CPF Life- Retirement in Singapore- How Risky is it?

I was reading an article on Financial Times and it was stating that pension payments are falling as bond yields are falling. This is simply because bonds no longer provides a simple matching for the pensions liabilities as bond yields begin to fall to below zero.

In Singapore as bond yields begin to fall, it dawned on me how then does the Singapore government guarantees the pension payment to us -using our CPF- which effectively our pension or retirement scheme. They would not be able to use our CPF contributions to purchase bonds upon retirement to match our retirement needs as yields is now close to zero. [ just to be sure, 10 year SGS bond yields is 1.8% as of writing ( 17/11/2019]  This means that upon retirement, the government would not be able to purchase a government bond and pay you the interest payment as your monthly payout while protecting the principal. This means that the Singapore government would have to take on additional risk to pay you your monthly payouts on your CPF retirement scheme. My question is that how then does the Singapore government is able to do that for you without jeopardizing our retirement money? It is my belief that the Singapore is taking too much risk in their portfolio to guarantee their monthly payouts for you.

In this article, I will define what is retirement for you and how much money is required for you to retire. Secondly I will explain how does the government grow your retirement for you and pay you your retirement payouts and lastly propose what the government can do to protect their money without risking your retirement money.

What is Retirement?

What does retirement means to you? It can be relaxing on a beach day in and day out without worrying about money running out. Or it can mean covering just the basic necessities without worrying like food, clothing or shelter- or just to survive. I would define retirement as having a decent standard of living while living your post-working years out. That would mean the basics as well as some measure of frills such as a short trip overseas twice a year.

In Singapore, a recent article in Strait Times state that at $1,379 per month would suffice in Singapore to fulfill the definition above.  And that is a constant amount without taking consideration of inflation every year.

If you have the full retirement amount sum (FRS) or $176,000 if you are turning 55 in 2019, you get payouts of about $ 1350 to $1450 per month on the standard plan.

How does the government guarantee the retirement amount every year

You have been accumulating your CPF contribution since the first day that you are working. When you reach to age 55 or 65, you magically want to get some money out or suddenly you have monthly payouts when CPF asked you to do so. How then can the government guarantee that?

Based on numbers above, if you choose the standard plan, your yearly payout is ($1400 x 12= $16800) on a lump sum payment of $ 176,000 which is a payout of 9.5% payout on an average life expectancy of 85 years or a 20 year payout life. The total sum comes up $336,000 or 1.9 times principal sum. How then does government guarantee you that when SGS bond yields is 1.8%. Even when compounded- the returns is only 42% after a 20 year period!! This means that CPF cannot invest your principal upon reaching 65 in Singapore government bond to guarantee you the money.

If they were to pursue this strategy, you would have to make up the shortfall themselves.

When you contribute to your CPF, they would have to reinvest the money while you were working so that they can pay you when you stop working. But you have to bear in mind that you would have to pay an interest of up to 5% on your CPF balances while also guaranteeing your retirement.

The government would have to give your money to various sovereign wealth funds that we have and also their own government income to pay you these amounts.

Recently the government have announced the Net Investment Returns Framework to ensure that the government can fund themselves. What this means is that the government is spending your future reserves to fund themselves and on their nation. And this future reserves is invested in equities, risky assets which sometimes returns are not guranteed. And this includes your CPF contribution.

They invest in private equity, risky debt, real estate and other risky assets in order to ensure that they have funds to pay you and other government expenses.

This article is not about how to run a sovereign wealth funds or raising taxes to fund our expenses so I will not go there.

But suffice to say that we have to savvy and sophisticated enough in the financial markets to ensure that the song continues to be played in Singapore. Now do you realize that our CPF funds are actually built on a house of cards.

How then can we protect ourselves?

The sovereign wealth funds have been effective in running our money on our behalf. Generating out sized returns over the years to ensure that we do not need to raise excessive taxes to fund ourselves.

I would suggest that the government stop subsidizing our retirement and allow our populace to plan retirements for themselves. Right now, based on records, the government is ensuring our retirements so long as we keep working during our working lives. I would suggest, half the amount that the government provide for retirement and allow the population to have better control over their retirements.

There would be people who fall through the cracks, these are people who need the subsidies and not everyone.

In this way, we can potentially reduced our tax burden and building for the future rather than subsidizing the middle class.

Similarly, in this way, we can build up our private financial markets, allowing for our population to participate in more entrepreneurial ventures.

Admittedly, this would be a hard sell to the electorate who have been so used to subsidized retirement. But this is a bitter pill, I feel worth taking. This would move the needle in the trajectory of our nation rather than little incremental changes.

In sum, I have highlighted how much risk the Singapore government have taken in our investment portfolio to ensure the population's financial security. And I would hope that the government would release the tight leash that they have over the electorate's purse strings.

What is a good country

Today, I had a strange thought about running a country. It is not about me running a country per se but rather my thoughts about how a country or even any organization should be run.

Very often, we start from what the objectives of an organization should be run. But many a times, we run the risk of being narrow-minded of defining what a "good" country or organization is.

There are myriad number of divergent interests within a country that defining what is a "good" country is highly contentious. Different people have different opinions on what a "good" country is and sometimes, some appears more logical than other's and other's more idealistic but many if articulated correctly each have their valid points. For example, in pursuit of democratic principles, some may have run afoul with more authoritative regimes. While on one end, one may complained of oppression, meanwhile on the other end, the state will state that they were being treasonous. Havng said that, this is not a piece on which type of regime is better but rather trying to explain that both sides have their story.

At the risk of trying to sounding in support of oppressive regime, sometimes, democracy is not the be all and end all of all political aspirations. Democracies is simply a means of which accomplish several political ends rather than an political end itself. If democracies does certain things, I am pretty sure that even states and governments will give the people some power.

Then very often, we will quote North Korea as an example of an oppressive regime which makes servants out of their own people. Now even North Korea is opening up given the recent developments. Perhaps we know too little of the hermit country to comment that the people are not happy, or wants what everyone else is having. China with it's powerful Internet control, does not have widespread demonstrations for democratic reforms given its exposure to the outside world. I wonder what makes you think that every North Korean feel that they were "oppressed"

And of course authoritarian regimes is never welcomed but what we view as authoritarian might be viewed as protecting national values or being patriotic to other's. Which means that there is section of people whom still views such actions benignly or even positively.

I am not in support of oppressive or authoritarian regimes that much is clear but sometimes, some "democratic" supporters feel every act that restrict them by the state as "oppressive" and they feel that they were victimized even if they know they were doing something illegal. Some people even feel that the laws were made to control them and not to regulate everyone but just applied to them

There are many ways by which a country is run and that is what a democracy is made of. If a country is run by a group of "enlightened" people, wouldnt that run afoul with democratic principles.

Sometimes, supposed authoritarian regimes practiced democratic principles, they talk to various interest groups of people, forms committees and action groups with divergent interests and take action. Just that they don't vote formally!!

True governance does not come from a system but rather the people, no system is better than a united group of enlightened, intelligent and motivated people.

People find a way, not the system.

System is malleable but the man stands upright.