Singabloodypore

From Asia Sentinel
Our Correspondent
31 August 2007

As Asians’ lifespans increase dramatically, governments are unprepared to care for them

Singapore’s latest adjustments to its Central Provident Fund (CPF) scheme, announced on August 9, the island republic’s National Day, make for dire reading on two accounts.

First, having been forced to save so much for so long, so many Singaporeans are as yet ill-prepared for rapidly approaching retirement. Second, other rapidly aging places in Asia, particularly Hong Kong, are even less equipped to face the twin challenges of aging and longer life spans. The lower income groups in both Singapore and Hong Kong societies are in the worst situation and will continue to get an especially raw deal.

The changes outlined for Singapore’s CPF were:
* A 1 percent rise to 3.5 percent in the interest rate paid on CPF balances up to S$60,000.
* A scheme – details to follow – to force members to take out insurance against living beyond the age when their CPF funds would be exhausted.
* Phased increases to the Draw Down Age at which money can be withdrawn from the CPF (other than for approved investments). The draw-down age was once only 55, is now 62 and will rise to 65.
* Various measures, including income supplements, to encourage employment to age 67 or above.

The interest supplement is tacit acknowledgement of how far the forced savers have been subsidizing the borrowers – the Singapore government and ultimately US and other consumers who are being financed by Singapore’s savings excess. The current normal interest rate on CPF balances is 2.5 percent -- barely above the rate of inflation. Indeed, for years, the interest rate has been about nil in real terms. It is noteworthy that while the giant state investment corporation Temasek boasts double-digit returns on investments, Singapore’s forced savers have been receiving a quarter of that amount.

The first consequence of this is that savings have not in practice earned anything, so balances are now far from adequate to sustain a reasonable standard of life for low-income retirees despite the fact that contributions to the CPF are 36 percent of income and were once as high as 40 percent.

Middle-income earners have been able to take advantage of their ability to place some of their CPF savings directly into stocks and mutual funds, which have earned much higher rates of return. But that has not applied to lower-income earners who must first accumulate enough in the CPF’s own fund before investing elsewhere.

The CPF has of course enabled most people to buy their own homes – albeit mostly in the government-built and controlled Housing Development Board flats in which 88 percent of the population live. But it has left a situation where many are relatively asset-rich but will in future lack sufficient income, requiring them either to borrow against their flats, or sell them. Indeed, of those nearing the age in 2006 (55) when they were supposed to reach the Minimum Sum in their ordinary CPF accounts, nearly half had to pledge the value of their HDB flats.

Even the Minimum Sum, currently at S$99,000 is a modest amount given that the median wage in Singapore is around S$27,000 a year (before CPF deductions) and even the lowest paid 20% earn about S$14,000 in a year. Although the minimum sum earns interest of 4% a year, its provision is very basic even assuming people own their flats and have medical coverage under the CPF or otherwise. Based on the minimum amount, the CPF provides S$610 a month for 22 years so for someone retiring at 62 would last only till 85.

Officials now admit that “with rising life expectancy, a significant proportion of members will outlive their CPF monthly payouts,” so the government is to devise a scheme for insurance against living longer. It would provide for a monthly income of S$250-300 when their CPF annuity – assuming they start withdrawing at 62 – runs out.

People will have to buy such insurance either from the CPF or an annuity, payable till death, from a private sector insurance company. But even the latter yield only about S$550 a month assuming that the minimum sum is invested in them at 55 and payment begins at 62.

Most people have more than the minimum balance – but not so much more that they can look forward to a comfortable retirement. Which explains why the retirement age is being raised, eventually to 67, and even the government recognizes the inadequacy of CPF returns.

While the CPF has also given an enormous boost to home ownership, it is clear that an excessive percentage of most households’ wealth (particularly those of lower and middle incomes ones) is tied up an illiquid asset whose value may well stagnate as the population ages and the birth rate remains very low.

In many ways the government policy is realistic. Demographics have changed dramatically since the CPF was devised. The percentage of the population over 65 will double to 20 percent in 20 years and the average life expectancy from birth, now 79.6 is still rising. Those who reach 65 can already expect on average another 20 years of life and half, mostly women, will exceed that.

The need for an exceptionally high savings rate to develop the infrastructure and accommodate the once fast growing population has changed too. But it is disingenuous of government to suggest that the changes now to be made will reward the older groups with higher interest rates and work supplements. They are merely partial compensation for the past.

The government is entirely responsible for the abysmal return on forced savings. Fairness suggests that at the very least all past savers should be back-dated with accrued compound interest of a real (inflation adjusted) rate of 2.25-2.50 percent and that should become the standard for the future. That figure is line with average yields in developed countries of inflation-linked government bonds and over time is roughly in line with the historical post-inflation yield on Singapore government bonds. The government can readily afford this. Indeed it would be a very much better investment in Singapore’s future than its investments in US instruments that it failed to understand.

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