CPF Changes A Fair Deal, So Why The Hesitation?

Source : The Straits Times, Sept 29, 2007

ACCORDING to a certain fortune teller, I will live to 103.

That's the age an online longevity test, www.poodwaddle.com/realage.swf, spat out after quizzing me on my medical history and lifestyle.

That would mean I have over 61 years left. Despite the stories of contented centenarians one sometimes reads, I confess the prospect filled me with dry-throat dread.

My sense of trepidation was so overwhelming, I momentarily entertained thoughts of picking up smoking so the computer would shave a few decades off my life expectancy.

Like many other Singaporeans, my unwillingness to contemplate old age is connected to fears about what my health will be like, how to deal with loneliness that will envelop me if my loved ones die first, and how to cope financially.

The announcement of the latest changes to the Central Provident Fund (CPF) ran up against a natural resistance to confronting such difficult facts. The Government's announcements were as welcome as someone forcing you to stare into a photograph that has caught you with a particularly unflattering expression.

The instinct is to deny the person in the image represents you.

Similarly, many do not want to connect with the picture the Government is presenting, of people who will grow old and who risk real suffering unless they are forced to start saving more now.

People have been reluctant to embrace the obvious. The facts are that many will live longer than their parents did, with fewer young people to support them.

The other set of facts has to do with just how much savings people have put aside in their CPF. In a recent Straits Times Insight survey, seven in 10 said they knew their CPF would be inadequate for retirement. They also listed as other options for financial independence - continuing work, tapping on other savings or their family.

Judging by this survey, certain realities have actually sunk in. Singaporeans know they do not have enough for old age. Whatever they have set aside has, for the most part, gone into their home, not an inconsiderable asset they can monetise later.

So why has the debate witnessed an undercurrent of tension between Government and people?

Some attribute the unhappiness to the longevity insurance. If that is so, one suspects it is over the modification of the CPF system from one of forced savings to incorporate the element of risk pooling.

When it is forced savings, the understanding is, it is my money and it will be returned to me or my beneficiary.

When it becomes an annuity that premises its continued funding on risk pooling, I am contributing to a pool. Yes, I am betting on a long life and someone else underwriting it but I do not like the fact that if I exit too early, I 'lose'.

But the extra one percentage point members will get from their CPF balances will pay for the annuity, as the Government has explained. Hence, they will not be out of pocket by taking up an annuity.

Seen that way, it is a pretty fair deal.

However, what complicates the matter is the other issue being debated, which is whether the Government ought to give better rates of returns.

Why can't it match the returns made by Government of Singapore Investment Corporation (GIC) and Temasek Holdings, which invest on its behalf?

The reasons it has given are compelling. First, this is as good as it gets for a product that is virtually guaranteed. Put simply, for the majority of CPF account holders - seven in 10 of them who have balances of less than $60,000 and stand to gain the most from the changes - this is a sure-win proposition.

It must be flattering to GIC fund managers to hear that Singaporeans have such confidence in their abilities, but as the saying goes, past performance is no guarantee of future returns.

GIC investments certainly seem like a good bet, but they are not guaranteed, and it would be irresponsible of the Government to claim it was.

Second, exposing CPF members to higher risks may not be something they can live with. The ST Insight survey found that nearly half of those polled did not know how much interest they earned on their CPF.

That surely is an indication that many are not financially savvy and would probably be better off leaving it under a risk-free, guaranteed scheme.

Indeed, most of those polled were largely risk-averse. Asked about investment choices, close to four in five would opt to invest their CPF Ordinary Account savings in those with no or low risk.

Beyond these reasons, there are two lessons from other countries worth paying heed to.

One is that pension funds by companies are untenable and national pension funds are in a fiscally calamitous state. In the United States, for example, the social security system has gone from a worker-to-retiree ratio of 16 to one in 1950, to three to one today, and is expected to be at two to one by 2030, at which point spending on old-age entitlements will make up two-thirds of the federal budget.

Italy is faring even worse, with a mere 0.7 worker for each retiree, which means there are more people collecting benefits than paying taxes.

The second lesson is this: Financial strategists in the West have come to the conclusion that with longer life expectancies, annuities to hedge against longevity make sense. The latest issue of the magazine, Financial Planning, makes this case that the elderly should have 'at least some fraction of their nest egg' annuitised.

Perhaps, these concerns over longevity insurance and interest rates hark to a larger underlying issue, which is over the question of subsidies and just how much direct subsidy the Government is prepared to commit upfront to fund the people's retirement needs.

It is ideologically opposed to the pay-as-you-go system of other social security funds, which end up burdening future generations. It is also against dipping into past reserves.

As of now, it says these are non-negotiable issues. But the pressures it will face on this front will only grow and the hard reality is that it will need to continually explain and defend its position to new generations of retirees.

As Second Minister for Finance Tharman Shanmugaratnam set out on the previous page, there is a chunk of assistance given over the course of a low-income worker's life through Workfare, housing grants and so forth, that amount to one-third of his retirement savings.

Another step the Government is taking is in the redefining of net investment income or NII, which will unlock more money than is traditionally put away. This, if anything, signals that it is putting its money where its mouth is.

It is unfortunate that the Government's sincerity is sometimes obscured by its zealous emphasis of the anti-welfare, self-reliance message, as well as the coincidence that its biggest give-aways seem serendipitously to match the electoral calendar. As a result, the level of trust in the latest moves is surprisingly low for a Government with such a strong record.

All in, it has its work cut out for it. Singaporeans will probably take longer to be convinced, which is a pity.

The sooner the country hunkers down to map a realistic strategy for its ageing population, the better off it will be.

And that should be obvious even without the aid of a fortune teller.