The CPF Advisory Panel’s Part Two of their recommendations to “enhance” the CPF system was released yesterday.
For readers who are not in the know, the CPF is the Central Provident Fund which is the public pension system in Singapore. Below is a quick chronology of events before we proceed to discuss the recommendations (if you are aware of the background, please skip on):
- In May 2014, I was sued by the Singapore prime minister in relation to an article that I had written on the CPF, the lack of transparency in its management and the inadequate pension funds that Singaporeans were receiving – an OECD (Organisation for Economic Co-operation and Development) report at that time ranked Singapore’s pension funds as being the least adequate among Asian and European pension funds compared. I have since been ordered to pay the prime minister S$180,000 which I have to pay until 2033.
- Prior to that, I wrote several articles that revealed that the CPF funds are being channelled into the Singapore reserves and then into the GIC and Temasek Holdings – the two government investment firms, where these investment firms were earning high returns of between 6.5% to 16% (at that time) but the CPF pension funds were only earning 2.5% to 4% – said to be the lowest returns on pension funds in the world.
- Before I was sued, the Singapore government did not publicly inform Singaporeans of the channelling of the CPF funds into GIC and Temasek Holdings. I had to trace on different government websites to locate the information to put them together.
- It was only at the end of May 2014, after I was sued did the government finally admit that the CPF funds are indeed being funnelled into GIC.
- For the next 4 months, from June to September 2014, I organised and/or took part in monthly protests to demand for transparency on the government’s management on the CPF. The first two protests were attended by 6,000 and 5,000 people, respectively – one of the biggest protest attendances since Singapore’s independence. After the 4th protest, the police interrogated about 20 of us and charged 6 of us – to stop the protests. I was fined S$1,900.
- In August 2014, during his National Day Rally speech, the prime minister said that he would appoint a CPF Advisory Panel to study making enhancements to the CPF system.
- The CPF Advisory Panel was appointed in September 2014 – the same month that the last protest was held and then squashed.
- The panel released the first part of its report in February last year, before the general election in September. The second report was released yesterday.
In this article, I outline the summary of the second part of the report, and give my views on it.
There are two main components to the recommendations. In the first – the panel introduced a ‘new’ CPF payout plan:
- Under the current CPF Standard Plan payout, a person receives a constant payout until he or she passes on.
- The panel came out with a ‘new’ CPF plan which it said will offer increasing payouts. On first thought, you might think it looks good – until you look at the details.
- The panel gave the following illustration: If under the Standard Plan, an individual receives a constant payout of S$720 every month from 65 years old.
- But if an individual wants to get increasing payouts (under the ‘new’ plan), the individual will instead have to accept getting a lower S$560 a month in the first year (or about 20% lower), which will then see a 2% increase every year after that. So, you will only get increasing payouts if you are willing to accept lower payouts at the start.
But that’s not all.
Strangely I cannot find the following information in the panel’s report, but look at what the Channel NewsAsia reported:
Starting from a full calendar year at age 65, the cumulative payout for both individuals roughly evens out at age 90, which means to say, both would get a cumulative payout of about S$218,000 in the fourth month of their ninetieth year.
What this means is that if you go onto the ‘new’ plan, you will only get back the same cumulative amount as the Standard plan when you reach the age of 90.
More importantly, what does this mean?
First, look at the life expectancy of Singaporeans in the chart below. Men have a life expectancy of 80 years old, for women it is 85 years old.
This is really how you should look at the panel’s recommendations and what it really means:
- Under the current CPF Standard Plan, you get to take out higher payouts at the start. But under the ‘new’ plan, you only get lower payouts at the start.
- Since the ‘new’ plan would only let you take out the same cumulative amount as the Standard plan when you reach 90, this means that before age 90, you will always be getting lesser in total under the ‘new’ plan than the Standard plan.
- However, as the life expectancy of men is 80 years old and for women is 85 years old, if someone opts for the ‘new’ plan, he or she will get back lesser cumulative payouts in total, as compared with the Standard (older) plan before he or she is likely to pass on.
So is the ‘new’ plan that the panel just recommended good? Some people would think that it is actually worse – this plan becomes yet another way for the government to lock up your CPF for their other uses (other than for your pension).
But look at how the panel used several strategies to spin the recommendations to try to make them sound good.
You saw above how the panel tried to sell that you could get ‘increasing’ payouts – but only to find out that you would have to accept lower starting payouts.
The panel also said that, “payouts under the two LIFE plans offered today are not designed to increase over time, and hence the purchasing power of the payouts will decrease as members get older.” Their proposed ‘new’ plan is supposed to mitigate that.
But the reality is that the purchasing power under the current Standard plan is already low, so by making the starting payout lower, it means purchasing power will become even lower and remain low over the years, then what’s the point? – we will get to this a bit later.
The panel also said: “The rate of increase of payouts should be set at 2% for the escalating CPF LIFE plan”, which means that under the ‘new’ plan, payouts would increase by 2% every year.
But this is just marketing speak – to give you the impression that payouts are increasing, but in reality, you are still getting back the same amount of money in total at age 90. In fact, you get back lesser in total before age 90. So does 2% increments matter? It does not.
Also, why just 2%? Knowing that the life expectancy for men is 80 years old and that for women, it is 85 years old, why did the panel not propose to increase payouts by 2.5% or 3% to allow individuals to attain the same cumulative payouts by age 80 or 85 years? Why cause individuals to get back lesser money before they pass on?
I will briefly touch on the second component of the recommendations before moving on:
- The panel also introduced the ‘Lifetime Retirement Investment Scheme’ to allow CPF members to invest in external funds to earn higher returns (other than the Singapore Government Securities (SGS) that the CPF are currently invested in – which are then funnelled to the reserves and then to GIC and Temasek Holdings).
- The difference from the current CPF Investment Scheme (CPFIS) which also allows CPF members to invest their CPF externally is that first, the panel claimed that administrative fees under the new scheme are expected to be lower. Under the CPFIS, the panel said that fees are “3% for sales charges and … up to 1.75% (for annual fees) per year”. Under their proposed scheme, fees “could be 0.5% per year or lower”.
- However, to keep costs low, instead of having someone to actively manage your CPF funds, the panel recommends that the funds are passively managed instead.
What are the concerns?
- My initial thinking was that the new scheme could be a good thing because there have been requests for the CPF to be managed and invested on its own. However, what does it mean for the funds to be managed “passively”. Even under Hong Kong’s Mandatory Provident Fund (MPF) pension funds, I understand that there are fund managers and even then, they are able to keep fees as low as 0.6% of fees.
- There are also not enough details at this moment to make an informed critique. My worry, however, is that the CPF funds have been traditionally used by the government as a cheap source of funds for their use via the GIC and Temasek Holdings. The government is unlikely to be willing to let go of the CPF, and therefore even under the proposed ‘Lifetime Retirement Investment Scheme’, would the funds still be somehow channelled to the GIC and Temasek Holdings? Would there be hidden fees for the administrative fees? But these are hypothetical questions which we can only consider better with more details – though knowing the government, I would scrutinise carefully what would be proposed.
More importantly, the panel proposes that CPF members should still have at least $20,000 in their CPF Ordinary Account and $40,000 in their Special Account – just as under the CPFIS – before they would be able to use the excess funds to invest under the ‘Lifetime Retirement Investment Scheme’.
But what is the issue with this?
- The panel itself revealed that 40% of active CPF members aged 45 do not even have $40,000 inside their Special Accounts. Even though CPF members contribute a higher proportion of their CPF into the Ordinary Account than the Special Account, but Tan Chuan-Jin revealed in 2014 when he was Manpower Minister that, “an average of 55% of (the Ordinary Account) savings had been withdrawn (by CPF members) to finance their flats at age 55“. As flat prices have increased and CPF members use increasingly more funds from their CPF to pay for their flats, logically the proportion of Ordinary Account savings used to finance flats would be higher as generations are younger. Thus how many Singaporeans would have enough combined funds inside their CPF to invest?
- As such, the ‘Lifetime Retirement Investment Scheme’ is likely to benefit only the higher-income earners and where the lower-income earners would not be able to earn higher returns on their CPF – if the proclaimed effect of the proposed investment scheme takes place. Low-income earners would still have no choice but to accept low returns while their funds are being diverted to GIC and Temasek Holdings, and the rich would have more flexibility to withdraw from the loop to invest elsewhere, which would then further widen the rich-poor gap and inequality in retirement.
- The solution to this is to ensure that wages rise at the bottom to allow wages (and savings) to catch up by defining a poverty line and implementing a minimum wage to that level – however, the government has refused to do so for both these definitions.
I would now like to revisit the panel’s Part One of their recommendations.
Prior to the recommendations, there have been grouses with the CPF Minimum Sum for many years. To ‘resolve’ the issue the government then changed the naming of the ‘CPF Minimum Sum’ and renamed it to be called the ‘Full Retirement Sum’.
However, the inherent problems with the ‘CPF Minimum Sum’ are still not changed. The main bugbear that a segment of Singaporeans have with the ‘CPF Minimum Sum’ is that it required them to set aside a minimum amount of funds inside their CPF, which they otherwise were not able to withdraw at 55 years old.
- But the basic issue is that Singaporeans have not been able to earn enough savings inside their CPF and are therefore not able to save enough to meet the ‘CPF Minimum Sum’. However, there was no effort by the government to allow the general population to earn higher savings (i.e. by increasing CPF returns across the board).
- Instead, all the government did was to rename the ‘CPF Minimum Sum’ to the ‘Full Retirement Sum’ but kept the same functional components. As such, as of 2015, Singaporeans were still required to have at least S$151,000 inside their CPF to meet the ‘Full Retirement Sum’ – as would be required under the ‘CPF Minimum Sum’.
So, why does this matter at this point?
- According to the government, if you have enough funds inside your CPF to meet the ‘Full Retirement Sum’, you would receive a CPF payout of S$1,200 to S$1,300 from retirement at age 65.
- However, if you only have half that amount, or the ‘Basic Retirement Sum’ of S$80,500, you would only get a payout of S$650 to S$700.
- The panel just revealed that 40% of active CPF members aged 45 do not even have $40,000 inside their Special Accounts. And since a significant proportion of their Ordinary Account have been used to finance their flats, how much would the majority actually have, after combining the leftover funds inside their Ordinary Account with the Special Account? Perhaps another S$20,000 or S$40,000 – or a total of S$60,000 or S$80,000 at age 45?
- Also, noting that people at aged 65 today would have earned lower wages over their lifetimes and could therefore only save lesser, how much would they have inside their CPF? Would it only be about S$60,000 or S$80,000? I estimated that the median balance would be only S$55,000.
- Previously, socio-economic blogger Leong Sze Hian had estimated that 85% of Singaporeans aged 55 and above would not have been able to meet the (now renamed) ‘Full Retirement Sum’ which has now been increased to S$166,000. I estimated this to be about 90%.
It looks like our estimates could not have been far off.
And what is the issue with this?
- If the majority of elderly Singaporeans do not even have S$80,500 inside their CPF, then they would not even be able to get a monthly payout of S$650 under the ‘Basic Retirement Sum’.
- The last time the government revealed how much the median CPF Life payout was, was in 2011 when Deputy Prime Minister Tharman Shanmugaratnam said in a parliamentary reply that the median payout was only S$260 and the highest payout was only S$1,280.
- How much would the median payout have increased to today? – S$400? S$500? I estimated that the median payout in 2014 would only be S$400. I do not think I am that far off.
So, the problem?
- The government might come out with all the fanciful names – ‘Full Retirement Sum’, ‘Basic Retirement Sum’, etc and what their respective payouts could be, but the issue?
- Most elderly Singaporeans would not even get the S$650 payout under the ‘Basic Retirement Sum’ because they simply would not have enough retirement savings to do so.
- Then what is the point of having all these names, except to let the government look like it is ‘trying’ to salvage the situation? Until now, the government still has not revealed what the median CPF balance of Singaporeans is, and what the median CPF payouts are, despite numerous requests.
Perhaps, now we know why they do not.
Simply put, the whole CPF scheme that the government is trying to sell is hollow. They are trying to sell a scheme to Singaporeans which they know there is nothing to sell.
Just take a look around you. If elderly Singaporeans are able to get back enough payouts (what would be adequate for you to live on in a month? – S$1,500?), then why are there still so many elderly Singaporeans working as cleaners, security guards or collecting cardboards?
So, how does all these tie in with the panel’s Part Two of the panel’s recommendations – which we started this article off with?
- The panel decided to come out with a ‘new’ CPF Life Plan, where they said that Singaporeans will have to get a lower CPF starting payout. Thus if the median payout under the Standard plan is only, let’s say, S$400 today, then under the ‘new’ plan, payouts would only start at S$320 (the panel said that starting payouts will be about 20% lower).
- The panel also said that they came out with the ‘new’ plan to assuage the “concerns of (CPF) members over the reduction in purchasing power of payouts” and to “protect (CPF members) against increases in the cost of living in their retirement years”.
- But remember the point I made above that if the purchasing power of the CPF payout under the current Standard plan is already low, then under the ‘new’ plan, it would be worse?
- This is what I meant – S$400 is already very poor purchasing poor; S$320 is even worse. Even with a 2% increase in the payout every year, it will still be very poor.
Thus is there any difference that the panel came out with a ‘new’ plan? No – the payouts will still mean very poor purchasing powers, and in fact, under the ‘new’ plan, it is even worse because Singaporeans would be getting even lesser starting payouts and would not get back as much payouts in total as the old Standard plan until they are 90 years old – but which most people would not live until then.
So, from what we know about the CPF recommendations made by the CPF Advisory Panel so far, did they actually enhance the CPF system for the general population?
The only glimmer of hope perhaps, is the ‘Lifetime Retirement Investment Scheme’ but I won’t be holding my breath, for the reasons mentioned above.
I am afraid this was mostly a public relations exercise all this while to placate Singaporeans while allowing the government to continue to earn from Singaporeans’ CPF.