Pension to give peace of mind to the elderly poor?

The Central Provident Fund works for those who have CPF savings. But for those who don't, a targeted basic pension scheme is the answer.
By Aaron Low, Deputy News Editor, The Straits Times, 1 Jan 2015

OVER the years, while reporting on manpower and economic issues, I've met dozens of families with zero savings.

They are just getting by, using their meagre wages to support their own families and their aged parents. They save by eating meat only once a week, or using candles to save on electricity.

Most do so without complaint. Their fortitude and filial piety are moving, and it's hard not to be affected by their plight.

Their problems have been acknowledged by the Government which has made significant strides to strengthen the social safety net in the past three years.

Still, one area needs addressing urgently - helping those old folk who do not have enough in their Central Provident Fund (CPF) for their retirement.

It is a timely concern; in about a month's time, an advisory panel set up by the Government will issue recommendations to improve key areas of the CPF - a key pillar of Singapore's social security safety net, but which has recently become one of the country's most hotly debated policies.

Prime Minister Lee Hsien Loong in his National Day Rally speech promised that the Government would review the CPF, and examine allowing members to take out a bigger lump sum when they hit the withdrawal age of 55.

The four areas the panel is looking at are how to: adjust the Minimum Sum to meet the objective of delivering a basic monthly retirement payout for life; enable CPF members to withdraw a higher lump sum on retirement; help payouts keep pace with the cost of living; give more flexibility to members who wish to put their money in private investment plans.

The Minimum Sum is the minimum amount that must be set aside in the CPF when a member turns 55. Half can be in the form of a pledge from a property purchased with CPF funds.

But on top of these four areas, the panel should look at introducing a basic pension for those who, despite their best efforts, have fallen between the cracks.

Daily living expenses continue to be a constant source of worry for many elderly people. One need only look at the numbers of elderly people working as cleaners or petrol pump attendants, or selling packets of tissue paper, to be confronted with the harsh reality of growing old in Singapore without adequate retirement funds. But there may yet be an answer.

The limits of CPF system

MENTION "pensions" and images may come to mind of heavily- indebted governments burdened by pensions for a burgeoning group of retirees.

But there are several reasons why a sustainable pension system should, and can be, implemented here. For starters, the CPF is a good system but it is limited.

The CPF is a fully funded, defined contribution system where individuals build a retirement nest egg from compulsory savings deducted from their own wages every month. The state provides a decent rate of return that helps compound the growth of these savings over the years.

This means that only those who work get CPF. Those who earn a good salary can build up bigger CPF balances. But the CPF does little for those who earn very little, and it does nothing for those who have not worked at all.

A Mercer study of pensions in October ranks Singapore's CPF system top in Asia, among 25 countries surveyed.

Singapore achieved this because of the good governance and sustainability of the CPF system. But it ranked poorly in adequacy in providing for its members, a charge that is not new.

The facts speak for themselves.

Last year, only half of the members who turned 55 had the Minimum Sum of $148,000. This included those who combined cash savings in their CPF accounts and the pledged part of a property's value. In other words, fewer than half of CPF members had, at age 55, even enough to meet the state-mandated minimum sum for retirement.

Additionally, last year, about 12,400 members out of a total of some 200,000 members between the ages of 50 and 55 had less than $40,000 in CPF savings. This amount includes funds withdrawn for housing, investments and education.

This is a crucial level because members with at least $40,000 are automatically included in CPF Life, a life annuity scheme.

Those with less can still opt in, but the payouts are lower. At the $40,000 level, a man turning 55 this year can expect to get between just $380 and $430 a month for life from the age of 65. Those with $30,000 are likely to receive between $299 and $331.

Is this enough? Well, the latest Household Expenditure survey shows that for a retiree household in a three-room HDB flat, average expenditure per person was about $725. For those in one- and two-room flats, it was $623.60.

With payouts of around $300 to $430 a month, many households with low CPF balances will struggle to make ends meet.

To be fair, many retirees have other means of financial support, such as allowances from children or other savings. But the reality is that family support may be eroded as family sizes get smaller, and there are fewer working people supporting the elderly.

Sustainable pensions

SO WHAT'S the best way to help those with very little or no CPF balance to prepare for retirement?

In Singapore, most families own a Housing Board flat. One common suggestion is to help retirees monetise the value of their flat. Renting out a room provides an income.

HDB owners can choose to take up a reverse mortgage or to sell the tail-end of their flat's lease back to the HDB. This lets HDB owners continue living in their flats and draw an income from it at the same time.

But what about those who don't have their own HDB flat and have little family support?

A basic pension is one solution.

Singapore may be inching closer towards such a scheme for its elderly. In his National Day Rally speech, PM Lee announced a "Silver Support scheme" to give poor elderly an annual payout to cope with living expenses.

That might well form the backbone of a pension scheme for the needy elderly.

Why not take this idea further and create a pension scheme for those with very little CPF savings and support from their family?

Such a pension scheme can be kept sustainable if built on sound fiscal principles. It has to avoid the problems associated with pension plans in other countries, such as being universal (given to all above a certain age without means testing); and being funded on a pay-as-you-go basis (paid for by tomorrow's taxpayers).

Rather than a universal scheme, the Singapore system can be means tested to weed out those who do not need the support, and be targeted, at, say the bottom 20 per cent or one-third of elderly.

The majority should still rely on the CPF. For the poorest, there is the Public Assistance Scheme that gives a monthly allowance. The basic pension should be for the group just above them that are equally in need of help.

National University of Singapore economics professor Chia Ngee Choon, a proponent of a basic pension for this group, has done her sums. She says it is feasible to introduce a basic pension for the bottom third of the elderly population aged over 65.

This would cost the Government less than 1 per cent of GDP in most scenarios, she estimates. In other words, a basic pension scheme could cost the state less than $369 million a year. That is just over half the money spent on Workfare last year.

Also, rather than fund this pension as a "pay-as-you-go" system that depends on future taxpayers, Singapore can fund it through the endowment fund route, which is how policies such as Edusave, Medifund and GST Voucher Fund are being financed.

An endowment fund can be set up using current budget surpluses. Pensions paid out can be drawn from the investment income of this fund. This essentially means that the money can last a long time, with the Government making periodic top-ups to ensure a steady flow of funds.

The endowment fund needed to pay fully for pensions will need to be huge, close to $10 billion or more. And it would need to generate close to 4 per cent in returns a year to fully pay the pensions.

But even this is not a huge burden for a Government that has always been fiscally prudent. The Pioneer Generation Package of health-care subsidies cost $8 billion and the Government was able to fund it in one Budget. So it has the fiscal resources and the political will to do likewise for a pension fund.

Nor will the drawdown from this pension fund be expected to grow indefinitely even as the population ages.

This is because the group that needs to be supported by a basic pension may not grow significantly. Future retirees will be better off as their wages are likely to be able to support higher savings to fund their own retirement. An NUS study in 2012 estimates that 70 per cent to 80 per cent of new entrants to the workforce will be able to meet the Minimum Sum for their cohort.

There are also more women working than in previous generations. The labour force participation rate for women rose from 28.2 per cent in 1970 to 58.6 per cent last year.

There are moves, too, to help those who want to work to do so longer into their twilight years. Together, these steps mean more people are likely to be able to fund their retirement within the CPF system without having to rely on a pension.

Meanwhile, patching the CPF system with a carefully crafted and targeted pension scheme will go a long way to supporting those who have been left behind.

The Pioneer Generation Package and the revamped MediShield Life give pioneers peace of mind when it comes to health-care costs. Setting up a pension fund will go a long way towards addressing the worries of the elderly poor about other living costs.