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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.

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