CPF Life – does it really address retirement needs?

This arti­cle was first seen on http://theonlinecitizen.com/2008/02/cpf-life-does-it-really-address-retirement-needs/

By Leong Sze Hian

I refer to the arti­cle “Income that stretches a life­time, under new scheme” (BT, Feb 13).

Under the old CPF sys­tem, a min­i­mum sum (MS) of $ 67,000 at age 55, at the old guar­an­teed inter­est rate of 4 per cent, can pro­vide a monthly pay­out of $ 600, from age 65 to 85.

Under the pro­posed Life­long Income scheme (LI), the extra 1 per cent inter­est on the aver­age yield of the 10 year gov­ern­ment bond plus 1 per cent, if assumed to aver­age 5 per cent, will pro­vide a monthly pay­out of about $610 (male) or $570 (female) for as long as one lives.

Using the same 5 per cent under the old scheme can pro­vide $720 a month, for 20 years – which is more than the $610 or $570 one would get from the new LI scheme.

In this con­nec­tion, I would like to sug­gest that the Committee’s report com­par­ing the old sys­tem and the new one, be also addi­tion­ally done at 5 per cent for both sys­tems, as it may not be an apple-to-apple com­par­i­son, to use 4 per cent for the old sys­tem against the new one at 5 per cent.

So, is it bet­ter to get $ 720 for 20 years, or $ 610 (male) or $570 (female) for life ?

Well, I think the answer depends on the median CPF Min­i­mum Sum (MS) that CPF mem­bers have at age 55.

Since most CPF mem­bers near­ing retire­ment (age 55) have an aver­age of $66,000 in their accounts, accord­ing to the arti­cle “CPF bal­ance of older mem­bers up to $66k but still can’t meet needs” (ST, Jun 30), is the aver­age of $ 66,000 for the com­bined total of all CPF accounts, i.e. the Ordi­nary, Spe­cial and Medis­ave accounts ?

If this is the case, I esti­mate the median bal­ance of the OA and SA total, to be about $ 20,000 plus, because only about 4 in 10 active CPF mem­bers were able to set aside the cur­rent pre­vail­ing MS of $ 99,600, either in cash or by pledg­ing property.

With increas­ing HDB flat prices, more of the OA may be used up for hous­ing, and the extra 1 per cent inter­est may not be enough to grow CPF account bal­ances to $67,000 for about 60 per cent of active CPF mem­bers, by 2013.

I would like to ask how was the 60 per cent of mem­bers hav­ing $67,000 esti­mate derived, as a median bal­ance (50 per cent of mem­bers) of about $ 20,000 for those age 50 now (assum­ing the median bal­ance of those age 50 now is not sub­stan­tially more than those who are 55 now), plus the extra 1 per cent for the next 5 years to 2013, can­not pos­si­bly grow to $ 67,000 for 60 per cent of members.

If the median bal­ance is only $ 20,000, then it may be bet­ter to get $ 215 a month for 20 years, instead of $ 182 (male) or $176 (female) for life, because such a low amount may not be enough for lower-income retirees who may have lit­tle or no other assets to liq­ui­date for income in retirement.

So, I think it may be unlikely that the lower-income will opt-in to the LI.

LI may not be enough to pro­vide for retirement

As to the announce­ment in con­junc­tion with the LI, that life expectancy for a male and female born in 2006, is 78 and 82.8 respec­tively, I believe some Sin­ga­pore­ans may be inter­ested to know the life expectancy for those who are age 50 now. After all, it is this group that will be the first cohort to go into the LI, and not those born in 2006.

I would like to sug­gest that the actu­ar­ial pro­jec­tions be made pub­lic to facil­i­tate feed­back and review.

By exclud­ing the pro­jected 25 per cent who have less than $40,000 in their MS at age 55, the revised LI now, may not address the prob­lem for which it was intended in the first place – which is to pro­vide for those who may not have enough in retirement.

Are there any coun­tries in the world, which have national pen­sion schemes that excludes the bot­tom 25 per cent of the pop­u­la­tion?

Uncer­tainty of inter­est rates needs to be addressed

I also refer to the arti­cle “Most S’poreans expected to opt for pay­out at 80” (BT, Feb 14), and media reports about the big push to get peo­ple on board the new CPF scheme – the tar­get being work­ers over 50, those with lit­tle CPF sav­ings and the self-employed.

In order to encour­age more Sin­ga­pore­ans to opt-in to the National Life­long Income Scheme (LI), I would like to sug­gest that one aspect of uncer­tainty in the scheme, be addressed.

The uncer­tainty that may deter some peo­ple, is that the Committee’s LI reported in the media, assumes a 5 per cent inter­est rate on the first $ 60,000 of the Retire­ment Account (RA) and 4 per cent on the amount above $ 60,000.

For exam­ple, if the aver­age inter­est rate in the future is 4 per cent, in the default Refund 80 plan, using the $ 67,000 RA exam­ple given, the monthly pay­out of $ 610 will run out at age 78, after 13 years and 3 months.

What this may mean is that there will be no money in the retirees’s RA com­po­nent, and the monthly pay­out will only resume at age 80, from the LI Refund Pre­mium (RP) component.

This uncer­tainty is the result of peg­ging the RA inter­est rate to the aver­age yield of 10-year Gov­ern­ment Bonds plus 2 per cent for the first $ 60,000 of the RA, and plus 1 per cent for the amount above $ 60,000.

This uncer­tainty is per­haps height­ened in per­cep­tion, because the floor rate on the RA after 1 Jan­u­ary 2010 is 2.5 per cent, and the guar­an­tee of 4 per cent under the old CPF sys­tem, is only good for 2 years until 31 Decem­ber 2009.

To help per­suade more peo­ple to join the LI, why not guar­an­tee a rate of 4.6 per cent (using the $ 67,000 RA exam­ple), so as to assure CPF mem­bers, that there will never be a gap between their RA pay­out run­ning out, and the com­mence­ment of the LI at age 80 ?

Alter­na­tively, the guar­an­tee could be given that if one’s RA runs out before the LI start­ing age, the Gov­ern­ment will con­tinue the monthly payout.

If there are sur­plus funds in the CPF member’s RA when the LI starts at say age 80, because actual CPF returns are higher than pro­jected, how will these sur­plus funds be returned to mem­bers ?

Guide­lines on select­ing options

I would also like to sug­gest that some guide­lines to be given on how to select the 12 options available.

For exam­ple, the dif­fer­ence in the refund to ben­e­fi­cia­ries, between the Refund 65 and Refund 90 option, if a female dies just before reach­ing 65 is $ 38,765. This is 58 per cent more had she selected Refund 90 ($ 105,765 refund), instead of Refund 65 ($ 67,000 refund).

So, maybe some­one whose health is not very good, should not choose Refund 65.

Finally, since about 25 per cent of active CPF mem­bers have less than $40,000 , and 40 per cent have less than $67,000, at age 55, it means that only 25 per cent will get more than $364 (male)/$340 (female), and 60 per­cent more than $610 (male)/$570 (female), for the life annu­ity pay­out start­ing at age 65.

After adjust­ing for infla­tion at 2 per cent per annum, $610/$570 is equiv­a­lent to only $453/$424, $372/$349, and $305/$285, at age 65, 75, and 85, respec­tively, in today’s value.