What you need to know about Singapore's annuity scheme

An annuity scheme is a type of mutual help programme: a group of people pay a lump sum into a common fund and are then entitled to receive a monthly payment for life; those who die early would receive less total payment than they put in, thus subsidizing those who live long. In other words, it is the reverse of life insurance, in which those who live long subsidize those who die early, just as in health insurance those who stay healthy subsidize those who incur greater medical expenses and need to claim more than they pay into the plan.

However, whereas insurance schemes have the more fortunate people subsidizing the less so, and their idea is readily understood by everyone, annuity is a less familiar idea. Singapore's national saving programme, Central Provident Fund (CPF), has for some years provided annuity schemes for people reaching certain age limits and so entitled withdraw their saved funds from CPF, but the take up rate was very low, even after the Government had introduced new rules making it compulsory for CPF members to join annuity schemes in the future, and undertaken considerable publicity efforts to familiarize everyone with the idea.

The change was made because since around 30 years ago the issue of an aging society began to attract notice. This has led to several initiatives: the raising of the retirement age and retention of older workers was one, and this remains only a partially implemented idea. The introduction of a legal mechanism to force children to take care of aging parents was actually tried, though this is probably part of Singapore legal history everyone would prefer to forget. The issue of deferring CPF money withdrawal caused perhaps the greatest controversy, and the eventual result was the Minimum Sum scheme under which some money had to remain with CPF and is available for withdrawal only over a specific age schedule, which has been gradually shifted upwards and the target period is now set for age 65 to 85.

This leaves the question of what happens after age 85, which is now being addressed with yet another proposed scheme. While the number of people who live that long is small, it is not negligible either (at present there are about 25000 Singaporeans in that group, women outnumbering men 2:1, but the number is likely to grow.) One could hardly produce yet another legal requirement to make their children financially responsible, since the children themselves would be close to retirement already. So the latest thought is to require every person to purchase an annuity at age 55 so that the CPF monthly payout would extend beyond 85.

I am sure the logic is perfectly sound to an accountant/actuary, but it is unfamiliar to ordinary CPF members - the immediate thought is "what if I die early? I would pay the premium for nothing". As much consideration, the Government approved alternative choices within the annuity scheme whereby one could choose a smaller monthly payout but have a residual sum remaining for passing to one's heirs.

All this complexity would have been unnecessary if there had been an old age pension scheme, whereby the Government pays a monthly stipend to every citizen above a certain age. This scheme is not just a feature of welfare oriented states like Sweden, but also in more capitalist places like Hong Kong, but the idea has been strenuously resisted by the Singapore government along with other welfare schemes like unemployment insurance, child endowment (milk money for every child born till adolescence) and others.

The philosophical basis of CPF, with each person being responsible for funding his own retirement, rather than depending on government handouts in one's old age, is self reliance. By providing mechanisms whereby some CPF money could be taken out to fund other investments of an account holder's own choice, such as property purchase or shares, personal enterprise of a sort and market forces are brought into play. Those who do it well stand to gain more, hence we have an element of meritocracy as well.

"Self reliance", like "justice", "development" and "democracy", is a good word, easily accepted by any audience, and good words are liable to be overused, with the speaker deliberately conveying his own particular meaning, and it is always necessary to look into it a bit further. Does self reliance eliminate the need for social welfare completely?

Some selves are easier to rely on than others. Some people are born smarter, calmer, healthier, richer, etc, than others, or are simply luckier. Just as social welfare has its limitations, so does self reliance. We might have a meritocratic system, but this does not mean every benefit one enjoys is due to merit and is well deserved.

Market forces might in the most cases operate towards the optimal deployment of resources, but there are also cases beyond its reach, e.g. in a totally free market for health services, a doctor would probably get paid a lot more for wart removal or breast enlargement for wealthy clients, than for saving the life of a poor person, but it would be hard to argue that the former has more merit than the latter. It is usually necessary for governments to step in and fill gaps market forces miss out. Similarly, pornography and prostitution are easy ways for a girl to make money because there is constant demand, but governments usually would place some restrictions on such self reliance and market forces.

Taken to extreme, you could say both annuity and life insurance are anti self reliance: in life insurance, the people who pay premium but do not die are subsidizing those that die early; in annuity, those who pay premium but die soon are subsidizing those that live long. They differ from old age pension only in the nature of the group: instead of being subsidized by other members in the same annuity/insurance scheme, old age pension requires subsidy by other taxpayers.

An old age pension scheme would obviously have budgetary constraints, but the cost of giving every citizen above age 85 a monthly payment of, say, $200 would be well within the treasury's capabilities. Whereas one could argue that certain welfare provisions might encourage undesirable patterns of behavior, e.g., unemployment benefit might reduce motivation to work; child endowment might encourage illegitimate births; such argument hardly applies to old age since people do not deliberately get old. Theoretically people might save less knowing that that money from the government will become available at a certain age, in Singapore most people save by paying into their CPF then using withdrawals to pay for housing; in other words, saving is all but automatic for them.

Once again, some out of box thinking is needed on the part of policy makers to consider alternative possibilities.