Are Singaporeans able to retire with escalating medical costs, low CPF interest and expiring HDB flats?

(Photo - Terry Xu)

by Kwok Fangjie

On Friday (13 Apr), a netizen wrote to former NTUC Income Chief Tan Kin Lian asking if average Singaporeans would be able to retire after news that older HDB flats are a “ticking time bomb”. This is because the value of a HDB flat would revert to zero upon expiry of its 99-year lease.

CPF’s low interest rates force Singaporeans to rely on capital appreciation of their HDB flats as a source of retirement income

Although CPF members could earn up to 5% interest on their accounts, most of monies in the Ordinary Account earn 2.5% interest which “is inadequate” to take care of retirement needs. Mr. Tan said that if the long-term inflation rate is 2%, CPF members need a higher interest rate on their CPF savings to provide real returns.

He acknowledged that this was a simplified assumption as the realty is much harsher. He illustrated this through the point that “medical expenses form a significant part of [retiree’s] expenditure. We know that the inflation of medical fees is much higher than 2%.” Just last week, a report showed that healthcare inflation in Singapore was one of the highest in the region.

To overcome this problem, “most people rely on the appreciation of their HDB flats to compensate for the low rate of interest paid by CPF” when they needed to retire. These elderly could “sell their flats at [an] appreciated value to get some cash to downgrade to a smaller flat” and for spending “on their retirement needs”.

Such a model is now no longer possible with low demands for older resale HDB flats

However, this was no longer possible in today’s market. Seniors “are not able to find buyers for their aging flats, which now have a remaining lease of less than 60 years”. This is because most flats are paid for by monies in the buyer’s CPF OA and there are restrictions on the use of such monies for older flats.

As a result, the supply-demand mismatch has “now worked against the owners [resulting in] inadequate cash flow from the CPF savings and an overpriced HDB flat that they are not able to liquidate”.  A letter to the Straits Times Forum last week confirms this as writer Ronnie Lim Ah Bee said that the elderly are in “a fix” and have become “disillusioned”.

Higher interest rates could be achieved as CPF members should invest for the long term

Mr. Tan said that an alternative could be obtained from the Australian social security model. There, many people invest in superannuation funds to earn a yield of more than 10% a year. According to pension fund advisors Chant West, such funds returned between 7.4% to 13.2% with average returns of 10.8% for the 2016/2017 financial year.

He said that this was better than the “safe” yield paid by CPF. While acknowledging that such investment funds have some volatility and may fluctuate in value from time to time, this should not concern people. These investments are made for the long term and fluctuations could be ridden out. Also, CPF members could be educated on how to manage risks through diversification.

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