The Central Provident Fund Advisory Panel is due to announce recommendations on enhancing flexibility in CPF withdrawals. But how will flexibility affect CPF members and Singaporeans as a whole?
The CPF is a "commitment savings device" - a way of locking up savings for the future that cannot be touched in the present. Many of us have the desire to save for our old age, but lack the willpower to set aside money consistently for that purpose. Commitment savings policies like CPF protect us from our own tendency to put short-term desires ahead of long-term needs.
Why is CPF participation mandatory? Unfortunately, some who refuse to commit to save will become destitute in old age, by accident or design. Mandated savings mean that those who were prudent do not have to pay for the retirement of others who were profligate.
Singapore is hardly unique in adopting a mandatory savings policy. Mandatory savings schemes are the second most common form of old-age provision worldwide, after "pay-as-you-go" pension schemes where retirees are funded from general taxes. No government-run pension schemes anywhere in the world allow individuals to opt out, for similar reasons.
But a commitment savings policy requires an equally strong commitment from the Government, as the guarantor of the CPF. Here, the Government faces a policy dilemma. Revisions to the CPF scheme are needed to meet new challenges for retirement. Yet revisions also may weaken trust in the Government's commitment to provide a stable set of rules for the CPF system.
Much of the present debate surrounding the CPF scheme originates in the introduction of the Minimum Sum scheme in 1987, and subsequent revisions both to the Minimum Sum and the CPF drawdown age. These revisions were crucial to enhance retirement adequacy, given dramatic improvements in life expectancy in Singapore. At independence, Singaporeans could expect to live only to 67 - barely a dozen years after the CPF withdrawal age of 55. Today, Singaporeans look forward to living to over 80.
Even though the CPF drawdown age has risen, the number of years people can expect to live after drawdown has actually increased. But these revisions understandably disappointed CPF members expecting to withdraw their savings in full at age 55. Critics are still aggrieved by their inability to withdraw CPF in full at age 55, although most CPF members approaching retirement age today were young in 1987, and so should have adjusted their expectations by now.
Enhancing flexibility also presents a policy dilemma. Enhancing flexibility will weaken CPF as a commitment savings device and could hurt retirement adequacy among those who will rely on their CPF the most. After all, CPF members who lack other savings at retirement are the most likely to need flexibility to cash out their CPF.
Even better-off CPF members can be harmed by cashing out their CPF. National University of Singapore economists Sumit Agarwal, Jessica Pan and Wenlan Qian found in a recent study that members withdrawing their CPF balances at age 55 tended to simply leave large portions in their bank accounts, which pay negligible interest. Their findings are ironic in the light of calls to raise the rate of return on CPF funds, to better ensure retirement adequacy.
One way of managing these problems is to design a CPF lump-sum withdrawal mechanism that places funds by default into more productive (but safe) investments than ordinary bank accounts. For example, lump-sum withdrawals may be placed by default into fixed deposits that return higher rates than ordinary bank accounts. These changes would give CPF members the satisfaction of withdrawing their capital, yet prevent members from losing too much ground in terms of retirement adequacy.
However, we must also accept that many CPF members wish to use their lump-sum withdrawals to realise lifelong dreams or ambitions. The reality is that many lower-income CPF members will face great difficulty maintaining an adequate standard of living in retirement from CPF savings alone. While flexibility may worsen their situation somewhat in the long run, refusing to grant flexibility, by itself, does not address their basic problem of inadequate lifetime savings.
The more appropriate way of addressing retirement adequacy among lower-income Singaporeans is for the more fortunate to help shoulder that burden by guaranteeing all Singaporeans a minimum standard of living in retirement.
Although the upcoming Silver Support Scheme to help needy Singaporeans aged 65 and above with living expenses through an annual bonus payout represents a welcome step in this direction, social provisions for old-age security are currently fragmented between different agencies, and retirees can fall through the cracks.
Many countries guarantee a minimum basic pension to all citizens, or at least to all workers with a good record of contributions to their retirement accounts. Reforms that will strengthen CPF in the long run should both help younger workers build up their savings for retirement, and guarantee contributing workers the prospect of an adequate retirement.
The writer is Assistant Professor of Economics, Nanyang Technological University.