Government “kiasu, kiasi, kiabo” over CPF Life?

Here is a comparison between the default CPF Life Standard Plan payout for the writer meeting the minimum sum of $155,000 and the example of Mr. Tan in the CPF Life Handbook, who has $100,000, below the minimum sum, property pledge required. The writer’s payout is derived from the CPF Life Estimator. Mr. Tan’s given in the handbook. The assumed investment rate is 3.75%, the low end of the assumed investment rates for CPF LIFE.

At 55, CPF deduct half the minimum sum, $77,500 the first premium instalment from both the writer and Mr. Tan. The remainder of both RAs earned 4% with an extra 1% on first $60,000. This will be on combined balance, including the first premium which earned rate of 3.75%. At age 65, the remaining RA pays for the second premium instalment. The writer calculates the accumulated capital at age 65 and then amortised against the CPF Life estimated payout. Here are the numbers (CPF does not reveal its calculation so the writer use the default common sense approach)

The first thing that jumps out is the disparity between the estimated bequests and the residual capital after drawing the monthly payouts.  At age 65, without a single payout, the bequest is $187,263 against accumulated capital of $225,453. As an annuity plan, the difference can be explained as those who expired earlier providing the reserves for those who lived longer on the basis of risk pooling.

However, the next thing that jumps out is the capital depletion age which is when the accumulated capital is completely drawn down: 88 years for the writer and 86.75 years for Mr Tan, both well in excess of the 82-83 years life expectancy. The government in effect made triple provisions for those who lived beyond the life expectancy:

1) the excess over the bequests of those who expired earlier

2) stretch the monthly payout well beyond life expectancy and

3) to a smaller extent having those who met the minimum sum compensate those who did not, which then begs the question why should anyone want to meet the minimum sum.

If that is not enough, legislation has been provided to wind up CPF LIFE in case the Plans are insolvent.

The Basic Plan

To avoid a long article, the writer provides a brief summary of the Basic Plan which is predicated on drawing most of the monthly payout from the RA while the annuity only kicks in at age 90. As such, the Basic Plan provides a larger bequest from the RA and over a longer time frame but with lower monthly payout compared to the Standard Plan.

At age 55, the first CPF Life premium instalment equal to 10% of the respective RA is deducted. At age 65, the second instalment equal of 10% of the accumulated RA balance is deducted. The writer draws $1,098 per month from his RA as the payout under the Basic Plan while Mr. Tan draws $737. At the age of 90, the remaining balances in the RAs will be completely depleted. Then, the CPF Life annuities start providing their respective payouts. If both expire before age 90, here is the unused accumulated capital in their respective CPF LIFE annuities and if they live, the capital depletion age.

When the government said a third of Singaporeans who are 65 today will live beyond 90, then two thirds of them will not see a single cent paid from the CPF LIFE annuity. Again the government has built in triple provisions 1) the payout from the RA is stretched well over life expectancy 2) annuities kicking in well beyond life expectancy, guaranteeing massive reserves to pay for those who live beyond 95 3) to a smaller extend, those who meet the minimum sum mitigating those who do not.