The scheme is basically an annuity that aims to provide Singaporeans a monthly income for life. The objective is good, but can it deliver?
A calculator on CPF website estimates that a female retiree with $40,000 minimum sum can expect a lifelong monthly income between $342 and $372 depending on the plan she chooses.
Assuming the paltry sum of $300 is enough for her monthly expenses, CPF Life will be able to meet the objective.
Enter Inflation. What seems to be enough will be insufficient in a matter of time due to inflation.
Say $300 is needed for daily expenses now. With an annual inflation rate of 2%, $359 will be needed for daily expenses in 10 years time. In 20 years time, that figure is $437.
So while the monthly income stays stagnant, cost of living increases exponentially. If you think that is bad, it gets worse.
The CPF website states, “…for the entire duration of the policy, payout amounts can change, depending on the actual CPF interest rates and underlying mortality experience. For instance, a 0.5 percentage point difference in interest rate assumption will lead to a change in payouts by about 10%.”
If the CPF interest rate rises with inflation, that is a relief. But the CPF interest rate for the Retirement Account is pegged to the yield of the 10-year Singapore Government Bond plus 1%, and the trend of the 10-year bond yield vs the trend of inflation is not encouraging.
While central banks in most other countries fight inflation by raising the interest rate, the policy of MAS is to allow the appreciation of the Sing Dollar. This has an effect on pushing the interest rate lower.For the 10-year period from 1998 to 2007, the 10-year bond yield fell from 4.48% to 2.68% while changes in CPI implies that inflation rose from –0.3% to 2.1%. See figure.
So while the motivation behind the CPF Life scheme is good, it does not address the problem of inflation.
