IPS forum on CPF: Improving the CPF system.

The final speaker in the afternoon session's panel discussion was Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy. He tried to suggest ways in which the CPF could help to meet not only the basic retirement needs of Singaporeans but to maintain their current lifestyles at retirement.

Prof Hui said that in order for people to maintain their current lifestyles at retirement, they would have to have a retirement income that has an IRR (income replacement rate) of 60 to 80%. 

He shared that the CPF provides a higher IRR for lower income groups than it does for people who command higher salaries, typically, of more than $5000 a month due to a contribution cap set by the government. 

In his opinion, this cap should be raised and CPF members should be allowed to contribute more to their CPF accounts if they want to.

I feel that Prof Hui missed the point that the CPF is primarily meant to cater to the needs of lower income Singaporeans. This is the reason for the extra 1% of interest paid only on the first $20K in our CPF-OA and the first $40K in our CPF-SA. 

If we are financially more capable, we will have to find ways to make more money for our retirement years ourselves. We shouldn't burden the system.

I also wonder if there is a need to maintain pre-retirement lifestyle at retirement. Is an IRR of 60 to 80% really necessary? Could we not lead a simpler life during retirement? In my case, although  some would argue that I already have a simple life, I could give up my little car when I retire, for example.



With the purchase of housing, the IRR falls naturally.
I feel that monetisation is a solution in funding retirements for some.

It is difficult to have our cake and eat it too. Although Prof Hui does not seem to like the idea of monetisation of our homes as an option for retirement funding, we have to be pragmatic. 

Prof Cherian said that the Americans are quite pragmatic when it comes to downsizing their homes if there is a need and why shouldn't Singaporeans be pragmatic too?

Prof Hui made a point about raising the CPF withdrawal age for younger workers who are likely to live a longer life on average. I do agree with this as life expectancy increases some 2 to 3 years every decade. This helps to address the issue of increasing longevity and keeping CPF retirement payouts more sustainable.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Young working Singaporeans, you are OK.
3. Why a wealthy nation cannot afford to retire?

IPS forum on CPF: The CPF-IS and its alternatives.

The afternoon's third speaker was Mr. Alfred Chia whose job was to talk about the CPF-IS. 

He had to walk carefully through his presentation because people could feel that he had vested interests to protect if he was not objective enough. 

To his credit, I think he did quite well in toeing the line.

Mr. Chia said that whenever the CPF Board liberalised rules to allow members to use their CPF funds for investments, it would be the insurance companies and banks who got very excited. Their motivation is to make money from fees, after all. 

Plenty of products would be pushed out then to entice CPF members. Unfortunately, these have happened more often than not during market peaks.

Click to enlarge.

Anyway, very unfortunately, 85% of CPF members have lost money under the CPF-IS. 

This is due to a cocktail of factors but such a high percentage could be reduced if CPF members are better educated on things investment.

Mr. Chia also talked about Dollar Cost Averaging and how, for the average guy, this could be the best way to go. Of course, this should not be a new concept for regular readers.

I believe that sales people will always be sales people. They have to sell things to make money for themselves. 

We have to take on the responsibility of deciding for ourselves if a financial product makes sense at all. So, increasing our financial literacy, like it or not, is important in our society.

Personally, I have always said that the CPF pays risk free rates of 2.5% to 5% per annum. Unless a certain investment product is able to do better, it is better to leave our CPF money where it is. 

Indeed, I find the risk free rates in the CPF-SA so attractive that I would encourage anyone to do Minimum Sum Top Ups if they are allowed to. Of course, they would enjoy income tax relief at the same time.




"We can never be too sure about our investments and how they will do. However, the CPF gives us a measure of certainty which we need in our golden years. So, it is a good tool in retirement planning and we should make good use of it." AK, 24 March 2014 in Securing risk free returns early for retirement.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Dollar Cost Averaging and expected returns.
3. Nobody cares more about our money than we do.
4. Double your income, not your income tax.

IPS forum on CPF: Balancing returns, risks, facts and fallacies.

The second speaker in the afternoon session was Professor Joseph Cherian who is the Practice Professor of Finance and Director at the Centre for Asset Management Research and Investments in NUS.

Prof Cherian listed three fundamental concerns about retirement funding:

1. That retirees receive a reasonable level of payout every month.

2. That the payouts should last for as long as one lives.

3. That the payouts should be indexed to inflation.

This is where the CPF Life comes in and although it promises to give a monthly payout for life, the payout is not indexed to inflation. So, for the same person, $1,000 at age 65 is probably very different from $1,000 at age 75, for example. This is a very good point.

He went on to share some myths surrounding the CPF and inflation in Singapore. His slides are very good and I will share them here:



Click to enlarge.

Prof Cherian also raised the point about how the private sector should not be allowed into the reverse mortgage business of HDB flats because they are only interested in charging exhorbitant rates like what happened in the USA. This should be the government's responsibility.

Lastly, some might remember that in my open letter to the Prime Minister, I said that not enough has been done to communicate issues regarding the CPF clearly to Singaporeans. Prof Cherian said that we have to keep the messages simple and that we should conduct communication programs on retirement and the importance of the CPF. I agree wholeheartedly.

See slides: here.
(I highly recommend that you go through Prof Cherian's slides which are very detailed and also entertaining.)

Related posts:
1. AK attended forum on CPF.
2. An(other) open letter to the PM.
3. We do better managing our savings than the CPF does.