Compulsory annuities give the rich spare change in twilight years?

Expecting the PAP to help the “poor”?

Come on, you are talking about a party that has a philosophical attitude that being poor is your fault and by extension don’t deserved help.

I don’t want to sound big headed but I have always thought the CPF as it was and still is being implemented would ultimately have the unintended consequences of benefiting or not have any impact on the well off. Under PAP this is probably not a bad thing, if not, an intended consequence.

Er Bart, how would increasing the premium of, in your words, the “rich” help when those with actuarial odds that are not favourable to benefit from a payout? I mean if Mr Poor is to die before the payout point, the fact that Mr Rich pays more ain’t going to benefit Mr Poor anyway.

How do you draw the line between the rich and the poor? What about the well off (i.e. neither rich nor poor)? Who is going to be responsible for drawing that line, the CPF, the annuity provider, social scientists? Can you imagine the administrative nightmare that would be?

For that matter if actuarial odds are the determinant of an individual’s potential ability to benefit from a draw out, then should it not be the case of discriminating by actuarial odds than someone’s wealth?

So the bigger question is whether the annuity in the form as it is proposed is indeed able to resolve the “ageing time bomb” question. Is it going to cause more problem than it solve? Is this proposed scheme likely to equitable, in particular, helpful to the poorer members of the society.

As I have eluded to in my earlier reply here, I have my doubt that the PAP administration care about helping the poor given its currently ideology. What I suspect is the PAP real motive is to avoid drawing from the state coffer to make up for any short fall, which could easily be covered given the reported, if it could be believe, surpluses or even purely from the economic growth cycle.

Thus all these debates about whether compulsory annuities is nothing more than a smoke screen for some wider PAP agenda that we are no privy to or can only guess from.

Bart, you are talking about a compulsory schema. If I was voluntarily buying my own insurgence, I can assess my annuity risk and then decide if it is worthwhile. With a compulsory scheme, I have no choice to opt out, then what is the point of my paying into a scheme that I have very low chance of benefiting. So basically, lower premium don’t help.

at82, You are precisely right. The annuity scheme is so inefficient and, in my opinion, it is one of those typical PAP one size-fits-all scheme that serve no one.

Like you said the rich will be able to manage on their own that the scheme is nothing more than an irritant, unless the premium is raised to an unbearable level. Whereas the well-off (neither rich nor poor) will find such a scheme to be an opportunity costs — i.e. money that they may be able to get better returns or use for something more worthwhile. As for the poor, it could be money that will be needed to possibly survive.

(a) If it was the intent was wealth distribution, then why don’t just say to the population: we are going to take the CPF of the rich and possible well off and just give it to the poor. Simply call it a tax or as the Brits call it — National Insurance. Quite clearly, the PAP can’t do that because after all this years of telling not to emulate the “bankrupt” western pension system, that would tantamount to admitting that the whole CPF scheme was a shamble.

(b) The so call rich that you find in Singapore are either not Singaporean or, if they were, would be terribly upset if Taxes were raised and leave the country. So mucking around the CPF avoids having to expand the tax base.

PS: I once did an empirical research in Singapore on the rich, some of my data were based on my British (Ang Mor) were sent to work in Singapore, and they told me that it many of the rich based on Singapore do not contribute much to CPF. For example, many rich are either self employed or owner of businesses or overseas tax exile, who make their money abroad, who do not contribute to CPF. If my research is correct, than raising premiums on annuity won’t expand the annuity pool anyway.

Bart,

Forgive me for saying this. When you make statements like:

You guys raised valid points, one policy or another, there are always tradeoffs. But the principle of risk-sharing is highly sound.

It sound kind of glib and the kind that brings the American phrase: dah!

It’s like saying, making sure that there is enough air for human to live is a sound principle.

Coming back to the issue of the annuity policy that is being proposed, and in my opinion already a done deal, the crux of the issue, in my opinion and others may disagree, is why go the annuity route? Is the annuity approach the only way out? Why aren’t other options put on the table?

Especially, when the bigger question of what is CPF for has not been clearly addressed. So details about premium rates are irrelevant at this point. Unlike many criticism of the CPF, my criticism of the CPF is not so much whether it is lack risk sharing or not. My criticism is that it has such a mismash role that it is hardly surprising that ended up in the state it is today. To me the annuity thing is another jumble mix into an already mismash pot.

As you can tell from my tone, I am no fan of the PAP but I am not against the notion of “intervening” or more accurately make policy changes. My peeve, is that the kind of policy changes seemed to lack carity.

On the issue of CPF, I repeat the question again, what is it for? A saving scheme? A pension scheme(1)? A wealth distribution macroeconomic instrument? A macroeconomic instrument for “national development” i.e. providing cheap source(2) of money to build infrastructure?

Only when this question is answered than can any rationale “economic” — i.e. appropriate policy instrument — argument be made. For example, if the CPF was a purely saving scheme, than it becomes clear that the role of the government ought to be to try to optimise on the return on investment or if not, may be not take on this role at all and leave it to the private sector (in the UK, you have this scheme call ISA, which basically, make saving worthwhile by not taxing). If it was a wealth distribution scheme, say intended to distribute from the rich to the poor (i.e. like those you find in Nordic countries) then make it so.

In the real world, any government will have to confront all these issues head on. But to me the problem with the way the PAP approach these is to rush through (i.e. which is often mistaken for being “efficient” government) policies and when unindended consequences occur rush through another, thus piling problems on top of the old one. The CPF being one and is now being to show signs of eruption.

(1) It is worth pointing out that there are two kinds of pension scheme operating in the UK (final salary scheme — in Barts’ phrase defined benefit) or annuity based penson scheme (in the UK these are essentially private pension scheme or in Barts’ phrase defined contribution). The most notable universal defined benefit schema in operation in the UK is the National Insurance scheme. In this case, the risk, to the government not individual, is being or rather should have been mitigated by transfer funding between younger and retiree generations. There are also non universal scheme operated by private companies but it is becoming rare. Private companies scheme is again based on future, loosely speaking, “profit” to meet current pension liabilities. Generally, an annuity based scheme is most suitable when dealt at an individual level because the payout terms can only optimally be assessed individually. If you try to impose it as a universal scheme, generally, speaking it would be a nightmare for the provider to assess risk — here I mean risk to the provider of the scheme not risk to the individual not getting his/her payout. So in such scenario, the provider would want to avoid paying out to the individual as much as possible.

Ok technically, CPF does not lead money to individual to buy flats. Rather it is HDB and, lately, private institutions. So it could be rightly argued that CPF is not a national development fund. But one could argue that it is indirectly a national development fund for if this money was not allowed for buying flats, it would not have been available for HDB. Especially when CPF don’t have to pay interest on money drawn to buy a flat, this means opportunity cost is passed from institution to the individual.

Bart,

On your point:

Let’s stick to the thread in this post, which is whether the CAS scheme benefits the rich more

My simple answer is: for people with net worth of above $10 mil, which I define as rich, MY OPINION is CAS scheme would benefit the rich however much you vary premiums. That is because: this category of people do not contribute much to CPF because their basic pay will not be high but they could be getting high non taxable income source (i.e. CPF is calculated on a percentage of basic pay not Net Worth).

On your point:

But here, let’s stick with the current post. We cannot possibly discuss all of Singapore’s problems in one single entry.

Note in my last post, I did not proposed solving all of Singapore’s problem. My last post is directly relevant here: if the rationale behind the CAS scheme was not addressed then all this argument about premium is largely moot. Until and unless some clarity is established on the role of CPF, you would not be able to even begin working out the “economic” optimal benefit of the CAS.

Let me summarise my point again.

(a) If the CAS was meant to be a old age pension scheme than fine, the premium should be reflected on the basis of actuarial risk (i.e. from an provider perspective risk that it may have to payout and from an individual perspective risk that it may not payout). So should policy makers err on the side of provider or individual subscriber? If it is on the basis of actuarial risk then you will get a situation where a Mr Rich and a Mr Poor paying the same premium if both are assessed as having the same actuarial risk.

(b) If the CAS was also meant to include an element of wealth redistribution — i.e. hence the need to vary premium by wealth regardless of actuarial risks — this seemed as, at82 and others pointed out, highly inefficient way of doing so.

Aaron et al,

For anyone wanting to have a go a formulating or creating investment funds, here is an relatively dummy’s guide. http://www.ssga.com/library/esps/Soverign_Wealth_Funds_Andre_Rozanov_4.27.07rev2CCRI1182371372.pdf

Even if you are not, it is a very good primer to learning about principles about (macroeconomic or “helicopter” vision) fund management. I think this will given insight into what CPF “should” have been and is meant by risk. Note: I am using “should” loosely here as it is important not to be carried away that there is indeed a right solution. What you can take away from that is the ability to understand what seemed to be missing when the CPF was devised.

For those who would like to learn about economic principles relating to real world situation, in other words, hear economists speak in normal English, best place to learn is the BBC. One good thing about the BBC is they have a policy of speak Normal English even for complex concepts. Unfortunately for Singapore listeners, it often relates to UK scenarios but the principles apply in many aspect to Singapore too. I’ll try to find the site and pass it on via this blog, if Aaron permits.