Retirement and Housing

Lucky Tan usually has some rather wild analysis and last week's post is no exception. The causation implied by the post is clear: (i) Govt forces Singaporeans to save in CPF; (ii) Govt allows Singaporeans to buy property using CPF; (iii) Singaporeans have no choice but to work longer since they do not have enough funds in their CPF accounts to support retirement.

This is obviously a seductive theory: simple enough to understand and conspiratorial enough to appeal. Not enough for retirement, blame government policies (again)! Despite his flawed reasoning, Lucky was essentially right on the point - many Singaporeans sit on a highly valued housing property but otherwise do not have enough cash for retirement. Though there are ways to monetise the asset to fund retirement consumption, the problem is in fact more than just that.

Before I continue, I will digress a little here. My uncle is a taxi driver who has worked hard all his life, lived frugally, and saved assiduously for his retirement. Looking at his bank account, you would hardly have guessed that he is a humble taxi driver. Already nearing retirement age, he nonetheless continues to work hard to the extent of taking the physically taxing night shift. I once asked him why didn't he retire since he had already built up a substantial retirement account. In the end, the answer was as simple as it was illuminating, "Don't know when I will die."

The Retirement Conundrum

In one short sentence, he has summed up the retirement conundrum. Two days ago, this story was reported in the British media. A man was suing the NHS because the hospital had informed him that he was dying. Like a rational economic agent, he then went on a spending spree and consumed all his savings, only to be told later that the original diagnosis was a mistake! This comi-tragic story again illustrates the same simple point.

As my uncle wisely points out, no one has perfect foresight when it comes to preparing for death. Unless the budget constraint is incredibly lax, this obviously makes any financial decisions concerning retirement tricky. It is not a matter of how much asset or cash one has, but how much is enough against an unknown future?

In a state pension system, the individual is effectively insured against his own longevity. Once retired, a person simply collects state pension until he drops. The current working generation pays the taxes to support the retirees. The question becomes one of actuarial sustainability of this form of inter-generational transfer but it is no longer the problem of individual retirees.

Lack of Insurance

The nature of CPF - individual accounts - transfers the risk to individual retirees. If one knows the time of death, perfect foresight will make financial planning so simple: reach retirement age, cash in on the property asset, and spread consumption until the last day. It is therefore incorrect to blame the lack of retirement funds on CPF liberalisation for property purchases. Of course, those who entered the market during the bubble years would have suffered losses but there would always winners and losers in investment. Barring episodes of price correction, property prices have mostly risen over the past few decades effectively boosting retirement returns. Not allowing CPF for property purchases would in fact deny individuals an avenue for investment.

However, as many academics have rightly pointed out, the major shortcoming of the CPF system is the lack of insurance for the individual against his longevity. There is always the risk that the individual outlives his retirement cash, and this may to a large extent explain why many retirees like my uncle take the "kiasu" approach and continue to do some work to supplement post-retirement income. Not because they are hard up for cash per se, but because they need to guard against an unexpectedly long life. It is a little ironic to think that medical science has increased the life expectancy of people only for them to run the risk of old age destitution.

While the risk is mitigated by working past retirement age, it will never really go away. Retirement can be postponed for some years, but sooner or later work has to stop for one reason or another. The current working assumption is that the family will effectively become the insurance when the retirement cash runs out. By and large, I imagine this assumption to hold for most retirees. But with families getting smaller and more individuals remaining single, it will be more difficult to assume this in the future. To solve the retirement conundrum, it is this part of the CPF policy that needs re-thinking rather than the housing bit.