Wednesday, August 20, 2014

CPF changes do not go far enough

Aug 19, 2014


By Hui Weng Tat, For The Straits Times

THOSE Singaporeans who have been anticipating announcements of significant changes to the Central Provident Fund system to improve retirement financing may be forgiven for feeling disappointed by Prime Minister Lee Hsien Loong's National Day Rally on Sunday.

While the Silver Support bonus payment for poor elderly is to be applauded, the other announced changes do not address the fundamental source of concerns about retirement adequacy.

The extension of the Lease Buyback Scheme to four-room Housing Board dwellings would increase the number of households which are eligible by another 363,000. This compares with the approximately 230,000 three- room and two-room HDB dwellings currently eligible for this scheme.

However, it is not clear if this will make any significant difference to the popularity of the scheme. The low take-up of the current Enhanced Lease Buyback Scheme already provides strong hints that the typical Singapore family would prefer to have the option of bequeathing their property to the next generation.

Under the Lease Buyback Scheme, they sell back to the Government the last decades of the flat's 99-year lease in return for a lump sum and monthly payment. They can continue to live in the flat but can't bequeath it to their children.

For four-room HDB families with a larger family size, such bequest intentions would be even stronger. The continuing high property price, which reduces the affordability of housing purchase of the next generation, would only further strengthen such bequest motives.

PM Lee also seemed to adopt an overly-optimistic view of current retirement adequacy.

Take the example he cited, of a Mr Tan, whose monthly pay is $4,500. Mr Tan's current working income would place him around the 25th to 30th percentile of the Singapore household income ladder. According to the Department of Statistics (DOS), in 2013, the average monthly household income among resident employed households for the lowest 10 per cent of resident households was $1,711.

[Not sure how this is "overly optimistic" - taking someone at about the 25th - 30th percentile sound like he is handicapping his own example. Now, if PM Lee had taken someone from the 80th percentile...]

The $2,000 retirement income projected for Mr Tan, if paid out today, would therefore put him in this group of households with an income considered to be enough for basic or subsistence living.

[So... this is overly optimistic? How so?]

The prospect of such retired households being forced down to the lowest decile on retirement certainly does not paint a very optimistic view of adequate retirement living in Singapore. And with inflation, the real value of the $2,000 Mr Tan is due to get in 10 years' time would be even more paltry.

[I see the problem now. when you say, "overly optimistic" you mean based on your expectation of how much you think you need for retirement, and based on your calculations, you have concluded that you will be unable to meet your retirement needs. However, PM Lee says, "yes, you can meet your retirement needs!" (and you call this conclusion "optimistic"), because your retirement needs, which are so much more than the exemplar, Mr Tan and his family. 

I sense also a "snobbishness" on your part. A disdain for poor Mr Tan who will have to live at about the 10th percentile. Here is a reality for most people below the 50th percentile (and possibly some above it) - when you retire, when you cease to have an income, your quality of life will fall. At $4500 per month household income, which you note is about the 30th percentile, to $2000 which is somewhere above the 10th percentile is realistic. Grim perhaps, but realistic.]

The announcements in the Rally also did not deal with the major issue of protecting CPF Life retirement income from inflation. CPF Life is a national annuity scheme available to CPF members when they turn 55, which promises a monthly payout of about $1,200 from age 65 for life, for those who meet the current Minimum Sum in cash.

Latest available DOS data indicate that the average household expenditure of the lowest 20 per cent of households in 2007/08 is around $2,130 in current dollars. This will certainly be much higher 10 years from now, at between $2,600 and $2,850 (if inflation rate is between 2 per cent and 3 per cent).

A monthly payment of $1,200 would be barely enough to offer households even subsistence level retirement living. Hence the urgent need to keep CPF Life income inflation-adjusted so that real purchasing power is maintained.

[Which has been the contention of the CPFB, Ministers & Ministries - the minimum sum is barely adequate. They agree. The $1200 is barely enough. 

HOWEVER, many Singaporeans/CPF members do not want to leave the minimum sum for CPF, do not need $1200 (for whatever reasons) and is supremely confident (or over-confident) that they will be fine.

The problem is that CPF cannot be a one-size-fits-all scheme or else it will have to be set to the standard of the 80th percentile. Which means the Minimum Sum will have to be about $400k perhaps. And 80% of CPF members will not be able to meet the minimum sum. And everyone (almost) will be unhappy that they have to leave $400k for CPF Life.

Yes, Associate Professor. You are ABSOLUTELY right, and also COMPLETELY wrong. You are arguing academically, hypothetically, theoretically.

But CPF members are ACTUALLY unhappy with the Minimum Sum as it is right now. They are REALISTICALLY unable to meet the minimum sum. They are PRACTICALLY depending on other resources to fund their retirement. Or they may SIMPLY be deluding themselves.

Unfortunately, that is the political reality that the PM has to deal with. And also the practical reality - that the government cannot continue acting paternalistically. 

And which is why continuing to raise the minimum sum as you argued is theoretically and pragmatically correct, and politically impossible to implement.]

More fundamentally, the critical issue of Mr Tan not having enough retirement savings was also not addressed. In the case cited, Mr Tan did not have the Minimum Sum of $155,000 in his CPF account. Pledging his property in lieu of half the Minimum Sum would give Mr Tan a CPF Life income of $600 per month when he reaches 65 years of age.

The Lease Buyback arrangement would add an additional $900 a month, giving a total of $1,500 a month which will be below current subsistence living level.

The critical question really is: Why did Mr Tan not even have $155,000 in his account? Has he used up too much of his CPF savings for housing?

[Good question. One that I have asked many times. Relevant. But not germane. ]

If the withdrawals for housing are too high, is it not prudent and necessary to institute policy measures to tackle the problem of insufficient savings comprehensively at its source? That makes more sense than dealing piecemeal with post- haste measures of trying to augment retirement income through unlocking the value of property.

[I-V-O-R-Y   T-O-W-E-R.]

What of the increased flexibility of allowing lump sum withdrawals of the Minimum Sum at age over 65 years? To my mind, that is merely a cosmetic change that seems to pander to popular demands. Allowing this may not be in the best interest of most CPF contributors as any lump sum withdrawn means correspondingly lower amounts of retirement income for the individual.

[Yes it is. It is populist politics. Unfortunate. Unwise. But necessary.]

It does not address the fundamental issue of the retiree not having enough in CPF savings.

PM Lee announced that an advisory panel will be set up to study CPF changes. Its priority should be changes to ensure that savings are sufficient for retirement. Attention has to be put on the savings accumulation stage, not just the withdrawal stage.

[If your terms of reference were adopted, the panel's job will be very easy. Terminate all secondary schemes allowing the use of CPF funds, or severely limit the availability of those funds, and raise the minimum sum to $400k, and do not allow flat ownership to be used to offset any percentage of the minimum sum. Problem solved. It must be nice to live in your academic world.]

Singaporeans want the assurance that they can retire in their existing homes without downgrading or being deprived of the ability to bequeath wealth to the next generation. The current younger generation of CPF contributors must also have greater confidence that CPF savings will be enough for retirement.

The writer is an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.

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