Annuity Scheme Must Factor In Inflation

Source : The Straits Times, Forum, Sep 6, 2007

Initially I considered the compulsory annuity scheme beyond the age of 85 to be very unfair. But I have begun to understand and appreciate the need to do something for those who run out of money after reaching 85.

The way the longevity risk sinks in an annuity is the opposite of a term life insurance policy. Both offer risk reduction - one against loss of income for the family when someone dies, the other against loss of income when one lives and runs out of money.

The idea of compulsory annuity with a small sum deducted from the CPF accounts is to form a collective pool of funds against longevity risks.

This is fair because it covers all members, on top of other insurance policies. The benefits are for those who live longest, which could be any of us. We need to create the pool first for our ageing population.

But I wonder what we will be able to buy with $300 if we reach the ages of 85, 90 or beyond.

Will $300 have the same purchasing power it does now in 2038?

What if a bowl of wanton noodle were to cost $10, rice $3.50 a kilogram and a short bus fare $5 by then?

After all, in the early 1950s, a bowl of wanton mee cost 30 cents, rice cost 30c and a short bus fare, 5c - compared to $3, $1.50 and 60c respectively today.

Moreover, will the proposed $300 quantum be enough for old folks with illnesses three decades down the road?

If the annuity scheme is run as a non-profit independent statutory board and not as a commercial outfit, the funds will snowball year by year to enhance the payout to meet inflationary factors.

Then those who live beyond 85 in the 2040s can then look forward to celebrating their golden years in comfort and security.

Paul Chan Poh Hoi