Compulsory Annuities: A Forced Expenditure Or A Retirement Plan?

Source : The Straits Times, Sept 25, 2007

THE proposed compulsory annuity plan has been generating varied opinions recently.
The intended purpose of having a compulsory annuity plan is probably due to statistical studies showing that people are living longer nowadays. The Government is addressing the scenario where a person retires at the age of 65 and his CPF monies run dry at age 75, but he is able to live till 90. How then does he survive from age 76 to 90? To address this, it is better to get them to buy annuities so that their basic needs are taken care of in the later part of their lives.

I see a key difference between our Government in Singapore and governments of other countries. Our Government really 'thinks too much' (probably this is one of the key reasons why we voted them into government). They are thinking of possible problems that the country could face in the future, probably a time beyond their political careers, and put in place measures today to prevent these foreseeable problems from surfacing tomorrow.

If this issue is not addressed properly and promptly, it could pose a social problem in future, which the future government would then have to handle.

Having said that doesn't mean I agree with the compulsory annuity plan. From a personal angle, I would not purchase the annuity if it's made optional.

Having a decent-sized income today, I expect to have a sufficient retirement nest egg if I manage my savings properly. Therefore, it will not be relevant for me to pay a lump sum to purchase an annuity plan, as the payout of a couple of hundred dollars per month from a certain age would not make a difference to my life. But, if I do not live beyond that certain age, the costs of the annuity plan go into a pool to subsidise those who live longer. Prime Minister Lee Hsien Loong and his Cabinet colleagues need to come up with a plan that is good enough for its intended purpose, such that only the sick gets the immunity jab, and not overdo it with a plan similar to a national immunisation programme, as some people may prefer to leave all their monies behind for their immediate families.

It is a fact that there is never a single cure for all diseases. There will be another group of Singaporeans out there who may think that the compulsory annuity plan is good for them. In fact, I would fully agree that the annuity plan purchase is more applicable to lower-income groups who may have a self-sustaining problem after they reach retirement age and income stops.

Making it compulsory would anger a sizeable group of Singaporeans who feel that they are being forced to purchase something they do not need, and something of no relevance to them.

Making it an opt-in programme would also be problematic as those who need it (lower-income groups) are likely not to be highly educated. Some may not be able to have access to information to understand how annuities work and how to opt in.

Making it an opt-out programme, it could end up that the participation rate could be too low for the programme to work effectively if too many people opted out of it.

I would suggest making it a 'conditionally compulsory' programme. For example, legislation could be set in place such that if a CPF member's 'total CPF asset value' is below $100,000 by age 35, then the purchase of an annuity plan is made compulsory by auto-deduction of funds from the member's CPF account to pay for the annuity plan.

We are assuming here that those with total CPF asset value above $100,000 by age 35 would likely be able to take care of themselves. Nevertheless, for those who qualify for exemption to the annuities plan, an opt-in mechanism should be made available to cater to those who may still want to participate in the programme.

Jason Soon Hun Khim