There has been quite a lot of debate recently about the new proposed changes that have been thrown up to make changes to the current CPF program. I’m not going to go into the proposed changes as I don’t think they’ll really change the outcome to retirement adequacy, however as a background I’ve included a few articles that’ll give you some context.
- Potential Pit Falls of CPF changes (originally from the ST, reprinted here)
- What Exactly is the Big Deal about the New CPF minimum sum (originally from the MoneySmart blog, reprinted here)
- CPF proposals: A glossary of new terms (potential paywall eventually)
- CPF Reforms: Key issue is inadequate retirement savings
- Simpler, more flexible CPF scheme proposed
- The magic number is 65
How we buy homes
The problem isn’t really how much money we set aside for CPF (and our retirement) the real problem is how often the money isn’t really there throughout the years for it to rollover and grow. Most people will use their CPF to make the downpayment on their homes and then they would use their CPF contributions to actually pay for their monthly mortgage payments. This largely means that for the first 20-30 years (depending on income and how quickly the debt is paid) that most Singaporeans will put basically nothing in their retirement account. This is especially troubling for a lot of people that don’t have or choose not to save money outside of their CPF accounts.
Einstein once commented that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” This is the power of the CPF system, however, the power of compounding requires that you save early and save often. For example:
$10,000 compounded at 5% a year for 40 years gets you around $70,000. That same amount of money compounded for 15 years is only $20,000.
Consider for example that the average home-buyer is 30 years old and takes a 25 year mortgage. Which means that by the time she is done paying off her loan she would already be 55 years old and would have only another 10-15 year working years left and to have that interest compounded. One could argue that at this point in time it really doesn’t matter how much money she makes because it will never be enough.
Home as an asset
Although a person’s home has long been considered a financial asset, it has remained culturally unpopular for older persons to tap into the stored value in their homes for their retirement adequacy. The government in an attempt to make people use it as a financial asset allowed the price of homes to increase to such high levels. This may explain why most people continued to use their CPF to pay for their homes, since the rate of return on the valuation of their properties far out-paced what would they would have gotten out of their CPF accounts. As the government has taken steps to depress the housing market, it would seem that the notion of a home as a source of retirement adequacy even among the government is growing out of favour not to mention the growing literature and research on the aging where there are indications that moving old folks out of their familiar surroundings could have undesired effects.
CPF made a very education post on using CPF for home ownership here.
I personally don’t think that with the current plan we have in place will ever help people reach retirement adequacy. For a few reasons:
- We spend too much on the homes we buy.
- We use CPF to pay for it, and do so willingly because it has no direct impact to our pocketbook.
- We don’t see our homes as financial assets, but as something to pass down to the next generation. (Though they will most likely see it as a financial asset).
- We don’t save enough outside of the CPF system to sustain ourselves.
Questions that need to be answered, collectively:
There are a few options that the government aught to examine in trying to fill the gap between retirement adequacy and fear of retiring but that would require a few preliminary steps.
- Identifying how much a person or persons (spouse) would need to live comfortably in the flat/property that they own?
- Should children be required to supplement their parents income, considering that they will benefit from a windfall in the form of a property upon the passing of their parents?
- Should the government actively top-up CPF accounts to ensure adequacy?
Retirement adequacy is something that cannot be accomplished by the individual alone nor can it be accomplished by the state in and off itself as that will only lead to ruinous financial consequences for both the current and future generations. In a society such as ours where the aged outnumber the young and will continue to do so, the traditional model of simply getting one generation to fund the last is also not palatable. On top of that the government cannot not neglect the needs of the poor and disadvantaged of today in their rush to prop up the old. In my opinion, the government only has one course of action.
- Government offers to top-up all CPF accounts to achieve a monthly payout that is comfortable for all. At today’s rate and CPF Life payout schedules, I’m estimating that each individual would need at least $200,000 as their minimum sum. The only stipulation would be that for those that receive a top-up, that top-up would be amortised and deducted from their final payout to their beneficiaries in the event that they pass away soon after their retirement (75 years old).
- The government could potential establish an endowment to pay retirees who end up receiving less that the “minimum sum” directly. This is similar in nature to the Silver Support Scheme (SSS), but whereas the SSS pays a fixed sum no matter how much you are getting, I’m proposing that sum be varied.
- Another option would be to vary interest rates depending on the size of the monthly deposit into the fund. For individuals with low income and therefore lower payments to the CPF, they should enjoy a higher interest rates. By doing this the government can anticipate the costs of the CPF program and the ultimate payouts to that individual rather than waiting till he hits the retirement age (with his entire age cohort) and figuring at that point how much of a lump-sum needs to be paid.
- Better financial education. CPF should organise classes and lectures on the outcomes of one’s CPF values based on the different uses as well as different economic situations. For example, the current CPF system doesn’t take into consideration spouses that stay at home or caregivers who don’t receive any income essentially (unless working flexibly).
Considering how politically woven the CPF system has become (much like any Social Security or pension) scheme, any changes would need to be discussed, debated and to some extent eventually forced down for some people. Any changes will not benefit everybody equally, nor should it. It would be interesting to see what tack the government or even the opposition would take in the development of alternatives. In the end the adequacy of any pension or retirement scheme rest on the shoulders of the people who use it, and whether they use it judiciously.
[I had begun writing this post a couple of months ago and was editing it when I read, Ho Kwon Ping’s speech at the SR Nathan lectures at LKY-SPP. He articulates a lot of the same ideas as I do on CPF adequacy, though he doesn’t go into the reason that I believe we will never reach this goal of “adequacy” without properly examining the issue of CPF usage prior to retirement. You can read his speech here.]