CPF annuities

When policy makers plan for certain policies, they may have well intentions in mind. However, as these policies may have a great impact on the lives of the general population, it is apt for us to critically evaluate them and appraise their effectiveness.

The CPF savings which were due to be withdrawn at the age of 65, is expected to be paid out over 20 years, till the age of 85. In expectation of longer life expectancy of the citizens, policy makers announced that at a later date, it would be compulsory for CPF members to purchase annuities with their CPF savings when they 'officially' retire at the age of approximately 65. This is to "ensure that members have a source of income when their CPF savings run out" and the premium for it would be a "reasonable amount". But of course, there are many other factors to consider when contemplating such a plan. This includes population 'life expectancy distribution', i.e. the percentages of the population that would live till each age bracket.

In an initial newspaper report estimate, it might cost approximately 8000 to 9000 dollars in premium at age 65, to obtain a monthly payout of about 200 to 300 dollars from age 85, for life. However, we should not only look at the nominal values alone. Assuming in year 2007, a CPF member is 65 years old, and the $250 (approximate) payout he would receive at year 2027 would have a lower present value (PV) as compared to $250 of year 2007.

Year	Year number since payout starts	Present Value (PV) of annuity payout ($)
2027	1	138.42
2028	2	134.39
2029	3	130.47
2030	4	126.67
2031	5	122.98
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2037	10	106.09
2038	11	103.00
2039	12	100.00
2040	13	097.09
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Assuming an inflation rate of 3% per annum. As an example, the present value of payout at year 2027 is calculated as follows:
PV = $250 / (1.03)^20 = $138.42

[By my calculations, it takes approximately 5 years 6 months of payout to ‘breakeven’, taking into consideration the effect of inflation of 3%]

In this table, my purpose is to illustrate that due to the effect of inflation, the present value of payouts in the future is set to be declining throughout the years. This is definitely not encouraging as this leads to a decreasing purchasing power of the payout. In addition, to be realistic, not every potential annuity holder may live long enough to 'breakeven' on their annuity premium.

While this plan has good intentions in mind, there are its limitations. It is glad that the policy makers are currently working hard to review the fine details of the plan and continually fine-tuning it.