Some back-of-the-envelope CPF Life calculations

February 20, 2008 by admin
Filed under: CPF, Current Affairs, Financial Matters 

I have made some back-of-the-envelope CPF Life calculations.

This example is for a male participant who has $67,000 cash in his CPF Minimum Sum (assuming a total Minimum Sum of $134,000, of which half is property pledge, and half is cash savings).

These are my assumptions:

(1) The government makes a consistent rate of return of 5% on ALL of its funds under management. That is, the government is able to invest both the Retirement Account (RA) and Refundable Premium (RP) at an ROI of 5%. The return on the RP is NOT accrued to the CPF member’s account but instead held in government coffers. Only the return on the RA is accrued to the CPF member’s account and distributed to beneficiaries in the event of early demise, in which case, any investment return earned on the RP fund is kept by the government.

(2) Monthly income of $610 begins at age 65.

(3) The member chooses an LI payout age of 80.

The following table shows the balance amount in the member’s RA and RP account at each age from 55 to 90, the amount that the beneficiaries would get in the event of demise, as well as the amount of funds that the government holds in its coffers, assuming the government starts off by holding all the RP fund as well as any interest earned on the RP fund subsequently. I am also assuming that after the age of 80, the government starts paying off the member using the pooled RP fund while continuing to invest it at an ROI of 5%.

The member gets $7,320 per year, based on a monthly income of $610. As can be seen from the table, the RA fund has insufficient balance to pay the member by age 80. After age 80, there is no more RA fund, just one account from which the monthly income is drawn.

By the age of 80, the government is estimated to have as much as $54,452.59 in its coffers, based on an initial RP of $16,080.00. That is a HUGE profit for the government! Clearly if the CPF member passes away near the age of 80, the government stands to earn a LOT OF MONEY from the scheme! This is because the interest earned on RP fund is NOT given to the beneficiary but kept in the common pool upon the member’s death.

As can also be seen from the table, the amount of money that left outstanding in the member’s account rapidly diminishes after 80, so that by age 84, the beneficiary would get NOTHING in the event of demise of the member. However, the government coffers still have a lot of cash. There is enough cash in the government coffers to pay the member $610 per month. It is only after the age of 88 that the government starts losing money on the scheme (the negative balances are shown in red on the table).

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Comments

7 Comments on Some back-of-the-envelope CPF Life calculations

  1. ttg on Wed, 20th Feb 2008 9:49 pm

    2. Your assumption 1 on the rate of return of 5% versus the numbers presented gives rise to a question: What happens if the ROR is not 5% but lower ?

    I did a spreadsheet using your example, but using a ROR of 2.5% (aka CPF OA). The RA ran out of $ at age 75. What happens then ?

  2. admin on Wed, 20th Feb 2008 11:40 pm

    3. Dear ttg,

    The RA is guaranteed at a floor interest rate so monthly payouts are pre-calculated in advance. If it runs out, the government has to fund the monthly payout out of its own coffers, or more likely, it will cut entitlement benefits way before it happens. I guess it is the latter scenario that would scare you more …

    Will ask CPF Board about this and get back to you if they reply me.

    E-Jay

  3. Daily SG: 21 Feb 2008 « The Singapore Daily on Thu, 21st Feb 2008 11:57 am

    4. [...] The Singapore Daily on 21 February 2008 Singaporeans are fed, up with progress! – Sgpolitics.net: Some back-of-the-envelope CPF Life calculations – Singapore Property Frontiers: 10 Things You Need to Know About CPF [...]

  4. awakening7 on Fri, 22nd Feb 2008 11:06 am

    5. Hi,

    Now that the NLIC report has been published, I would like to know your (ie. http://www.sgpolitics.net) position on the NLIS. Given the various options now, will you support it, or will you oppose? Why?

  5. admin on Fri, 22nd Feb 2008 5:09 pm

    6. Dear awakening7,

    I will be coming out with a 2nd update which will contain my formal response to the scheme. Suffice it to say, I will continue to oppose the scheme, as long as the govt is not co-funding the scheme, and as long as payouts are not fixed but are left at the MERCY of the CPF Board which can arbitrarily decide to change them based on fluctuations in interest rates and mortality statistics. I will also oppose it as long as the govt is not doing more to help the poor. One off bonuses do NOT count, in my opinion.

    E-Jay

  6. LuckyTan on Mon, 25th Feb 2008 3:27 pm

    7. I can’t really draw any conclusions whether the govt actually makes alot of surplus from the scheme because your calculation has alot of assumptions built in. The govt the do the same thing it has been doing – borrow from the annuity pools at a low interest rate (say at 3-4%) for the GIC to invest. I’ve search hard but cannot find the statement whether the govt will redirect or keep any surplus from the scheme. They might enhance they payout if they only aim to break even once the scheme accumulate a surplus. If they borrow against it at a low nominal interest rate, the effect of the scheme is the same as locking up retirement funds for longer periods.

    I believe the root of the problem is the govt uses the CPF as a source of low cost investment funds by borrowing it at a low nominal interest rate. This is very unusual and one can argue that this is not done in the interest of retiring Singaporeans. One can find many other examples of retirement funds be it national or at the company level – they hire the best managers to manage the money to give retirees the best possible chance of a good retirement. Even our neighbors Malaysia invest the EPF and returns the gains to account holders – they guarantee 2.5% minimum interest but return an average of 6.5% for the past 20 years. Malaysia is not the only example in fact the majority of retirement fund around the world take the responsibility of generating higher than inflation returns.

    Locking up vast amounts of CPF minimum sums at low interest rate is the cause of inadequacy and this is not done in the interest of Singaporeans especially the poorer ones who depend on the CPF to retire. Now the PAP govt is trying to fix the fundamental problem of inadequacy by asking people to work longer, postponing the retirement age, and introducing annuities.

    One has to go back and ask the PAP govt why it is not doing what is best practice around the world when it comes to managing the hardearned retirement funds of ordinary citizens. Don’t they believe the money to should managed by the best and most competent managers instead of locking it up at low norminal interest rate.

  7. admin on Tue, 26th Feb 2008 7:52 pm

    8. Yes, that is one point I missed out, namely, the govt could well invest the pooled premiums at a much higher rate of return than the interest they are returning to CPF members. I suspect that in the end this pool will generate huge surpluses year in and year out.

    The roots of the CPF problem are:

    (1) persistently low CPF interest in recent years, which have significantly reduced members’ returns
    (2) use of CPF fund to buy property, whose prices have been going up by a lot

    These are structural problems that CPF Life scheme does not address.

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