Professors engage on the CPF

A new panel has been set up to advise the government on Central Provident Fund changes.

Headed by National University of Singapore president Tan Chorh Chuan, known for his collegial style of working, it will look at four areas:

1. Improving the Minimum Sum scheme.

2. Letting CPF members to withdraw lump sums.

3. Allowing CPF payouts to balloon from small to larger amounts as one ages.

4. Allowing CPF members to seek higher returns while balancing the risks.

The advisory panel has its work cut out.

It convenes in mid-September, must provide initial recommendations by early 2015, and is expected to complete its study within a year - perhaps in time for next August’s National Day Rally speech by the Prime Minister.

COF reform is an issue with many facets. Many academics and university professors have weighed in on this issue, in The Straits Times Opinion pages.

Prof Tan’s panel could do worse than look at some of the suggestions from his colleagues.

In May, Singapore Management University profess of finance Benedict Koh made a pitch for the introduction of “diversified low-cost life-cycle funds” as well as inflation-protected investment instruments for the CPF.

In April, Professor Joseph Cherian of NUS called for an inflation-linked life annuity.

Challenge for the panel: Evaluating pros and cons of methods to raise returns from CPF funds, without piling on the risks. And without exposing the government to too much political fallout, should funds’ returns be less than stellar.

This week, three of Prof Tan’s NUS colleagues wrote a piece looking at how Singaporeans behave when they turn 55. They looked at banking accounts information, and used that as a proxy for behaviour of CPF members when they turned 55 and were eligible to withdraw a lump sum.

They found that people withdrew lump sums - but not to invest. They were happy to forego the 4 per cent interest rate earned in the CPF retirement accounts, to leave their money in the bank, never mind the miserly bank deposit rates. (Bank deposit rates now are about 0.1 per cent.)

They described this as a puzzle.

But as one reader noted, there’s nothing puzzling about such behaviour. Singaporeans want to withdraw funds from the CPF in case the government changes the rules and locks them up further.

Challenge for the panel: How to persuade Singaporeans to see CPF funds as their money, and to trust that the government won’t break faith and lock up the money unnecessarily.

Another article this week from Donald Low, a former Administrative Officer now with the Lee Kuan Yew School of Public Policy of NUS, highlights an oft-overlooked aspect of retirement savings: the Supplementary Retirement Scheme. It gives a tax relief of up to $12,750 a year, which means you can deduct this sum from your taxable income. This amounts to a tax saving or rebate of up to $2,550.

Mr Low suggests turning the tax relief incentive into a tax credit. This would benefit middle- and middle-income earners, since they stand to get a tax credit from the government for putting money into their SRS retirement savings accounts.

As Mr Low notes, the SRS hasn’t featured much in discussions of retirement adequacy. One tax advisor has often described the SRS as a scheme that’s stillborn.

Challenge for the panel: Time to dust down this tax break that high income-earners take advantage of, and turn it into a more accessible scheme?

With Singaporeans’ retirement security hanging in the balance, the panel is onto a delicate and important task.

stopinion@sph.com.sg

Twitter @stopinion

Opinion Editor Chua Mui Hoong’s weekly blog highlights commentaries from the week’s Opinion pages.