With higher inflation, review of CPF returns timely

The review of Central Provident Fund (CPF) returns to contribute towards reasonable retirement adequacy beyond raising the Minimum Sum is timely and crucial.

When inflation hovered around 2 per cent, a 2.5 per cent return on the Ordinary Account — where most of our contribution goes, especially in the early years of employment — seemed decent.

When inflation hit 5.2 per cent in 2011 and 4.6 per cent in 2012, it diminished the real value of CPF balances. Inflation rates of 3 to 4 per cent could be a new norm.

When nominal returns on assets are below the inflation rate, real returns will be negative, which implies a fall in purchasing power.

To maintain the same consumption basket, we must keep more money, which is a simple explanation for raising the Minimum Sum to keep up with rising living costs.

The latest Minimum Sum amount has created some discomfort, as there are opportunity costs.

Keeping more money in one place means less can be used elsewhere, or that flexibility is curtailed.

The nominal returns on CPF balances are better than bank deposits. Also, CPF returns are relatively risk-free.

Options are available, however, to place our savings in other relatively risk-free retirement plans with stable returns that mostly exceed 2.5 per cent.

For instance, there are large, established insurance companies that have achieved at least a 3 per cent return on savings and retirement plans to date.

There are also options for regular payouts during retirement for those who want more discipline in terms of a regular income stream.

Given the availability of these alternatives in the Singapore context, it is timely that CPF rates are reviewed to keep pace with the new inflationary norm.

CPF contributions are compulsory during employment, regardless of the returns, which makes it more urgent to explore all options regarding CPF retirement adequacy.

Raising the Minimum Sum is only one of the means to that end.