Inflation risks on CPF payouts



CPF payouts are not inflation hedged

Non salaried retirees face a greater risk than salaried employees in the face of inflation. At least, we assume salaries increase with inflation. Government need to help citizens mitigate the risk of 1. Inflation and 2. Longevity.

In Asia, most governments do not offer inflation protected benefits to their citizens. Given that revenues received by the state is linked to inflation, it could be the responsibility of the state to offer inflation protected schemes.

Such a scheme should have 3 core features
Reasonable level of payout.
Payout that lasts for as long as the retiree lives
Payout level is inflation protected

At the moment, the CPF life meets only #2. For retirees with meagre CPF sum, payout sums can be minimal. Our payouts are also not pegged to inflation growth. To provide inflation pegged payouts, we need inflation linked annuities. To overcome the need for inflation pegged payouts, Singapore government can consider issuing bonds that are inflation indexed such as the US TIPS and Australia CAINS.

I understand that inflation indexed products can imply risks to the government. This is especially of concern when Singapore’s y-o-y inflation can range between 4 to 8%. I also note that Singapore is a small country and can be easily impacted by global demand. In the face of inflation, currency appreciation is a good way to manage risks.

Singapore should also consider financial innovation to create inflation indexed products. One way is to create a mixed basket of inflation linked products globally and hedge the currency exposure. I am not a financial expert and suspect that such intricate hedging techniques may be too costly to implement. But this could still be better than for Singapore to issue sovereign inflation indexed products. In the latter case, Singapore government would bear the entire inflation risks on behalf of citizens.