The flip side of flexibility



    Feb 06, 2015

    The flip side of flexibility

    THE first set of proposals by the Central Provident Fund (CPF) Advisory Panel to revamp Singapore's retirement system, with its accent on flexibility and individual choice, has been generally welcomed. But there are some questions to think about too.


     A key one is the part property plays in terms of retirement adequacy. The recommendations will allow those owning property and with a CPF charge on the property to withdraw, at 55, savings in excess of the proposed Basic Retirement Sum of $80,500, while those without would have to meet the Full Retirement Sum of $161,000.

    This was presented as a "reframing" of the current requirements. Currently, there is a Minimum Sum requirement of $161,000, which will be used to pay for the CPF Life annuity scheme. However, whether or not they have enough to meet the Minimum Sum requirement, people can choose to pledge their property for up to $80,500. The excess cash can then be withdrawn. The property pledge, in some ways, was commonly seen as a concession. Ideally, people should be leaving $161,000 in the system to fund their retirement payouts.

    But now, the panel is saying the process had not been well understood, and not many people chose to pledge their properties. So it has proposed to essentially do away with the pledging requirement for people who wanted to withdraw money above the first $80,500, because most people would have incurred a CPF charge on their property when they used their CPF to pay for their homes.

    This is not a material change - basically, people will still be able to take out their savings above the first $80,500 as before - but the issue could be in the messaging. In highlighting what was once seen as a concession, it could have the effect of encouraging the perception, unintended as it may be, that property equates savings.


    Even now, the use of CPF savings for property purchases is often cited as the biggest obstacle to the accumulation of adequate CPF savings. You cannot eat a house, goes the argument, and a common anecdote is that of a retired couple, living in landed property but seeking financial assistance. Schemes to encourage the retired to monetise their assets, such as reverse mortgages, have so far received a muted response, not least because of the deep Asian cultural attachment to property. All this has not changed overnight.

    Until now, too, the narrative has been that Singaporeans are not accumulating enough for retirement, and the $161,000 Minimum Sum was deemed as just adequate. And now, the way seems to be cleared for more to chip away at this, using property to withdraw more savings.

    This leads to another big question: How would Singaporeans react? Consider that over 90 per cent of resident households own a home, and that most would have used their CPF savings for the purchase (and hence would have a CPF charge), meaning that a large number of Singaporeans could now take the option of withdrawing their CPF savings apart from the Basic Retirement Sum of $80,500.

    There is also the likelihood that the most vulnerable, those whose savings are the least adequate, would be the ones who would use the full flexibility to withdraw as much as they could, at 55, and later at 65, which the proposals also provide for.

    Singaporeans would, of course, be advised to think carefully about this, to consider the resultant smaller payouts for retirement, and whether the money is better left in the system to earn risk-free returns, rather than withdrawn for consumption or invested in riskier assets. But if they still want to make such a withdrawal, they could.


    Many will applaud this. This is individual responsibility at work and it is, as they would say, their money after all. Indeed, another proposal to allow those who wish to place more money in the CPF system to do so (up to a cap of $241,500) is also in the same spirit. And people should be left to make such decisions for themselves.

    While this may not be negative in itself, there needs to be the recognition that the collective outcome of all these individual decisions will not be without risk. If most Singaporeans, using property, choose now to withdraw as much of their CPF savings as possible, and then not put these funds to productive use, retirement adequacy may actually suffer overall, instead of being enhanced.

    This is especially when what is regarded as sufficient as a basic payout for a retired person ($650-$700) a month under the proposal, pegged to the current 21st-40th percentile retiree household expenditure, adjusted for inflation, is not a huge amount to start with and provides little buffer. Put in the context of a maturing economy, slower income growth and wealth accumulation, and smaller families, the system may well find itself under pressure.

    While the latest CPF proposals may address popular demands for more flexibility in withdrawing savings, as well as calls for greater individual responsibility, the longer-term question is whether retirement adequacy would risk being compromised as a result. To be fair, the work of the CPF panel is not yet finished. The picture will be more complete when it goes on to address CPF returns and payouts.