Making a sound retirement scheme better

The bequests of the nation's retirement scheme represent mixed blessings. The Central Provident Fund's legacy of time-tested reliability is an asset, while some conceptual legacies call for updating to reflect current realities. For example, successive rounds of CPF reforms have failed to scrub from people's minds the notion of 55 as the appropriate CPF withdrawal age, when decades of hard-earned savings can finally be unlocked and taken out as a lump sum to be spent at will.

That is unfortunate as life spans have lengthened considerably since the British - who set up the CPF - landed upon that figure over half a century ago, when the life expectancy was around 63. Today, many live past age 80 or even 90, made possible by better health care which also comes with higher medical costs.

That ought to prompt people to safeguard and stretch funds over a longer period. But what has not changed is the thrill many seniors feel at being able to cash out their CPF savings, even though in many cases it has led to ironic results. For example, many of the CPF members who made withdrawals neither spent nor invested the funds within the first year, as a recent study by NUS economists showed. Instead, they left their money in low-interest-bearing savings accounts, forgoing the much higher CPF Retirement Account interest of 4 per cent.

The latest reforms, like allowing withdrawals of up to 20 per cent of a member's balance, are well and good but the power to make a good retirement scheme better lies with CPF members as well. Placing virtue on a self-sustaining and sustainable system - to support them for the rest of their lives via monthly payouts - they ought to focus on building up savings, rather than splurging or spending on immediate needs. Close to $3 billion of CPF money is withdrawn each year by members who turn 55. If these funds are not properly used to strengthen financial safety nets, the system as a whole might get anaemic over time.

One drawback of annuities is that they can be difficult to understand. Some products available on the market have also been plagued by high costs and low returns. Those factors contributed to the British government's controversial decision last year to abolish compulsory annuity purchase. CPF Life is different in being a government-run annuity with guaranteed interest rates and low distribution costs. There should be no let-up in explaining such advantages and the changing retirement landscape to every cohort of CPF members so that they understand what's at stake. Also important is giving members sufficient time to prepare for rule changes and sufficient information on how their monies are protected.