CPF flexibility a double-edged sword

In anticipation of the recommendations next month of the advisory panel reviewing the nation's compulsory savings scheme, some might well wonder what can be drawn from retirement schemes elsewhere. Coincidentally, Britain, whose civil servants created Singapore's Central Provident Fund (CPF) almost 60 years ago, has passed radical pension reforms to take effect soon.

Parsed across generations, the changes evoke different responses. Younger people worry if the state pension fund will be strained as the population ages, obliging their generation to pay higher taxes and perhaps get lower payouts upon retirement. Those aged 55 and over welcome the flexibility to withdraw their nest egg via a series of lump sums as they will be "free to choose what they do with their money", in the words of Chancellor George Osborne.

Scope for more flexibility in the CPF scheme as well was signalled by Manpower Minister Tan Chuan-Jin who said giving more options to CPF members recognises the fact that people have different needs and would, therefore, have to accumulate different sums for retirement.

Although the British pension system is very different from the CPF, what is common among all schemes is the impact of politics. There is more at stake for the over 1.8 million workers who make regular CPF contributions, and for the Government, than the way CPF payouts and withdrawals are mandated - an issue that has proven to be a political hot potato. The challenge for the nation is to offer flexibility sought after by many without compromising income security for the majority in their retirement years.

Viability of reforms was the main concern of the OECD group when it warned this month that Britain's change could lead to pensioners running out of money and prove detrimental to incomes and the incentive to work.

Flexibility is thus a double-edged sword and should be weighed carefully. Those approaching 55, in particular, might wish to withdraw part of their CPF monies for some purpose and not be stymied by the CPF Minimum Sum. One compromise indicated by Prime Minister Lee Hsien Loong is the withdrawal of up to 20 per cent of their savings. Such a change is likely to drain the savings of those who can least afford it but may be viewed as a political necessity. Increasing options for higher-income earners is less likely to dent retirement adequacy.

The challenge would then be to make a case for differential treatment of CPF members based on incomes and savings levels. Importantly, changes must not get so weighed down by rules that Singaporeans flounder in making sense of them.