International Business & Economy Ex-GIC chief economist proposes "3 pillars" to address CPF reform and retirement...

Ex-GIC chief economist proposes “3 pillars” to address CPF reform and retirement adequacy

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The following is a Facebook post by former chief economist of GIC, Mr Yeoh Lam Keong.


With due respect to the very able DPM , and while the admission of the dysfunction of the CPFIS is a good and honest admission, I find his discussion of retirement adequacy and CPF ..somewhat well ..inadequate.

First, while the CPF is a transparent and safe forced defined contribution savings system with great integrity that has much potential, the fact is that in spite of engendering one of the highest personal savings rates in the world, it is sadly inadequate for retirement adequacy for both the lower and middle income groups.

Replacement rates (pension income as a ratio to last drawn pay) are significantly below 50%, whereas most developed countries with sustainable pension systems offer citizens retirement rates well above.

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The elderly poor in particular do not have pensions that guarantee basic living costs and thus a growing and sizeable number will live in absolute poverty as the baby boomers age. Many are poorly educated and have earned incomes while we were still a low and middle income country but must now retire with one of the highest first world living costs in the world .

We like we have laudably introduced a basic means tested non contributory pension (the Silver Support Scheme or SSS) to address this together with schemes like public assistance, such support had been inadequate and much too miserly. The average monthly payout of $200 for the SSS needs to rise to $500-600 pm to begin to address the basic needs of our poor elderly pioneers. The fiscal cost rises from 0.3% of GDP now to around 0.7% in 2050 when the number of elderly baby boomers peak.

This is an important “first pillar” element that use government finance or redistribution / insurance systems to look after the poor and less fortunate who end up at the bottom of the retirement adequacy pile.

While CPF pays a relatively high guaranteed interest rate, that is not the best or even an adequate return for a pension system. A more helpful and fairer rate world be the long term real rate of return (around 4%) earned by GIC. By comparison, the average CPF long term real interest rate has been around 1.5%. Every extra 1% paid to CPF members makes a big difference to replacement ratios at the end of 40 years of saving die to the powerful impact of compounding.

This is an important boost to the “second pillar” of investment options for compulsory defined contribution pension payments that CPF currently pays its member way too little on or at least, to be charitable, offers only a way too restricted low real return gauranteed product.

These 2 reforms alone strengthening our first 2 pension pillars are eminently affordable and would make a huge difference in long term pension adequate for both the poor and middle classes.

In addition to central state (GIC) management, well regulated and user friendly passive and good private sector pension products by experienced and reputable providers are also missing in action. This is what has been pointed out by DPM at long last. Most developed countries have been doing this for decades, e.g. the well established superannuation systems of Australia or NZ.

Allowing competition with GIC in the management of such CPF pension funds could further boost the options for reasonably safe long term options in our “second pillar” as well as develop our badly underdeveloped “third pillar” – voluntary pension savings for the population as a whole.

This would also potentially result in the greater development of the pension fund management ecosystem – locally domiciled pension fund managers, custodians, financial advisory and assessment firms- which has also been missing in action in our financial sector compared to countries with such alternatives.

So while its commendable that DPM has squarely brought the inadequacy of the CPFIS to address the all important issue of retirement adequacy, isn’t the scope of the debate and the focus of much needed retirement adequacy, pension and CPF reform still much too … inadequate?

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