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.