2 - The Central Provident Fund and Financing Retirement Needs of Elderly Singaporeans

Summary

INTRODUCTION

Many Singaporeans depend exclusively on a fully funded mandatory defined contribution (DC) social security system. The system, which is based on individual accounts, is administered and managed by the Central Provident Fund (CPF) Board, a statutory board under the Ministry of Manpower. The advantage of a DC system is that it links benefits closely to contributions, hence minimizing the disincentive effects of evasion and early retirement. Not only does this explicit link make the social security system less sensitive to demographic changes, it also avoids the problems of sustainability and the political costs of unrealistic benefit promises. Besides, it ensures individual equity and avoids intergenerational inequity. While there are fiscal advantages, savings available for post-retirement consumption expenses depend on the total accumulated amount and its returns. Moreover, the absence of mandatory annuitization exposes the individual elderly to the risk of outliving resources due to longevity. This risk is exacerbated as savings are allowed to be withdrawn before retirement for housing finance and other investments.

To assess the adequacy of retirement savings, it is important to investigate the accumulation and de-cumulation mechanism of these mandatory savings under the Central Provident Fund System. In the next section, the main features of the CPF system are critically reviewed. Section 3 examines the adequacy of the accumulation of the mandatory savings to finance the retirement needs of the elderly. Instead of emphasizing the mechanism of accumulation, the expenditure side of the lifetime budget of the elderly is modeled and the retirement needs in terms of the present value of retirement consumption (PVRC) is estimated. The estimation is obtained by simulations through three major components: calibration of subsistence and medical expenses of the elderly; forecast of cohort survival probability by age and by sex; and generation of yield curves to discount future cash flows. The simulation study indicates that the existing CPF-decreed minimum sum is inadequate to meet the future consumption needs of the female elderly. The inadequacy becomes more severe at higher medical expense growth rates.