So the Prime Minister acted according to script and used the National Day Rally to talk about tweaks to CPF. He absolutely refuses to acknowledge the elephant in the room: low real rate of returns (and high real estate prices) is causing inadequacies in retirement payouts and with the Minimum Sum.
Property Pledge
First off, one cannot help but wonder the point of a property pledge to make up shortfall in the Minimum Sum. A CPF member does not owe anybody any money in his CPF account and yet is compelled to pledge a financial asset, his HDB flat, for no actual financial benefit?
Retirement Pay outs can be higher, Minimum Sum lower
Anyway, back to the amortisation spreadsheet which in “Government ‘kiasu, kiasi, kiabo’ over CPF Life” show the extremely conservative longevity assumptions used by CPF results in significant unused retirement capital going back to CPF. Let us look at what a university and a polytechnic graduate have in their respective CPF account by age 55 if they start work today using median starting salaries data from the MOM and at a salary adjustment of 4% pa.
| Starting Salary | Age 55 Balance at current CPF rates | Age 55 Balance at 4.5% | Age 55 Balance at 5.5% | |
| University graduate | $2,800 | $1,395,772 | $1,722,343 | $2,047,659 |
| Polytechnic graduate | $2,000 | $ 998,308 | $1,230,245 | $1,462,613 |
Next, look the $155,000 Minimum Sum pay-outs at various investment rates based on the current assumption that annuity capital is depleted at age 88 and then with capital depleted at the still conservative age of 85 (compared to actual 82-83 years life expectancy)
| Standard Plan at current capital depletion at 88 | Standard Plan at capital depletion at 85 | |
| Payout at current CPF rates | $1,215 | $1,335 |
| Payout at 4.5% | $1,350 | $1,460 |
| Payout at 5.5% | $1,535 | $1,650 |
Finally, let us look at what the Minimum sum should be at the various investment rates in order to receive $1,215 per month from age 65 onwards.
| Investment Rate | Current Rates | 4.5% | 5.5% |
| MS capital depletion age 88 | 155,000 | 139,000 | 119,000 |
| MS capital depletion age 85 | 141,000 | 127,000 | 110,000 |
Opportunity costs due to the current low CPF rates are significant. Instead of providing what is right by the citizens, the government prefer to hoard taxes and the returns on reserves.
Basic State Pension is the way to go
Mr. Lee does not contemplate the one thing that resolves the retirement conundrum. This ought to be a Basic State Pension of $600 per month to run concurrently with CPF to cover the very basic necessities. Payout to citizens begins at age 65, prorated by the number of years income tax is paid over a base period of 35 years, capped at $600 per month. In 2013, the total number of residents aged 65 and above comprised 10.5% of resident population, or 384,000.
Total cost to the government is just $2.8b, but not all 384,000 are citizens and not all citizens get the full $600 per month. This raises permanent spending in the budget by a mere 0.8% of GDP or only 35% of the one-off $8.1b Pioneer Generation Package which meant there are far more excess returns than spending on a Basic State Pension. It will a) help those on low income b) very importantly make the Minimum Sum redundant.
The Miniaturist
“A People’s Tragedy” by Russian history specialist Orlando Figes was a gripping account of the 2 decades preceding the Russia Revolution. In it, Figes provided a colourful anecdote that behind his back, the last Tsar, Nicholas II, was called the Miniaturist. Nicholas II’s daily routine was to concern himself with the minute workings of the government, much to the exasperation of his ablest ministers. The Imperial Person would not discuss the great issues of the day; restructure the economy and the bureaucracy to modernise society and alleviate poverty and foremost, liberalise the vast machinery of social and political repression. In awe of his tyrannical dead father, Nicholas II did not wish to discuss much of anything substantive, only to tweak here and tinker there. In the meantime the country was seething with discontent.
Does Singapore have its own Miniaturist?
Chris K
*Chris K holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.