated contribution rates.
On the other hand, these workers will see an overall increase in gross wages, because their salary between $6,000 to $8,000 now require matching CPF contributions from their employers.
When Will the CPF Monthly Wage Ceiling Increase Happen
The government has announced that the increase in wage ceiling will be phased in gradually over years to give employers and employees time to adapt to the changes.
Here is the four key dates on which increases in monthly wage ceiling will take place.
1 September 2023: $6,300 (+$300)
1 January 2024: $6,800 (+$500)
1 January 2025: $7,400 (+$600)
1 January 2026: $8,000 (+$600)
Increase of CPF Monthly Wage Ceiling is a Policy Alignment Move
CPF wage ceilings are indeed reviewed periodically to keep pace with wage increases, with the last round taking place in 2016, where the monthly wage ceiling was raised from $5,000 to $6,000.
Even though this monthly wage ceiling was touted by Minister for Finance Lawrence Wong as a way to “help middle-income Singaporeans save more for their retirement”, the fact that the annual wage ceiling was not raised says otherwise.
This is because this move ensure that two workers whose annual renumeration is similar would make similar total CPF contributions, regardless of whether they have a higher monthly base pay, or if they have higher annual bonuses.