By SY Lee and Leong Sze Hian
According to the study “Pension fund performance” (Antolin, P. 2008, OECD working papers) – the Czech Republic and Hong Kong have the lowest real return (after adjusting for inflation) of the 22 countries in the world – at 1.0 and 2.1% per annum, respectively.
Since the bulk of (23% of the maximum 36% total contribution rate) Singapore’s CPF (Ordinary Account) pays only 2.5% – and inflation from 1980 (CPI 59.2) to 2013 (CPI 115.8) was about 2.1% – does it mean that the real return was only about 0.4%?
If so, then our CPF’s interest rate may be the lowest in the world.
4% on Medisave and Special Accounts?
Even though the the Medisave and Special Accounts pay a higher rate of 4%, and an extra 1% on the first $60,000 of our CPF balance, since arguably our Medisave account (up to 9.5% contribution) may in effect be consumed eventually by way of our or our parents or dependents’ illness and CPF medical and ElderShield insurance premiums – the higher interest may not be of much practical use for Singaporeans when they retire – as a source of retirement income.
This leaves just the Special Account, which starts at a contribution rate of 6%, but eventually declines to just 2, 1.5 and 1%, from 56 to 60, 61 to 65, and above 65, respectively.
Hence, the contribution of the higher 4% interest rate of the Special Account to increase the overall CPF interest rate, may not be very significant, because of the low contribution rate.
I estimate that even with the overall CPF rate at say 3.0% because of the higher rate on the Medisave and Special Accounts – the real return at 0.9% may still be the lowest in the world.
Low retirement adequacy rankings?
This may be the primary reason why so many studies indicate that Singapore’s CPF ranks so lowly in the world in respect of the retirement adequacy of its citizens.
Also, perhaps as much as half of the population may fall out of the CPF system, because they are economically inactive, unemployed or self-employed for prolonged periods in their working years.
Returns of other countries' pension funds
If we look at the returns of pension funds in the most recent year (2012) – the Dutch pension schemes reported returns of 14.3%, while pension funds in Europe and the US returned 12.5% and 11.4%, respectively.
What about CPF Life?
Let’s look at CPF Life from the perspective of a lower-income Singaporean.
If you have reached 55 years old – and only have $25,000 in your CPF OA and SA accounts – CPF Life will be mandatory for you because the $25,000 plus interest is expected to increase to at least $40,000 when you reach the starting age of 65 for CPF Life monthly payouts.
Your estimated CPF Life monthly annuity payout is $259 to $287. (Calculated via CPF life estimator calculator on their website)
How does one survive on $200 plus a month without any increase for inflation, for the rest of one’s lifetime?
If you have an illness or disability that is not serious enough to qualify for a waiver from CPF Life (terminal illness or permanent total disability qualifies) – but yet prevents you from holding a full-time job that pays you a decent pay to survive, or if you have dependents to support – you may suffer financial stress.
For such cases, is CPF Life a boon or a bain?
Shouldn’t there be some mechanism to enable perhaps appeals, on a case-by-case basis, to be exempted from CPF Life?