"The annuity provides a kind of retirement-income insurance: you contribute funds to the annuity in exchange for the guaranteed income stream of your choosing later in life."
- Investopedia [Link]
The basic idea of life annuity is it serves as a form of insurance where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients[Link]. What good is an annuity if income stream from it is not guaranteed? If you can't depend on it, you will need something else to insure against the uncertainty!
This week the govt passed amendments to the CPF Act that allows the govt to vary the payout on CPF Life at the Government's discretion. [Link]. The reason given was that they may have to cut down the payout to ensure the solvency of the CPF Life scheme (due to incompetent management?). What is happening is this : in a life annuity risk is transferred from individual to the insurance company. However, with CPF Life, the govt passed the risk right back to the individuals. So ordinary Singaporeans are forced buy an annuity that we can't count on for a guaranteed income stream. Even with a guaranteed income stream, we are already forced to bear the risk of inflation ...like I said in earlier post, the basic scheme may not even provide enough for McDonald's Happy Meals[Link] due to inflation. However, with the guarantee on the income stream removed, the basic scheme may not even be enough for maggIe mee! ...all to protect the govt's own scheme from insolvency....(hmm....protecting itself from its own lack of competence?)
The CPF scheme and its never-ending tweaks that always end up locking up our money longer and longer but never provide any more in the way of financial security for old age and protection against inflation. The whole CPF should be reformed. We should do what other competent govts do instead of locking up the minimum at a low fixed return. Hire the best managers to manage the money properly so that it will be adequate for retirement later on - that is what almost what every other major pension fund in the world does including Malaysia's EPF, Chilean Pension Fund etc etc. Contrary to what the govt tells us, locking money up at a fix rate is completely unsafe and makes us all vulnerable to inflation. The PAP govt endangers us so that the GIC can borrow the money for investments from the CPF. It is very unkind, unjust and ultimately unfair to the ordinary folks who are now asked to work until they are frail and old.