CPF LIFE Review

The CPF LIFE scheme is a national annuity life-insurance scheme launched in September 2009.  It’s administrated by the define-contribution pension-fund board CPF.  The scheme has since then gone through an iteration where the plans offered are reduced/simplified.  This scheme comes about to address the twin challenges of an aging population and the limitations of the current CPF drawn-down scheme.

Almost half a decade has lapsed since the scheme’s birth.  If you browse around the web for forums by the public about the CPF LIFE scheme, the responses are mostly negative.  Comments ranged from “it’s a scam” to the allegation that “the government does not want its people to draw monies from the CPF”, etc.  However, these diatribes masked 2 grave problems – the population is rapidly aging and through better medical science and improved sanitation the longevity of the silver-hair generation is slowly but surely improving.  For example, the median life expectancy of a 65 year-old retiree has now reached an impressive 20 years.  Many older people are expected to beat their peers and enjoy a 30-year retirement or more.  Given the younger generation propensity not to have children, the demographic dividend will sooner or later come to an end – the working population will have to bear the burden of those too old and frail to work.

Given the statistics, how are Singaporeans going to cater for a stretch of 20-to-30 years without work income?  The CPF LIFE scheme, as proposed by the government, is an insurance scheme whereby those who have a shorter lifespan will subsidy the living expenses of those who live longer, thus reducing the initial outlay of the individual’s retirement savings.  While CPF LIFE is not perfect, it’s a good first step towards securing our graying population’s future.  Although I do not like the fact that the government makes the scheme mandatory for the majority of the population, I could empathize on the need to standardize for a major national policy as important as a retirement pension scheme.

So is the CPF LIFE scheme value for money?  Your guess is as good as mine given the complexity of the actuary science to compute the costs-and-benefits of such a system.  Only with the passage of time and as the feedback loop of the payout data comes in can we know whether the current pricing truly reflects the cost of the payouts.  As a government sanctioned policy, I would genuinely believe that it’s a not-for-profit fiscally-neutral institution operated on a mutually beneficial basis for all Singapore residents.  This would mean that it’s probably a better deal to buy an annuity from the CPF than a for-profit commercially-operated insurance company who has to pay its agents’ commissions and cater to its margins.

The CPF account holders can visit the CPF website and check out how much bang they can get out of their bucks from the online calculator.  For example, a 55 year-old Singaporean with $100 thousand choosing the Standard Plan could get around $827 to $914 from 65.  After factoring into account of inflation from the passage of 10 years from 55 till 65, the monthly withdrawal is not that spectacular.  The annuitant would be expected to be living a fairly Spartan/subsistence lifestyle.  This is exacerbated by the fact that the payout is not indexed to inflation.  Assuming an annual inflation of 3% to 4%, after a 20-year retirement, the aged will see his payouts shrink by around 50% – at a time just when his medical expenses are about to skyrocket.  As such, the retiree needs a Plan B for his retirement income, whether it’s a part-time job, savings or his children.

So should I enroll in this scheme and which plan should I opt for?  For those with health conditions, the scheme is unlikely to be of benefit and they can opt out under the Medical Ground Scheme.  For those that can’t opt out but are heavy smokers, drinkers or morbidly obese and can’t see time on their side compared to the healthy, they can choose the Basic Plan and leave a larger bequest to their beneficiaries.  However, I do expect to see a major portion of the population who would choose the Standard Plan with lesser bequest.  They are the singles or widowers with no spouse or children and thus a bequest would be meaningless to them.  There’re also those who are financially destitute and would squeeze out every ounce from whatever they can lay their hands on.  In this case, the bequest would likely be used to pay for their terminal-disease treatment and funeral.  The 2 schemes were sufficiently simple and at the same time add some flexibility to the different needs of the various sections of the population.

Going forward, I’ve 2 items for the CPF LIFE scheme on my wish list.  First, I hope the CPF board would allow annuitants an option to delay monetizing the plans from 65 to perhaps 70 or 75.  Frankly speaking, given the longevity profiles of Singaporeans, 65 year old is too young an age to retire.  We should allow those who want to continue to work to continue to do so and let them withdraw a higher payout later so they can truly enjoy the fruits of their labor.  Secondly, it’ll be great to offer a plan with a lower payout but indexed to inflation so that the income from CPF LIFE will not suffer from the ravage of inflationary pressure.  Given the disparate financial and health profiles of Singaporeans, there’s a need for measures to encompass the different needs of various entities of the society.

Personally, I feel that while the CPF LIFE scheme does not cater to the needs of all Singapore residents, it’s a pretty good start.  It just needs time to prove itself.

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