I saw this video posted at SGHardTruth where Minister Tan Chuan Jin points out that with the power of compounding on the CPF, the retirement of todays youths are in a healthy shape. You can take a look at the presentation here.
A summary of his presentation as an illustration is shown below:
Here is my take:
- I remained unconvinced that the planners know the situation on the ground other than planning by statistics. In his illustration he cites a person fresh from polytechnic at the age of 25. From what I have learnt from past experience and current, polytechnic students graduate at 19 years old and then serves 2 years in the army. Usually they take the time to study in a local university or a private distance overseas university program graduating at the age of 25. How is it that a poly grad will start work with 4 years of hiatus and not have upgraded?
- In all the narrative of the words retirement, CPF they have to litter with using the CPF to buy housing. If the purpose of a HDB flat is to have at least a dwelling over our heads, and we are spending the best part of our human capital period on repaying mortgage, and not building up wealth, isn’t this not heeding the advice of compounding? The problem with housing is that it is not cheap, most are not prudent in managing their take home pay, and thus other than CPF Special account, they don’t compound their money out of it.
- There are some assumptions provided, that there isn’t any salary increment for the poly grad, and that compounding can accumulate a retirement savings of $165k at the age of 65. That argument does not look very assuring, considering the minimum sum then would be $521,926 at 3% inflation growth over 40 years. Since majority of the CPF OA is going to repay mortgage, will the person build up to that amount? Either this wasn’t put down as an assumption, or that the minister’s guys make a boo boo using today’s figures 40 years from now.
This isn’t really convincing. To make the matter worst, Wilfred Ling, an IFA provides this tidbit in his assessment of the CPF Changes:
What did not change is that the solvency of CPF Life is not guaranteed by Government. I wrote to Straits Times to complain about this ridiculous feature of CPF Life and the Ministry of Manpower replied stating that CPF Life members bear all the bankruptcy risk by having their CPF Life payout reduced. To me this is terrible from financial planning stand point.
If the CPF life annuity is to provide a floor to take care of necessities to hedge longevity risk, having an annuity where the first payout is the ceiling and that there is a chance due to bankruptcy the payout will go down, this really is not a very assuring thing, and seems to me like a potentially deflationary annuity.