Budget 2015 in review: Role of government in retirement adequacy

cpfBy Benedict Chong

Like any other Budget before it, Budget 2015 was not without its fair share of handouts. Singaporeans were treated to a smorgasbord of goodies, ranging from the Silver Support Scheme to pension fund contribution increases, subsidies and grants to SMEs and more taxes for the rich.

Some have viewed the Budget as “progressive”, but the key question we need to ask is, progressive in what way? If we are speaking in terms of additional social spending, then it would be true, and never had Singaporeans ever made a louder call for increase in social spending.

But if we were to look at how Budget 2015 has allowed us to progress as a nation and a competitive economy, much is still to be desired. Budget 2015, like any other, lacked the necessary foresight and policy gumption to take Singapore into the next 50 years and beyond. It spells a temporary relief for the short term, but doom for the future.

There has been much debate and scrutiny in the past two years about our Central Provident Fund, Singapore’s version of a pension fund, and this is in part due to the protest at Speakers Corner and the case of Roy Ngerng vs the Prime Minister. The government cannot deny that it had to take action to ensure retirement adequacy.

On its part, the government has rolled out a number of policy tweaks. Recommendations by the CPF Review Committee had called for greater flexibility in how older workers can access their CPF savings. The government will likely accept and implement all of the committee’s recommendations. However, the key node of the recommendations – allowing citizens to partially access their minimum sum, which they would otherwise not be able to touch between the age of 55 to 65 – can only be seen as a piece-meal gesture.

SDP New Economic Vision Feb2015 05Among the policy alternatives we have, the Singapore Democratic Party has proposed in its economic policy paper, launched in early February 2015, for CPF savings to be returned in full to retirees.

Dr Chee Soon Juan, SDP’s secretary-general, had said that withholding savings through the Minimum Sum Scheme is “not only impractical but also immoral”. Strangely, he did not go as far as to call for the total abolishment of the CPF scheme, “broken and immoral” as it is.

The CPF is indeed a fundamentally immoral system. It is enforcing a mandatory scheme against the will of workers, in a system they cannot choose to opt out of nor be given the freedom to choose an alternative against, for better or worse.

Even if the government has the best interests of the worker at heart, it is still immoral to force and coerce any individual into any scheme. There is zero reason to keep CPF, especially when private insurance companies can provide similar services at more flexible terms.

The CPF system is also essentially broken. The bigger problem lies in the inadequacy of the system to provide for retirement. It says a lot about the usefulness of a savings scheme if saving up to 40% of income every month is still insufficient for any individual’s retirement.

Of course, when pursuing the abolishment of State-managed pension schemes, the government will necessarily counter rhetorically, questioning the paucity of comparable alternatives available to the people. Research papers by State sponsored institutions will then surface, proliferating how the returns on CPF contributions are superior to private alternatives, due to their supposedly guaranteed and risk-free nature which in turn is due to the State’s power to tax.

CPF’s risk-return quotients, as compared to other forms of investment. (Image - IPS-TW)
CPF’s risk-return quotients, as compared to other forms of investment. (Image - IPS-TW)

But when the State forcibly appropriates almost 40% of every individual’s income, how is it even possible to nurture a competitive and private retirement insurance scheme? Life insurance policies offered by financial institutions such as AVIVA, AIA and Prudential will hardly be able to exploit the economies of scale required to make such schemes both profitable to the insurer and beneficial to the insured (consumer).

In many countries, retirement schemes, whether private or public are heavily regulated by the State. Such funds are typically limited to the purchase of sovereign bonds, resulting in indirect financing of government spending. The consequence of such overt use of regulations together with expansionary monetary policy leads to a depression of interest rates that punish responsible savers while rewarding irresponsibility; that is until the house of cards collapses.

The presence of government in the provision of social security also trivializes the bonds within families and between friends. An instinctive response to financial desperation would be to turn to one’s near and dear, of which government and the State is not a part of. If unavailable, the next plan would be to approach charities hat in hand. But with the State taking over such functions, the damage to communal bonds can hardly be overstated.

In addition, the coupling of CPF with healthcare and housing funds distorts both the market for health insurance and housing. With large amounts of CPF monies being poured into the housing market and supply restricted due to State controls, the only way the market can react is through high prices, effectively pricing out individuals and families late to the party.

HDB corporate video websiteWhile the government has reasoned how CPF funds are in actual fact taking the form of housing assets whenever it was used to fund residences, the present system quickly disputes those assertions. With the practise of leasing policies that depreciates property prices the instant they are bought, how is it possible that said CPF monies are ‘parked’ in housing assets? With constant depreciation of housing prices running down their leases, are Singaporeans really “asset rich and cash poor”?

In any case, whether Singaporeans purchase insurance schemes or not for retirement sustenance should not be a concern of the government. There are individuals right now who place a higher utility on the present value of earnings than the future value of their CPF disbursals. Such individuals are typically sole breadwinners from middle-class families. The larger the number of dependants, the higher the utility placed on present value of earnings.

By attempting to universally calibrate individual behaviour through a national savings scheme, only inefficiencies and hardships can abound for the majority of middle class families, the colloquial ‘sandwiched-class’.

But if the government were to admit its wrongdoing and either return the CPF savings or at the very least, allow individuals to withdraw their contributions in an opt-in/opt-out scheme, such inefficiencies can be corrected.

Undoubtedly, there will be irresponsible individuals who will splurge their ‘windfall’ on exotic trips and gambling but many more will benefit from renewed flexibility in their finances. People should be free to make their own decisions, if not necessarily free from the consequences of their choices.

Of course, such a practice has never been initiated before in any contemporary country with a strong centralized government, which throws up the question regarding the role of government in retirement insurance. Active regulations are unnecessary, counter-productive and of little effect, as evidenced by how financial institutions in the United States still tottered on the brink of collapse despite purported federal regulations.

What government can do, however, is to provide the necessary arbitration avenues through which contractual disputes may be resolved. As a last resort, judicial courts should also be available to provide for legal rulings between defendant and plaintiff.

Regulations (if any) on consumer advocacy groups should also be relaxed to provide professional help to consumers and possibly initiate and organize justifiable class action lawsuits against errant insurers. The possibility of such lawsuits and reputational strains together with free competition in the marketplace for insurance policies would be more than sufficient to discourage deleterious practices by any insurer.

Whenever government policies are criticized, a natural response from our elected officials will be for us to propose alternative models. Yet, this assumes that the government has to act and do something, anything to solve some imaginary problem. But many of these problems are actually the consequence of government policies and not intrinsic to society and the economy. As individuals, we should be responsible for resolving our own problems and not turning to ‘big brother’ to tackle them.