Monday, January 03, 2005

Retirement risk 

In my previous post, I linked to a post by Brad DeLong that looked at rising risk to income in the US.

Today, I read a post by another Brad — Brad Setser — discussing social security and touching on the same income volatility brought up by his namesake. Much of the discussion has little relevance to Singapore. But I think the overview on social security in the US right at the end of his post provides a good comparison to the principle behind the Central Provident Fund in Singapore.

The fact that social security -- unlike many private pensions -- is fully portable limits the risk that lots of "job churn" and income volatility during an individual's working years will translate into limited retirement income. Social security's guaranteed income also protects against too much income volatility after an individual retires. Private pensions once were structured like social security -- they assured a guaranteed income. Not any more. You get just what you stuffed away in your defined contribution/ 401 (k). Some folks may do well (if you bought stocks in 1980s and sold them in 2000). Some folks not so well (Say if you bought the NASDAQ at 5000 ... ).

The fact that social security benefits are not correlated with the stock market -- or the bond/ housing markets for that matter -- is another one of the social security system's key virtues. Most retirees already have plenty of market risk from their private pensions. Social security both diversifies the sources of an individual's retirement income, and insures against a range of other risks: the risk an individual might make less than he or she hoped during their working life, the risk an individual may be disabled and unable to work, the risk an individual may invest their savings poorly (remember Enron employees with all their retirement assets in Enron stock?), the risk an individual might outlive their savings, etc.
The CPF, of course, gives Singaporeans only what they put into it through savings and investment. It is a system that encourages frugality, prudence and self-reliance on the part of the individual.

That Singaporeans also become risk-averse doesn’t seem surprising to me.


The rules surrounding CPF are in constant flux.

Specifically the parameters concerning withdrawal at retirement and the Minimum Sum requirements. Having these rules changed (unilaterally and with minimal, if any, consultation) does not encourage a feeling of security.

The rumours and murmuring are enough to cast doubt amongst us serfs about *IF* we would ever live long enough to 'retire' and recover our hard-earned CPF monies.

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