Some Random Thoughts on CPF Reform (1)

Some Random Thoughts on CPF Reform (1)

There are some ways to improve upon the current CPF system in order for the system to serve the needs of average Singaporeans better.

(1) Define Secure Retirement Savings Goal (SRSG) and use it—beside a fixed retirement age-- as an alternative basis for CPF draw-down age.

(a) Define the Secure Retirement Savings Goal (SRSG) in terms of the CPI-adjusted life-time income that may be generated a balance in CPF saving, based on a person's age.

(b) For example, a male aged 65 may be able to secure an annuity income of 6% of his CPF balance, while a male aged 40 may only be able to secure 4%. The reason why the older man is able to secure a higher income is, he is more likely to die earlier, hence receive less years of annuity income from the annuity provider.

(c) For example, the SRSG for year 2010 may be S$6,000/year. Adjusted for inflation, this becomes $6,300 in 2011 if the inflation rate is 5%. The SRSG is then readjusted on a yearly basis based on the recent year's inflationary rate.

(d) Using the above examples, for a 65-year-old to “make it” to the SRSG, he'd need an amount of $100,000 in his CPF balance. With this amount, he receives 7%, which is the SGSR of $60,000/year, inflation-adjusted. Similarly, a 40-year-old with a balance of $150,000 today should also be able to “make it” to SGSR, because, at 4%, that amount would also generate $6,000/year for him, inflation-adjusted, for life.

(e) The present CPF system mandates a fixed retirement age. However, while many would like to retire at 65, others may want to retire much younger. Some of these people need to enjoy their fruits younger because they have poor health, and may not expect to live far beyond age 65. We should give such people an option to do so providing they are able to prove that they have become equally financially secure at a younger age. A system that dictates that everyone can only receive their CPF income from ages 55-65 is too rigid.

(2) Allow for Earlier Withdrawal for those who've 'made it' younger and encourage Singaporeans to save more when they are young and healthy

(a) Having explained the SGSR concept above, I want to move on to suggest that those who have made it to the SGSR be allowed to make CPF withdrawal from as young as age 40.

(b) This encourages younger Singaporeans who are still healthy and productive to cultivate the habit of regular saving. If we ask a person aged 20-plus to save more today, he may not be as motivated because the withdrawal age is too far away for him. But if we were to allow him to make earlier withdrawal if he “makes it” earlier, he may well be motivated to save more.

(c) Encouraging our younger citizens to save more when they are young is important. As we know, we may not enjoy good health till age 65. The economy and the job market may, likewise, not be rosy till then. More importantly, if we cultivate the habit of saving younger, we become more psychologically, culturally, and economically as a nation, resilient to financial crises which a small island-nation with little natural resources like ours are vulnerable to.

(d) I must emphasise that giving the option to make withdrawal younger doesn't equate to forcing those who have “made it” to make withdrawals or to stop working entirely. These people are, of course, given the option to not make withdrawal and to continue to work and make additional CPF contributions. Many millionaires are still working despite that they can afford to retire.

(3) Allow Medisave & Medishield to be used for Approved overseas medical treatments

(a) To make medical services more affordable for the poorer Singaporeans, and especially those with limited Medisave balances and no health insurance, we should liberalise on the use of CPF Medisave fund and Medishield insurance for treatments in MOH-accredited overseas facilities. These facilities should include hospitals, community hospitals, dialysis centres, clinics, nursing homes and mental health institutions, and the overseas locations, Malaysia, Indonesia, Thailand, China and India.

(b) For example, just across the Causeway, dialysis can be done at a much lower cost. Similarly, nursing homes, hospitals, clinics, and probably other types of healthcare facilities in JB, Malaysia charge much less than those in Singapore. Many retirees do not mind travelling to JB to save a few dollars for their hair-cuts, groceries and foot massage. If they could use their Medisave and Medishield for their healthcare services, they could be able to save a significant % of their monthly expenses. This is especially so for those retirees who spend a significant % of their monthly expenses on medical treatments like dialysis, chronic diseases (such as diabetes, high cholesterol, high blood pressure and heart disease). As we know, Malaysia has effectively controlled its medical inflation by having 50 One-Ringgit public clinics nationwide, which charge only one ringgit (S$0.45) for each GP consultation inclusive of medications. This results in the private clinics there being under constant pressure to keep costs low in order to survive.

(c) Many drugs prescribed in Singapore are original versions which cost more to import. On the other hand, many generic versions of the same drugs are available at much lower costs in Malaysia, India and Thailand. For example, HIV drugs may cost more than S$1,500/month whereas they could be had for under S$400/month in Thailand or India, which produce their generic versions.

(d) Our Mandarin-speaking citizens may find it easier to seek treatment in China, while our Indian-speaking citizens in India and our Malay-speaking citizens in Malaysia. By accrediting hospitals and other facilities in each of these foreign countries, we provide more choices for our citizens.

(e) This may also help our local hospitals alleviate their occasional crowding problem. Those patients requiring non-urgent treatments who have the time and willingness to to seek quality treatment overseas should be allowed to, and by allowing them to use Medisave and Medishield overseas we make it easier and more affordable for them to do so.

(4) Allow CPF to be used for more types of insurance schemes

(a) Beside Home Insurance, Dependent Protection Scheme, Eldershield and Medishield, CPF should also be used for purchasing (Occupational) Disability Income insurance and Unemployment Insurance (UI)

(b) The Eldershield insurance protects against “Severe Disability” which is defined in the disability to perform 3 out of 3 Activities of Daily Living (ADLs) such as washing, feeding, and toileting. On the other hand, Occupational Disability Insurance (ODI) protects against the disability to engage in one's occupation from which he earns an income. I think ODI is equally if not more important considering that a person's ability to earn an income and contribute to CPF depends usually on whether he is able to continue to work. He may not lose the ability to wash and feed himself, but still be unable to earn an income if he suffers a lesser degree of disability.

(c) An UI scheme should be set up to protect working citizens from unemployment after 3 months active search for jobs. This is important considering that many Singaporeans are surviving from pay checque to pay cheque, so may not have sufficient savings to make ends meet if they are without a job for more than 3 months. A UI payout of a few hundred dollars a month for, perhaps, 3-6 months, could mean a lot for them if they can't find a job.

(5) Create a new Account called Basics Account under the umbrella of CPF Accounts

(a) Beside Ordinary, Special, Medisave, and Retirement Accounts, we could have an additional Basics Account. This enjoys the same legal protection from creditors and is meant to pay for one's basic necessities like food, utilities, public transport, school fees and primary healthcare.

(b) It could be made voluntary. Singaporeans could be allowed to make voluntary contributions to their BA. The balance is legally protected just like other CPF Accounts and earns an interest. The balance could then be used for the member's and his dependents' (including Spouse, Children, Parents, Grandparents and occupationally disabled siblings):

i. Staples (bought at approved outlets such as Fairprice stores).

ii. Milk powder and diapers for those below 3

iii. Primary care (essential check-ups and consultations and medications in polyclinics)

iv. Public transport fare

v. School and exam fees in public schools and tertiary institutions and approved essential books

vi. Meals bought in school canteens in public schools and tertiary institutions and approved essential books (subject to a daily limit)

vii. town council fees, property tax for HDB flats, water and electricity (subject to limits for each category and each year)

(c) The above limits could be programmed into an electronic payment card such as iNets or Ez-link. There's a cap for each year. This is to prevent abuse.

(d) When a person is holding a stable job which pays a regular income, he may choose not to utilise this account so that he may earn more interests. However, if he runs into financial trouble, this account is protected from his creditors. He may use it to pay for his and his children's basic needs while he becomes bankrupt or is finding a job.

(e) Contributions to one's own, spouse's, parents', grandparents', children's and disabled siblings' BA should be tax-deductible, up to a certain yearly limit. This encourages Singaporeans to make make contribution to their non-working dependents' BA. Once an amount is paid into one's child's BA, for example, it cannot be withdrawn for other purposes. It means that a gambler who had been a good father contributing to his son's BA years back cannot now make withdrawals from his child's BA to gamble. So, his child can still afford to pay his school fees, bus-fare, textbooks and canteen meals by making BA withdrawals for these approved purposes, even if the gambler father is now unable to. Similarly, the child's mother can still afford to buy food for the family, pay for her medical consultations in the polyclinic and bus-fare for fetching her child from school, with BA withdrawals. The gamble, in this example, may be troubled by his own folly, but his family members can pay for their basic needs as long as the latter have balances in their BA. Even if the gambler's creditors were to sue him in court, whatever contributions he had paid into his dependants' BA for their basic needs would be legally protected.

(6) Allow 100% of CPF Special Account to be invested, but keep the threshold for investable CPF-Ordinary Account fund

(a) The rational is simple. Special Account cannot be withdrawn early for housing, education, etc. purposes like Ordinary Account could, so the time horizon for SA is much longer. This means that it is generally more suitable to invest it in higher-risk investments such as unit trusts which have a significant portion allocated to stocks. So, locking up $40,000 in a low-risk, interest-bearing CPF SA may not allow this amount to grow as quickly as it could if invested in unit trusts or ETF.

(b) On the other hand, the first $20,000 in OA should remain uninvestable because balances in OA may have shorter time horizon for investment.

(7) Allow younger CPF members to opt in to CPF Life

(a) As explained above, those who have proven that they have made it to the SRSG, and also that they have sufficient OA to pay their outstanding HDB mortgage (if any) and the Minimum Medisave (minimum Medisave should be adjusted according to age. A younger person should have a higher minimum because he is expected to live longer and need more savings for healthcare and insurance premium), should be allowed to withdraw from their CPF, in the form of purchasing a CPF Life annuity and receiving the annuity income monthly.

(8) Create one more option under CPF Life's range of annuities: CPI-linked annuity

(a) In order to do this, the government should develop the bond market in Singapore by issuing inflation-protected bonds (just like TIPS in the USA).

(b) Next, the CPF Life should have the 5th Option: Inflation-Adjusted Annuity.

(c) Those who opt for Inflation-adjusted annuity instead of fixed-amount annuity income receive a lower amount of income initially. But the amount is adjusted yearly based on the inflationary rate.

(9) Drastically increase the Absolute Income Base (AIB) for CPF and SRS

(a) This allows Singaporeans to save more in their CPF and SRS when they are still young and healthy. The current cap for CPF is based on only the first $4,500/month of one's salary. I think the cap should be increased to at least $6,000, and preferably $8,000. This means the AIB should be increased by at least 30%.

(10) Universal Health Insurance: Legally require every Singaporean and PR to be insured under Medishield

(a) The Obama Administration had made a very difficult but necessary decision to provide every citizen health insurance. Without making it compulsory, many Singaporeans may lose their insurance and become uninsurable later. We must not repeat the mistake that the Americans made by making it optional for Singaporeans to have health insurance.

(b) Those who are not insured should be systematically enrolled into either the existing Medishield or another health insurance scheme. Those who have Medisave should use it to pay the premium while those without sufficient savings and can prove that they cannot afford the premium should have their premium paid for by the government. A special Fund should be allocated for this purpose.

(11) Medisave & Medishield for Primary Healthcare

(a) Allow use of Medisave for the following:

i. Essential and economically profitable health screenings. (with co-payment and deductible in cash)

ii. consultation and medication in polyclinics (with co-payment and deductible in cash)

iii. Approved vaccines (with co-payment and deductible in cash)

(b) Medishield should cover polyclinic treatments, with co-payment and deductible in cash.