27 August 2014

Talking Point — CPF Reform

Channel News Asia's Talking Point recently dealt with the proposed reforms of the Central Provident Fund scheme that were outlined by Prime Minister Lee Hsien Loong at his National Day Rally speech.

Permitted Withdrawals I
Mr Lee said:

"... I appreciate why some CPF members want to take more money out because they have been saving up over a lifetime of work, they want to use some of these savings, they want to do something they have longed wanted to do, some lifetime ambition. They may want to go on a journey, they may want go on a haj. Or maybe they have run into some family emergency and need money to deal with the emergency.

"So ... I think we should allow people the option to take out part of their CPF savings in a lump sum if they need to but subject to some limits."

Nowhere in his speech did Mr Lee say that CPF members will be allowed to withdraw part of their CPF moneys for specified purposes only. Yet some Talking Point panel members went further than Mr Lee, and said that partial withdrawals should be allowed for specified purposes only. One panel member opined that the haj was the only meaningful purpose.

Permitted Withdrawals II
Currently, CPF members may withdraw their CPF moneys in excess of the Minimum Sum and Medisave Minimum Sum.

Notwithstanding that, a Talking Point panel member opined that CPF members should be allowed to withdraw part of their CPF moneys in excess of the Minimum Sum.

Was he misinformed or does he know something that we don't know?
 
Permitted Withdrawals III
Mr Lee said:

"We provide this flexibility but members must understand clearly the trade-offs because if you take out the lump sum, that means you will have less left in the CPF and your monthly payments will also be less."

Talking Point panel members said that there should be enhanced financial education, complemented with financial counselling for CPF members who wish to withdraw part of their CPF moneys.

Financial counselling will fall on deaf ears if anyone is intent on withdrawing his CPF moneys.

Unlimited Withdrawals I
A viewer said that people who want to withdraw all their CPF moneys be allowed to do so, with a proviso. However Talking Point presenter Steven Chia wouldn't allow her to finish what she had to say, and abruptly cut her off mid-sentence.

The viewer echoed the sentiment of many people, that in the (unlikely) event that people are allowed to withdraw all their CPF moneys, those who do so should not look to the State for financial assistance after they have spent all their moneys.

Unfortunately, the reality is that it would be a political hot potato for any government not to help any citizen who is in financial straits, regardless of how imprudent he has been with his financial affairs.

Unlimited Withdrawals II
A viewer said that people could prove that they had sufficient financial resources should be allowed to withdraw all their CPF moneys, including their Minimum Sum.

People with sufficient financial resources don't need to be bothered with leaving the Minimum Sum in their Retirement Account or CPF LIFE.

In any case, the Government will never allow only the wealthy to withdraw all their CPF moneys.

CPF LIFE Is Great
A viewer opined that CPF LIFE is great because a Minimum Sum of $155,000 would give him a monthly payout of $1,200 for life.
 
He reasoned that a monthly payout of $1,000 is worth $12,000 a year or $120,000 over ten years and $240,000 over 20 years, the latter being more than $155,000. (Therefore, a monthly payout of $1,200 makes it even more worthwhile.)
 
Sadly, he needs financial education.
 
Firstly, a CPF member is required to set aside the Minimum Sum at age 55. By the time payouts start at age 65, this would have grown to around $235,000. Even as he receives his monthly payouts, the balance of his retirement moneys continue to earn interest, and this will ensure that he will continue receiving his payouts until he is in his early 90s (without CPF LIFE).
 
Secondly, with CPF LIFE, there is risk pooling. CPF LIFE members who die leave behind some moneys to fund the payouts to CPF LIFE members who survive them. This explains how each cohort's Minimum Sum will pay the annuities for life (provided the fund is not exhausted).
 
While the viewer may not have understood CPF LIFE's risk pooling, did he not understand compound interest principles?

Perhaps, he just wanted to tell other viewers that CPF LIFE is great! But that's true only if they out-live the majority of their cohort.
 
Silver Support Scheme
Mr Lee said:

"With the CPF and HDB for the majority of the population you can save enough for your retirement. But for a minority, 10, 20 per cent, I think even if they are working, they may not accumulate enough CPF during their working lives. Some of them may not have bought an HDB flat, some may have no family support to fall back on and in their case these individual efforts will not be enough. So, the Government and the society must help to do more, must do more to help them in their retirement. So, for this group, we should supplement their payouts from their own CPF savings with bonus payments from the Government .... So, we should have a new scheme for low-income elderly, actually, they are just poor elderly because no more income, but they are poor, they are elderly ...."

Not everyone who has a low CPF account balance is necessarily poor.
 
The self-employed are not required to contribute to their CPF Ordinary or Special Account. Even with tax benefits, some (perhaps, many) self-employed people are averse to contributing to their CPF Ordinary or Special Account because of the restrictions on drawing down on their moneys therein, and the moneys remain in their CPF account for a very long time.
 
Housewives are not required to contribute to their CPF accounts, nor are their spouses required to contribute to their CPF Medisave Accounts. For the reason stated in the preceding paragraph, few housewives or their spouses would voluntarily contribute to their CPF accounts.
 
Riskier Investments
Mr Lee said:

"How can members have more flexibility to invest their CPF savings, to accept more risks in the hope of higher returns?" 

A Talking Point panel member suggested that CPF members be allowed to take more investment risk with their CPF moneys in excess of the Minimum Sum.

While this suggestion seems prudent, many (if not most) people do not have balances in their CPF accounts exceeding the Minimum Sum until they are in their 40s or 50s, and the usual investment advice is to take less investment risk as a person grows older.

Inflation Adjusted CPF LIFE annuities
Mr Lee said:

"[F]or members who prefer payouts to rise over time, because we would like to be able to cope with future rises in the cost of living, how can we offer members options to do that because there is a trade-off? There is a finite amount of money. If you want more later on in the later years, it means that you have to have less earlier on in the earlier years and some may prefer to do that, some may prefer not to."

Although CPF LIFE payouts should be adjusted for inflation, especially since the payouts are expected to take place on average over a period spanning three decades or more, few people will choose to receive less now in order to receive more in the future. It goes against human nature. Most importantly, there is the risk that the CPF LIFE member may pre-decease the majority in his cohort, and leave behind even more than he would have otherwise.

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