Tuesday, 22 July 2014

Joint responsibility for old age income security

Many of the criticisms aimed at the CPF system are based on a lack of understanding of how it actually works
By Laurence Lien, Published The Straits Times, 21 Jul 2014

AT FIRST, it was not my intention to write about the Central Provident Fund (CPF). But I feel compelled to do so given the persistent lack of clarity about what the real issues are.

Some citizens have asked, is the money still there? Why does the Government need to hang on to our money after age 55? Is it because the money is lost?

As a previous director at the Ministry of Finance overseeing government investments I can only say that no one should worry about that. Unfortunately, the Official Secrets Act does not permit me to say any more than what is publicly known.

The investments of GIC are large and diversified across asset classes and geographical markets. Its 20-year returns - at 6.5 per cent in US dollars and 5 per cent per annum in Singapore dollars - are not substantially different from benchmark returns.

Citizens may not be similarly reassured because the Government has chosen not to release detailed numbers of the Government's balance sheet, including the actual size of GIC's assets under management.

Ironically, in the Singapore Government's case, the reticence is borne out of a desire to be conservative - to reduce the pressure to be profligate - and not a need to hide losses.

However, we have reached a stage of our political maturation process in which the lack of transparency, and perceived lack of public accountability, needs to be addressed. Transparency breeds trust.

There has been much debate over the changing Minimum Sum amount and the perception of constantly shifting goalposts.

But the policy intent has all along been very clear. Set at $80,000 in 2003, the idea has been to raise the amount gradually until it reaches $120,000 (in 2003 dollars) in 2015, with amounts adjusted yearly for inflation. There has been no change in this policy.

That said, however, each cohort does not get much advance notice. Someone who turns 55 between July 2014 and June 2015, will need to set aside a Minimum Sum of $155,000, which is equivalent to $117,500 in 2003 dollar terms. But this figure was announced only in May 2014.

The $155,000 figure is 32 per cent more than what the cohort five years older had to set aside. Rather than being too precise about the Minimum Sum quantum keeping up with the latest inflation rates, I am sure CPF members would welcome the Government setting the limits early and giving sufficient notice of future changes.

Ironically, this year's increase of the Minimum Sum (from $148,000 to $155,000), at 4.7 per cent, was the lowest rate of increase since 2003. It would have been even lower if the inflation rate had not been so high over the last five years. If the inflation rate had stayed at 2 per cent over the last five years - the rate from 2003 to 2009 - the Minimum Sum set this year would be $146,000 instead.

Apart from inflation eroding retirement savings, the widening income inequality here means that pitching it for the lower middle income household would make it increasingly less relevant for large segments of the population. A monthly payout of $1,200 is inadequate for many as the median monthly income is $3,250. Meanwhile, many other CPF members are not able to accumulate the Minimum Sum by age 55.

Multiple uses of CPF for purposes other than directly meeting retirement needs and the insufficient social safety nets - for example, to cater for periods of unemployment - have increased the pressures to expand the uses of the CPF.

Many have also asked whether the CPF returns are fair. They are, if they are measured against what is available in the market. The current yield on a 30-year Singapore Government Security, which is considered a long-term risk-free investment, is only 3.1 per cent per annum.

But the Government is not a commercial entity that needs to be profitable and obtain compensation in return for taking risks. It can take a long-term view and smoothen returns on behalf of CPF members.

Even the Ordinary Account can be invested in the long term. Although more liquid by design, the net contributions into the Ordinary Account are generally positive year on year.

In fact, the total balances of CPF members have increased every year from $52 billion in 1993 to $253 billion in 2013. This gives GIC the stability that it needs to invest CPF funds for the long term.

Currently, the Government is between a rock and a hard place. If it makes high returns, it will be accused of creaming off excess returns to fund already large coffers. If it makes low returns, people may worry that their funds are not safe.

Looking ahead

APART from more transparency, I believe the Government should commit to being revenue neutral over the long term on the investments of CPF funds. Based on GIC's current asset allocation, the Government should be able to accumulate excess returns on invested CPF funds over the long term and pay out bonus returns periodically.

The Government can also provide an option for CPF members to take on some risks willingly to invest in a fund that has a higher expected return than the Special Account, but whose price will be subject to market risk.

Some Singaporeans argue for the return of CPF funds to members at age 55.

A number of well-regarded retirement funds around the world, for example, the Chilean pension fund, require members to use the balance in their individual accounts to purchase an annuity and/or set up programme withdrawals over a retiree's expected life span. Annuities help to prevent either overspending or underspending.

The majority of CPF members should not be so focused on the Minimum Sum or on wresting control of it.

They should instead look at total retirement planning in order to answer questions such as: How much money do they require for retirement? What is the potential shortfall? How much must come from personal savings? How much longer do they need to work?

Higher-income CPF members must realise sooner, rather than later, that the CPF was not focused on them, and that CPF savings alone are likely to be inadequate.

The Government needs to work with those who are self-employed, or who have been outside the workforce for many years, to systematically shore up their retirement adequacy.

Income security in old age presents dilemmas and hard choices for policymakers everywhere, not just in Singapore.

The sooner everybody - government and people - starts working together, with openness and cool heads, to address it today, the better off everyone will be in the future.

The writer is a Nominated Member of Parliament, chief executive of the National Volunteer and Philanthropy Centre and chairman of the Lien Foundation.


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