CPF schemes inadequate, writes former GIC Chief Economist

By Yeoh Lam Keong

With due respect to the very able Deputy Prime Minister (DPM) Tharman, and while the admission of the dysfunction of the CPF Investment Scheme (CPFIS) is a good and honest admission, I find his discussion of retirement adequacy and the CPF somewhat.. well.. inadequate.

First and foremost, while the CPF is a transparent and safe forced defined contribution savings system with great integrity that has much potential for optimal social security and pension policy, the fact is that in spite of engendering one of the highest personal savings rates in the world, it is sadly inadequate with respect to retirement adequacy for both our lower and middle-income groups.

Replacement rates (pension income as a ratio to last drawn pay) are significantly below 50%, whereas most developed countries with sustainable pension systems offer citizens retirement rates well above.

The elderly poor, in particular, do not have minimum guaranteed pensions that cover basic living costs and thus a growing and sizeable number will live in absolute poverty as our baby boomers age. Many are poorly educated and have earned incomes while we were still a low and middle-income country, but must now retire facing one of the highest first world living costs.

While we have finally introduced a basic means-tested non-contributory pension ( the Silver Support Scheme or SSS) to address this, together with schemes like public assistance, such support too has been inadequate and much too miserly. Research shows average monthly payout of $200 for the SSS needs to rise to $500-600 pm to begin to address the basic needs of our poor elderly pioneers. The fiscal cost of this reform rises from 0.3% of GDP now to around 0.7% in 2050 when the number of elderly baby boomers peaked. We can thus well afford it and surely our policy makers can do better than we are doing now for the sake of basic social justice!

In World Bank parlance, this is an important “first pillar” pension reform that uses government finance or redistribution / insurance systems to look after the poor and less fortunate who end up at the bottom of the retirement adequacy pile.

While CPF pays a relatively high guaranteed interest rate, this is not the best or even an adequate return for a pension system. A more helpful and fairer rate paid to CPF members would be the long-term real rate of return (around 4% ) earned by GIC. By comparison, the average CPF long-term real interest rate actually paid historically has been around 1.5%. Every extra 1% paid to CPF members makes a big difference to retirement replacement ratios at the end of 30- 40 years of saving due to the powerful impact of compounding.

Raising the CPF rate towards the GIC’s long-term rate of return would thus be an important boost to the “second pillar ” of investment options for compulsory defined contribution pension payments that CPF currently pays its members way too little on; or at least, to be charitable, offers only a much too restricted low real return guaranteed product.

These 2 reforms alone – strengthening our first 2 pension pillars – are eminently affordable and would make a huge difference in long-term pension adequacy for both the poor and middle classes.

In addition to central state (GIC) management, well regulated and user-friendly passive as well as sound private sector pension products by experienced and reputable providers are also missing in action. This is what has been pointed out by DPM at long last. However, most developed countries have been doing this successfully for decades eg the well-established superannuation systems of Australia or NZ.

Establishing a proper superannuation system of our own and allowing regulated private sector competition with GIC in the management of CPF pension funds would further boost the options for reasonably safe, long-term options In our “second pillar” as well as develop our badly underdeveloped ” third pillar” – voluntary pension savings for the population as a whole.

This would also potentially result in the greater development of the pension fund management ecosystem as a whole – locally domiciled pension fund managers, custodians, financial advisory and assessment firms- which has also been missing in action in our financial sector compared to countries with such pension system alternatives.

The greater home bias for long-term investment in local assets inherent in local pension funds (compared to zero home bias for external reserves managed by GIC) would also deepen and develop our local equity and capital markets, which are currently languishing compared to other economies with well-developed pension industries.

So while it is commendable that DPM Tharman has squarely called out the inadequacy of the CPFIS to address the all-important issue of retirement adequacy, isn’t the scope of the public debate and the focus of much-needed retirement adequacy, pension and CPF reform still much too… inadequate ?

This post was first published on Mr Yeoh’s Facebook account. Mr Yeoh is former Chief Economist of GIC, Singapore Sovereign Investment Fund and an adjunct prof at the Lee Kuan Yew School of Public Policy.

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