IPS forum on CPF: International retirement income systems.

The first speaker in the afternoon session's panel discussion was Ms. Wong Su-Yen who is the Chairman (Singapore) of Marsh & McLennan Companies. She did a comparative analysis of the best practices in retirement funding around the world.

I will not go into the details but there are 3 points I would note here:

1. The CPF, Singapore's "pension system" does not cover all adult Singaporeans. It is not universal. This is something which was mentioned in the morning session as well.

2. The dependence of the CPF on SSGS to generate returns means it does poorly in asset diversification. She suggested that people be given more flexibility to invest their CPF savings in the earlier years of their working life. This should taper off as they age.

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3. There is a growing gap between the official retirement age and the life expectancy of Singaporeans. So, there is a question of sustainability of the current system if the official retirement age is not raised.

What do I think?

1. The fact that the CPF cannot be looked at as a relevant retirement planning tool for everyone is something that could have escaped some of us before. It could have simply lurked at the back of our minds. Although this is a problem for some, the CPF can never and should never be used to provide pension payments to all Singaporeans, including those who don't have money in their CPF accounts.

The CPF system is about encouraging people who are gainfully employed to take responsibility for their retirement needs and not someone else's. There has got to be some other measures for people who were unemployed for significant periods of their lives through no fault of their own.

2. The CPF generates risk free returns through the purchase of Special Singapore Government Securities (SSGS) which are basically bonds. This means that investment risk is transferred to the government and CPF members don't have to suffer any heart attacks when times are bad. The suggestion to allow younger Singaporeans to invest a larger portion of their CPF money themselves could, in my opinion, do more harm than good since the majority of Singaporeans actually lose money when they invest their CPF savings in riskier assets.

Conventional wisdom says to avoid concentration risks. However, Warren Buffett and Charlie Munger would say that if we know we have a good thing in hand, we should buy more! And what is a good thing? For most of us who are not financially savvy, the question must be why risk a risk free return of 2.5% to 5% per annum?

3. The growing gap between the official retirement age and the growing life expectancy of Singaporeans is a real worry. People still want to retire at 55 or 62 but, for most of them, their CPF funds will not last them till age 80. This is the reason for CPF Life. This is where there is a shift to risk pooling. Those who live longer get a better deal, so to speak. Those who don't, lose out.

So, taking everything into consideration, the CPF has done pretty well for its members. What we have to think about now, I believe, is to come up with another system to help those who are not able to benefit from the CPF system. The lack of universal coverage is a weakness in our country's "pension system".

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Retiring before 60 is not a dream.

IPS forum on CPF: Behavioural perspectives on the CPF.

The morning session's last speaker was Mr. Donald Low who is an Associate Dean and Senior Fellow at Lee Kuan Yew School of Public Policy. Mr. Low's training is in Behavioural Economics and something he said confirmed a suspicion of mine which is, left to their own devices, most people will not save for their retirement. When it comes to saving for retirement, there has to be a degree of compulsion as a vast majority will give in to present day wants and prefer immediate gratification.

Mr. Low also said that people overestimate their own abilities and are often overly optimistic. He feels that lump sum withdrawals increase the risk of monetary loss and that an annuity payment like the CPF Life is better.

He said many things about the genesis of the CPF and the huge political loss of 1984 and why raising of the withdrawal age (from age 55) was never mentioned again, why this led to the minimum sum being formed and how it is in effect a backdoor to the raising of the withdrawal age.

Two things Mr. Low said which I feel should be considered and, in fact, implemented:

1. People are definitely living longer. Why should not the withdrawal age be raised? Raise it not for everyone but for future cohorts of workers. Make the process automatic and transparent. So, for example, in every 3 years, increase the withdrawal age by 1 year for the next cohort of workers.

Life expectancy improves 2 or 3 years in every decade. Peg the withdrawal age to life expectancy. I think this makes a whole lot of sense.

2. What the government should also do is to help people better visualise what it is like to age. People tend to think that they are invulnerable when they are younger. If we can help them visualise what it is like to be much older with all the implications, they could become more pro-active in retirement planning. This gels with my idea that more could be done to educate Singaporeans on retirement planning and how the CPF should be a cornerstone of their efforts.

People sometimes wonder why I do not maximise returns by investing all the CPF-OA I am allowed to invest with. In fact, to some, they are puzzled why I am contented to receive 2.5% per annum in interest rate.

My usual explanation is that I do not know everything but I do know that the CPF-OA pays me a risk free rate and because the interest paid is not withdrawn, 2.5% per annum compounded becomes a rather powerful force.

As Mr. Low pointed out, people are usually over-confident of their abilities and the more educated they are, the more optimistic they are. They will take more risk.

Perhaps, my approach of staying invested for income but always having a war chest ready (and I have said before that my CPF-OA money is one such war chest) shows that I am a little less confident of my own abilities.

Aiyoh, who threw a shoe at me? Who? Who?

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. We do better managing our savings than the CPF does.

IPS forum on CPF: Housing and the CPF.

The next speaker was Associate Professor Lum Sau Kim who is the Director of Graduate Programmes in the Department of Real Estate in NUS.

She spoke about what I would call the love affair Singaporeans have with real estate. Housing takes a big chunk of our CPF money. It is the dominant use of our CPF money, she said. 

Many would completely exhaust their CPF money for housing. Many people actually leverage as much as possible and buy the biggest homes possible.

Prof Lum said that, in effect, many are using housing as their pension funds and this is, in part, due to the lack of alternative investment vehicles. AK feels that this phenomenon can also be described as an overconsumption in housing and regular readers will remember that this is something I blog about often. 

People mistakenly think that their homes are investments when they are in reality consumption items unless they decide to rent out a room or two if they have spare rooms.

Prof Lum also made a good point on how due to Singapore's demographics, demand will not support higher prices of housing in future. Bigger flats will go down in prices faster than smaller flats as seniors downsize their homes, monetizing their bigger flats.

"Managing house price expectations is key. Otherwise, as we hit various demographic bumps, there may be clustering or cohort effects where the simultaneous rebalancing of household portfolios induces new shocks to the system, for instance in asset sales." Prof Lum.

We should also remember that with 99 years leases as the norm, as properties age and have less than 60 years left to their leases, it becomes harder for buyers to get financing. 

So, prices of such older properties could also suffer declines when the time comes. What the sellers are doing are selling the tail end of the leasehold.



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Interesting? I believe that this was something I cautioned readers about before on the buying of HDB flats with relatively shorter leases left.

In conclusion, please be prudent in the purchase of our homes. Do not over-consume thinking that housing prices will only go up and never go down. 

Housing prices and rentals are volatile and thinking of our homes as our future pension funds could be a bad idea.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Buying an apartment: Considerations.
3. Don't think and grow rich.
4. Never lose money in real estate?