This is the prepared text of my speech delivered in Parliament earlier today. I have some further thoughts on the points made in my speech, which I'll post another day -- need to work on my speech for the en bloc changes. The CNA video clip of my speech is here. [Update: Me on YouTube, in 2 parts at here and here]
Speech on the Minister Statement on CPF Reforms and Other Measures for a Secure Retirement
1. Mr Speaker, Sir, thank you for allowing me to participate in this debate.
2. At the National Day Rally, the Prime Minister had announced some far-reaching changes to the CPF scheme. The Minister provided some important details to this House yesterday.
3. Any Government measure that enhances and increases Singaporeans’ savings can only be a good thing. Based on the figures and projections released by the Government yesterday, Singaporeans would be better off and better prepared for the hard realities of a longer life. The Minister’s assurance that under the new system, all CPF members would receive higher interest payments, is comforting.
4. But to me, the real question is whether we can do more. Can we do more, in a manner that is balanced and sensible, and does not involve unwarranted or unjustifiable risks, costs or trade-offs? I think we can.
Poor rate of returns on CPF balances
5. Sir, the poor rate of returns on CPF balances is one of the main reasons why the existing CPF scheme, without reform, will be inadequate to meet Singaporeans’ retirement needs. As a long-term retirement savings plan, the CPF’s rate of return is crucial. Unfortunately, the rate of return enjoyed by CPF members has been poor.
6. In a 2006 paper, two NUS economists argued that “CPF members have not benefited from the power of compound interest”. They estimated that from 1987 to 2004, the real rate of return credited to CPF members was only 1.2% per annum. This was contrasted with an equivalent rate of 3.39% for EPF members in Malaysia. This shows just how poor CPF returns have been, when compared with other countries’ provident fund systems.
7. Now, the Minister has announced an improved rate of 3.5% for up to $20,000 in the Ordinary Account. Let’s put that into perspective.
8. Since last December, insurance company Aviva has advertised a product called BIG e. This insurance product targets CPF members, providing a guaranteed return of 3.5% per annum for CPF funds parked with it, subject to a minimum investment of $5000. Aviva fixes this rate every month in advance, but it has stayed at 3.5% since the product was introduced in December 2006. Funds invested with Aviva can be withdrawn at any time without penalty.
9. How is Aviva able to offer such a product and still make profits? Why can’t the CPF Board match Aviva’s rate for all CPF balances in the Ordinary Account? My layman’s perspective cannot comprehend this, and I hope that the Minister would explain.
10. More fundamentally, I remain unconvinced that the CPF Board cannot obtain better returns on members’ balances. The Minister took pains to explain why the full investment route, as he called it, was unsuitable, and I thank him for the explanation.
11. This presumably means that the previously proposed low-cost pension fund will now be shelved. The key obstacle seems to be the need to ensure that CPF returns are risk-free.
12. Sir, in the first place, I think some Singaporeans would ague that the CPF is not risk-free, but is instead subject to different risks, specifically, the risk of government intervention. It can take the form of deferred withdrawals, higher Minimum Sum requirements, and now even a compulsory annuity, but the net effect is the same: interference with members’ entitlement to their funds.
13. I will put that aside for now. I would like to discuss the Minister’s reasoning, about the impracticability of delivering higher returns while shielding members from volatility. The Minister said that this would have meant subsidising losses using other members’ or taxpayers’ money.
14. But CPF savings are meant for the very long term. Let’s just take the SMRA funds for example. The Minister himself acknowledged that the ideal peg for the SMRA rate would actually have been a 30-year Singapore Government Security, which the Minister estimated would return 4% per annum if it did exist.
15. Over a 30-year time frame, market volatility would even itself out. The Minister referred to recent financial market turmoil as a timely reminder of the risks of the full investment route. But Sir, even with the recent turmoil, even with the ST Index briefly dipping below 3000 points a few weeks back, the STI still closed at 3,476 points yesterday, up 14.4% year-to-date.
16. Yes, short-term fluctuations may be difficult to stomach. But over the very long run, they will smoothen out. Surely, over a 30-year time frame, the average returns would exceed 4% per annum. Surely, even if the short-term risk is borne by the Government, it will be able to even out that risk over the long term.
17. The Government of Singapore Investment Corporation provides a great example. Last July, at the GIC’s 25th anniversary dinner, the Minister Mentor disclosed that the GIC had earned returns of 8.2% in Singapore dollar terms over its 25 years of existence. I understand that the GIC has indicated that over the next 25 years, a more realistic expectation would be 6 to 8% per year.
18. The GIC manages our reserves. I would expect the Government to be no less careful with our hard-earned reserves, than the CPF Board is with members’ balances. I am confident that the Government will agree, that the chances of the GIC earning less than the CPF rates are very, very low at the very most. Shouldn’t we structure CPF policy around the likelihood of long-term gains, and not the improbability of sub-par gains, especially bearing in mind the substantial opportunity costs to CPF members of the latter option? If the Government is able and willing to adopt a long-term view with our reserves, then why cannot the CPF Board take a similar approach with at least the SMRA balances, or even a portion of Ordinary Account balances?
19. Indeed, it seems that the GIC may already be managing CPF balances. It is just that CPF members are not benefiting from it. The CPF Board invests the bulk of CPF balances in Government bonds. These bonds pay a rate equal to the rate that the CPF Board has to pay members. But what does the Government do with the funds it raises?
20. According to a 2002 paper published by the Asian Development Bank Institute, the Government invests those funds with the GIC. If the returns are as high as 8.2% per year in Singapore dollar terms between 1981 and 2006, or 6 to 8% for the next 25 years, then why are CPF members being deprived of the benefit of the GIC’s fund management expertise?
21. What does all this mean for members? The 2002 paper said, and I quote:
“This arrangement has not provided members with high enough real returns to capture the power of compound interest. To the extent the Government earns a higher rate of return on the CPF funds than what it pays to members; there is an implicit tax on CPF wealth. This tax is likely to be fairly large and regressive, as low-income members are likely to have most of their non-housing wealth in the form of CPF balances.”
22. That paper went on to state:
“To the extent that the [GIC’s] return on investments has been higher than the return actually credited to CPF members, a recurrent, highly regressive, large implicit tax on the CPF wealth has been borne by CPF members.”
23. Sir, how much has this contributed to the situation in which we now find ourselves, with an aging population with insufficient retirement savings? And if we do not rectify this, are we not perpetuating this undesirable state of affairs?
24. Going back to the proposed low-cost pension fund, its purpose was to give all Singaporeans, especially lower-income Singaporeans, better returns on their CPF balances. Such investment opportunities are typically unavailable to lower-income Singaporeans.
25. Even as Fullerton Fund Management, a Temasek Holdings unit, seeks to manage funds from institutional investors and high-net worth individuals, the Government declines to set up a low-cost fund for lower-income Singaporeans. That seems inequitable to me. Worse, it condemns Singaporeans to an unjustifiably low rate of return, one that contributes greatly to Singaporeans needing to continue working longer.
Nature of members’ rights over CPF funds
26. Sir, the Minister has also announced that a committee will be formed to study the proposed compulsory annuity scheme. I trust that this House will be given the chance to debate the committee’s findings at the appropriate time.
27. But for present purposes, it is worth discussing what a compulsory annuity would mean for CPF members. It represents an unprecedented inroad into members’ ownership rights over their CPF funds. Prior to this, members have been restricted in what they can do with their funds, but they are not forced to spend on anything. Schemes like MediShield, ElderShield, the Dependent Protection Scheme and the Home Protection Scheme are all optional, although some are opt-out.
28. The compulsory annuity, even if limited to some but not all members, would be a very different animal. Members will be compelled to purchase an annuity, from which they may get nothing.
29. In insurance terms, it is risk pooling. But viewed in a different way, it is equivalent to the Government expropriating CPF balances to fund an annuity for the group of Singaporeans living beyond 85. From yet another perspective, it is tantamount to a tax for the same purpose.
30. All this represents a sea-change in the nature of CPF members’ rights over their CPF balances. It means that CPF members do not really own their CPF funds, because the Government is able and willing to impose policies to compel members to use their funds in a certain way, even against their strongly-expressed wishes.
31. This week, it is a compulsory annuity. But if we take that first step, will it prove to be a slippery slope of encroachment onto CPF members’ rights? What will it be next week, next year, next decade? An increase in the annuity amount? Some other compulsory scheme?
32. We really do need to have a thorough debate on what it means to be a CPF member. Do CPF funds belong to CPF members individually, and what rights do they have in determining how it is spent?
33. I hope that the Government, the committee to be set up, and my fellow Members will think about and debate this fundamental question. The potential consequences are much more far-reaching than simply insuring against longevity risk.
Adequacy of proposed changes
34. Sir, the final part of my speech touches on the adequacy of the proposed changes, in facing the challenges posed by an aging population.
35. CPF is a fully-funded, defined-contribution scheme. It is premised on members getting what they pay in. But what about those who do not pay much, or anything, in?
36. In 2005, two World Bank economists published a paper setting out the World Bank’s thinking on how countries should structure their pension systems. They recommended a five-pillar approach to retirement funding. One of their key recommendations was for the state to provide a mandatory basic pillar of minimal pension payments, to provide for the poor.
37. We do not have such a basic pillar in Singapore. But we do have the lifetime poor, those who are born poor, who will die poor, and in between make too little to contribute much, if anything, to CPF. We have the informal workers, who by definition do not contribute to CPF. We have full-time homemakers and other groups, all of whom pay little or nothing in, and so will have little or nothing to take out.
38. The proposed measures will do little for all of these groups. They fail to address the fundamental issue of Singaporeans without any meaningful level of CPF balances in the first place.
39. Some may argue that we have Public Assistance, which is available to those aged 60 years and above who have no means of support. But few people are on PA. Earlier this year, this House was told that less than 3000 households are on PA. And that figure includes all recipients of PA, not just those who are too old to work.
40. I am sure we have a lot more than 3000 elderly persons with little or no CPF or other retirement savings. Yet, they are not on PA, for whatever reason. Obviously, PA does not fulfill the function of the basic pillar recommended by the World Bank.
41. What do we do about them? We encourage them to work, and to work longer. What if they do not, or cannot? Does that mean that they do not deserve to be supported in their old age? I hope not. But the proposed changes do nothing to help them.
42. So from this perspective, the proposed changes are inadequate. Indeed, focusing our approach to an aging population so heavily, arguably even exclusively, on the CPF scheme will inevitably result in such a gap.
43. The proposed changes are inadequate from another perspective. The proposed compulsory annuity as described would result in a payout of $250 to $300 per month to those aged 85 as of 2042. Assuming 1.5% inflation every year, that amount in 2042 would be worth only $149 to $178 in today’s dollars.
44. The compulsory annuity is supposed to provide a subsistence payout in case people live longer than they thought they would. But is $149, or even $178, enough even for a subsistence existence?
45. Remember, the fundamental premise for the compulsory annuity is that people are myopic and unable to save enough to support themselves, so they need a lifeline if they happen to live past 85. So there must also necessarily be the assumption that those relying on the annuity would have no other sources of income. What would they then do?
46. Sir, the Minister did acknowledge these gaps in his statement. It is therefore a little bit of a pity that the Minister did not also announce help measures that would be made available to those who need assistance. Unless and until that is done, the proposed changes do not, in my view, provide a comprehensive or adequate response to the issue of an aging population.
47. Sir, I do agree with the Minister on the need for a strong and fully-funded CPF system, based on defined contributions and not defined benefits. That has to be the foundation. That is a given. Any other system would be difficult to sustain.
48. But at the same time, I think we need to do better. And we can. We are able to extract higher returns from CPF balances, thanks to the GIC’s expertise. So why are we not passing these higher returns to CPF members?
49. Until we do so, why are we considering implementing a compulsory annuity, which will fundamentally change the nature and dynamics of CPF members’ relationship with their CPF balances? Why are we so ready to encroach on their ownership rights over their CPF funds?
50. We explicitly acknowledge that problems will remain, despite the proposed changes. So why were there no policies announced on how to address the residual problems? This is a significant omission.
51. We all agree that the aging population is an important and pressing issue facing Singapore. I only differ from the Minister on what can be done.
52. The Government is already doing a lot: the re-employment legislation to kick in by 2012; the higher Workfare payments for those aged 55 and above; the proposal for the HDB to “buy-back” the tail-end of certain HDB leases. These are all excellent initiatives. I hope, for the sake of the future of all Singaporeans, that the Government will do more. Because it can, and it must.
 Social Security Policy in an Era of Globalization and Competition: Challenges for Southeast Asia, Mukul G. Asher and Amarendu Nandy, 2006
 The Role of the Global Economy in Financing Old Age: The Case of Singapore, Mukul G. Asher, 2002
 Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform, Robert Holzman and Richard Hinz, 2005