Scheme or Scam?

Annuities scheme begins to take shape

By Lee U-Wen, TODAY Posted: 22 August 2007 1157 hrs


Singapore: If you are a Singaporean aged 50 or younger, you will have a "small portion" of your Central Provident Fund (CPF) minimum sum set aside for compulsory annuities.

This contribution will be pooled with others and once you hit the age of 85 and your minimum sum is exhausted, the annuity payouts will begin - possibly a monthly sum of $250 to $300 - assuring you a financial lifeline until the day you die.

For the first time since Minister Lim Boon Heng hinted that the Government was looking at making annuities compulsory and Prime Minister Lee Hsien Loong confirmed it on 19th August, citizens have been given an idea of what shape the scheme will likely take.

The actual premium amount has yet to be decided. But Manpower Minister Ng Eng Hen gave the reassurance that a major portion of the minimum sum will still be meant for CPF members to withdraw when they reach the official draw-down age.

Also not fixed: How the money will be drawn out, whether as a lump sum or monthly premiums.

But the tentative plan is to pay out $250 to $300 a month from the time members hit 85 - when the 20-year payouts from the minimum sum cease - until the day they die, said Dr Ng. "I'm trying to protect you for very long life expectancy," he added.

But should one not live to 85, the premium would be used to support others in the pool still alive. You can have the money transferred to your family members instead, but at the price of a higher premium.

Observers say the Government now has to "sell" the scheme to Singaporeans.

"To my knowledge, no country has ever made it compulsory for such a large chunk of the population to contribute to a pool in this manner. Most of us are waiting to see how much the premium will be," said Mr Leong Sze Hian, president of the Society of Financial Service Professionals.

Minister-in-Charge of ageing issues Lim Boon Heng urged insurance companies to come up with "creative" annuity products.

"They could have variations of life annuities, they could pay the person's estate in case he passes on too quickly after buying a life annuity. If those kinds of products came onto the market, more people would accept the idea of buying an annuity," he said. Said a group manager from Great Eastern Life: "This compulsory scheme is a chance for insurance companies to 'wake up their ideas'. Annuities are big in the west, but have never taken off in Singapore. The returns on annuities are now averaging just 2.3 per cent... The take-up was poor. Companies should now take advantage of the upcoming demand for annuities and come up with good products with better returns, say, 5 per cent."

The Ministry of Manpower is still "consulting widely" on the fine print of the compulsory annuity scheme, such as whether it would be managed by the CPF Board or the private sector. - TODAY/ym

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THE BIG QUESTION: is this compulsory annuity scheme justified in any way?

I got the above chart from a research article from the National Institute of Aging. A brief description the NIA is as follows:

"The National Institute on Aging supports 13 research centers
on the demography and economics of aging, based at the
University of California at Berkeley, the University of Chicago,
Harvard University, the University of Michigan, the National
Bureau of Economic Research, the University of North
Carolina, the University of Pennsylvania, Pennsylvania State
University, Princeton University, RAND Corporation, Stanford
University, the University of Southern California/University of
California at Los Angeles, and the University of Wisconsin.
This research brief was produced by the Population Reference
Bureau with funding from the Behavioral and Social Research
(BSR) Program of the National Institute on Aging. The brief
was written by Amanda Sonnega, Ph.D., Associate Director for
External Relations,Michigan Retirement Research Center,
University of Michigan, and edited by staff at the National
Institute on Aging and the Population Reference Bureau."

In the first 50 years of the 20th century, the Average Life Expectancy of the USA increased approximately from 47 to 68, an increase of 21 years. The following 50 years (1951 to 2000), the Average Life Expectancy increased from 69 to 77, an increase of only 8 years.

Clearly, the Average Life Expectancy of humans is not going to increase at a faster rate or even the same rate as the past. The spectacular increase in the longevity of humans is mainly attributed to reduction in infant mortality rates, proper sanitation, success of vaccinations in controlling infectious diseases, discovery of antimicrobial agents and so on.

In developed countries, infant mortality rates are less than 5 deaths per thousand live births. Compare that of a developing country such as Angola, which has an infant mortality rate of 184.44 deaths per thousand live births, according to wikipedia . Clearly, any further reduction in infant mortality rate will have negligible effect on the life expectancy in a country such as Singapore.

The implementation of proper sanitation, the concept of vaccinations, discovery of micro-organisms as the cause of many diseases and the subsequent use of antimicrobial agents against them are all once-off events as well. You can't keep using these same old tactics to prolong the life of a population perpetually.

Human cells, as it turns out to be, have a limited capacity to undergo cell division. This means that the cells in your body cannot keep dividing forever. This implies human cells populations(excluding cancer cells) and humans themselves have a limit on how long they can live. Even if you have the best medical care that will protect you from every single disease that can afflict you, you are still going to croak (the cause of death is called "old age"). You can get a heart transplant, a kidney transplant but can you transplant your brain when it fails?

Given that the higher the life expectancy of a population, the slower it increases, isn't it overly optimistic to expect the average person to live way past 85 years of age even in the next thirty years? Singapore's average life expectancy is about 80 years of age now. Can it hit 90 years in the next 30 years? If not then it's really retarded to pay for an annuity scheme only to meet your maker before you get to benefit from it. I'm not talking about the odd unlucky fellow. I'm talking about the majority.

Without even touching on the miserable "$250-$300" pay-out per month (including the paradox that if one has to depend on that pittance to survive then how can they afford the medical care that is supposedly going to keep everyone living longer) , one can hardly not notice how PAP is acting as if everybody is going to live past 100 years of age soon, judging from how they want Singaporeans to work longer, save more blah blah blah.

Perhaps scrutinising the demography of Singapore may shed some light. I sourced these figures from Statistics Singapore

Number ('000) Age Group

272.2 ~~~~~~ 50-54

219.1 ~~~~~~ 55-59

120.9 ~~~~~~ 60-64

111.5 ~~~~~~ 65-69

80.6 ~~~~~~ 70-74

57.6~~~~~~~ 75-79

32.1~~~~~~~ 80-84

24.6~~~~~~~ 85 & over

Notice the sharp jump in the numbers of Singaporeans from the age group of 60-64 years old to the age group of 55-59 years old. The number of deaths per year in Singapore is about 16 thousand. For arugment's sake, deduct 16,000 from the age group of 55-59. That is to see the effects on the numbers when we assume that all Singaporeans who died or are going to die in year 2007 are from the 55-59 years old group. It doesn't take a mathematican to figure out that the baby boomers are retiring soon.

Now that we know we aren't gonna live past 100 in the near future, that we are strangely forced to buy annuity schemes and that the baby boomers' generation is retiring soon, it is no wonder many jump to the same conclusion: THEY EITHER HAVE GOT NO MONEY TO PAY YOU OR THEY ARE SIMPLY REFUSING TO RETURN YOUR MONEY TO YOU.