Wednesday, August 25, 2010

Make CPF Life voluntary

Aug 25, 2010

Auto-inclusion works against encouraging personal responsibility

By Lydia Lim

SHOULD people be given a choice either to sign up or stay out of a national insurance scheme that has clear benefits for society at large?

That issue resurfaced last week when the Government amended the Central Provident Fund (CPF) Act to 'auto-include' more CPF members in the national longevity insurance scheme known as CPF Life.

An annuity scheme that is compulsory enjoys obvious benefits, in terms of financial viability and administrative conve-nience. But there is also a cost to curbing people's autonomy - and that has received scant attention.The only Member of Parliament to raise the issue during last week's debate in the House was Madam Halimah Yacob.

With auto-inclusion, any CPF member who turns 55 in 2013 or later, and has at least $40,000 in CPF balances, will be automatically included in CPF Life.

They will get a regular income from CPF Life from age 65, for as long as they live. It is a key plank in government efforts to boost Singaporeans' financial security in old age, as lifespans lengthen.

Last week's change basically affects those born in 1958 or later, who have less than $40,000 when they turn 55. This group would not be 'auto-included' at 55. But the change ropes them into CPF Life at age 65, if their CPF balances hit at least $60,000 by then.

While the move to protect as many retirees as possible 'is laudable', Madam Halimah said, it also leaves an impression that the Government is 'rather arbitrary' in its administration of CPF Life. 'While some members may welcome this move as they are now given a second chance, others may prefer to be given a choice instead of being compulsorily included when they thought that they were already excluded,' she said.

One who objects is part-time preschool teacher Nirmala Padnanabhan, 49. She has slightly over $40,000 in her CPF accounts but plans to whittle that down before she turns 55, by investing in shares or partially redeeming her outstanding home loan, so as to escape being auto-included in CPF Life.

'It's our hard-earned money. It's only fair that we are allowed to make our own decision instead of being auto-included,' she told The Straits Times.

Should CPF members like her be given a choice to opt out of CPF Life, if they so choose? What could happen if they were?

The Government's reluctance to allow opting-out may have been coloured by its past experience with MediShield, the national medical insurance scheme. MediShield was at one point at risk of not having enough funds as Singaporeans were allowed to opt out from the basic scheme offered by the Government and sign up with private insurers instead.

It was revamped in 2005 so that all Singaporeans are covered by the basic MediShield scheme. Those who want more coverage can then buy from private providers.

Like MediShield, CPF Life works on the basis of risk pooling. As an annuity or longevity insurance, it requires a population to pool their savings to create a fund that will be used to finance the old-age needs of those who live longer than the rest. If the pool is too small, the scheme will not be financially viable. So there is a cost to CPF Life if not enough people sign up or too many opt out.

But what of the cost to individuals when they are automatically included in the scheme, and given no choice on investing their hard-earned money?

The importance of personal freedom seems to be at the fore of the British government's decision last month to scrap its compulsory annuity scheme. It will do away with a requirement for retirees to use their pension assets to purchase annuities when they turn 75. New rules to be announced next April will give pensioners freedom to choose between taking their pension assets as a lump sum and as a stream of drawdown income.

Those who satisfy a minimum income requirement, yet to be set, will be able to draw down unlimited amounts from their pension pot. The reversal was welcomed by financial-sector experts and pensioners alike.

Among the reasons cited: Wealthy individuals will no longer have to buy annuities they do not need, and people who want to buy annuities can time their purchase to maximise the income they get.

The British reversal suggests a compulsory annuity scheme - in trying to be a one-size-fits-all solution - can actually create as many problems as it solves.

At a more fundamental level, I would argue that auto-inclusion cuts against what should be a key tenet of financial security - that of encouraging and enabling personal responsibility. Auto-inclusion implicitly conveys to CPF members that: 'You can't be trusted with your own money.' One fallout of such a message is that people live up to that expectation.

[One of the drivers of the CPF Life scheme is precisely that CPF payouts were almost immediately lost to scammers, timeshare marketeers, indulgent lifestyle, mistressess and foreign brides. So people have already proven that they are unable to handle their money. To raise this issue now is to forget the reason for working out this solution in the first place.]

Shouldn't we as a society strive for a better balance in policymaking, between a scheme's efficiency and viability and citizens' autonomy? After all, aren't policies made for people, not people for policies?

In recent decades, social scientists have come to better understand the value of autonomy. A person with autonomy acts with a full sense of volition and choice. A person who is controlled behaves with the experience of pressure and demand towards specific outcomes, from forces external to the self. Surveys in both developed and developing countries have found that people seek autonomy and that it improves their lives.

CPF Life is barely two years old and likely to be refined. It should move towards becoming voluntary, not compulsory.

A voluntary longevity scheme will of course need to go hand-in-hand with a massive campaign to educate the public on why it is in their interest to sign up. This will be a costly and difficult exercise.

But such a campaign offers opportunities to educate Singaporeans and spur them to think hard about retirement finances. These are vital steps on the road to personal responsibility in financial matters - which in the end is surely in the best interests of both state and citizens.

CPF Life was introduced because there were cases, many cases of CPF recipients blowing their life savings on the extravagant life they had always dreamed of, being swindled by unscrupulous marketeers promising fantasy lifestyles, gold-digging foreign brides promising sexual nirvana, and financial advisers promising illusory fortunes.

Of course, the many many cases may well be a small percentage of retirees.

Or not.

In any case the CPF Life is flexible. You can use your property as a pledge and reduced the amount of "investment" in CPF Life. Or you can even as the interviewee intends, "whittle down" your CPF to below the minimum for inclusion in CPF Life.

Why? In order to have control over one's investment decision over one's "hard-earned money".

Seriously? Less than $40k? Investment?

The very people trying to get out of CPF Life are precisely the people that needs CPF Life. With $40k, they are not likely to be able to tap into good investment opportunities. At retirement, they should be investing in safe, low-risk instruments, which are not likely to have a high returns. If they can get 2.5% returns, they would get $1000. If they can build this up over 10 years, they would have about $50k. Then when they start to draw down, that $50k could maybe last them 5 years. Eight if they are really frugal.

More financially stable retirees with savings other than their CPF are the ones that really do not need the CPF Life. BUT, the $40k would probably be small change to them. That is, they would have investments of hundreds of thousands, and the $40k can simply be considered part of a diversified portfolio and a "safe" investment.

Moving the scheme from compulsory to voluntary and taking the opportunity to educate the public about the desirability of the scheme is idealistic at best and self-defeating at worse. Voluntary human organ donation with public education went nowhere. Relaxing rules to allow CPF members to invest their savings resulted in losses more often than gains.

The track record for voluntary and autonomous choices have not been great in these respects.

To recap, the people who will most benefit from CPF Life will be those who have the barest minimum or just slightly more than the minimum sum. They really do not have a lot of options for alternative investments.

The richer CPF member really do not need CPF Life, but CPF Life needs them to balance up the pool. Excuse me if I do not feel that they are particularly disadvantaged.

Going the voluntary opt-in approach will be long, tedious, and result in the death of the scheme anyway. ]

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