Viaticle settlement and the CPF dilemma

 

I read various online articles on CPF last week. Many of the assertions are misleading with selective use of data, and it is so illogical, it defies any form of need to do a rebuttal.

Like if someone told you that durians are actually apples in disguise, you don’t really want to argue with the person – you leave him alone and and walk away.

So I’ll treat the “CPF is tax” and “HDB is cheating your money”  as chest thumping arguments by a mad man.

The one issue I do have, however, is this: CPF withdrawal of retirement funds. I thought it was quite legitimate and reasonable for us Singaporeans to ask to withdraw their CPF retirement funds early, and not wait for CPF to dispense them monthly when the member turns 65.

Hey after all, it is my own money.

I felt that way until I learnt about the viatical industry in the US. A Viatical is the sale of a policy owner’s existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit.

The parallels are not exact, but there are similarities, and maybe worth thinking about.

The viatical industry emerged in the 1980’s and 1990’s in the US, as an extension of the insurance industry.  It was the height of the AIDS epidemic.

This is how it works: Mr Smith has AIDS. He has a year to live and fortunately holds a life insurance policy that pays him $100,000 when he does. He sells his policy to an investor, at a discount, say $75,000.  The investor takes over the policy, and when Mr Smith dies, the investor collects the $100,000.

The Viatical industry extends beyond AIDS, with all kinds of variations.  In all cases, the investor stands to make a tidy profit, the equivalent of Mr Smith gets to collect the money and spend it before he dies.  Win-win, and everyone is happy.

In the US, the scheme is controversial.

It just does not feel right for an investor to profit when someone dies, even though the person is happy to get cash now. There is no protection like the CPF, Medisave and Medishield in the US and when someone is faced with a terminal disease,  he often is left to fend for himself using various commercial solutions. This can result in exploitative situations where insurers or investors profiteer from a person’s circumstance.

Now, let us replace the Mr. Smith with a Mdm. Tan.

Instead of owning an insurance policy, Mdm Tan owns her CPF Retirement Account savings.  Her CPF savings earns a tidy 4% risk free interest in CPF and she can draw it down at 65 (can you think of a bank that offer a better risk free rate?

But what if she has the ability to withdraw it earlier?  Similar to the viatical scenario, where Mr Smith can cash in his insurance policy at a discount early,  if Mdm Tan can cash in her CPF savings by foregoing the compounding 4% interest rate the CPF pays, she will withdraw a much smaller amount.

Mr Smith risks having nothing for the family he left behind when he dies.

Mdm Tan risks having nothing to support her old age. 

So when some Singaporeans want to withdraw their CPF retirement savings earlier and not when they reach 65, it can put the Government in a moral dilemma.

The Government actually saves money by allowing early withdrawal, because it is costly to pay 4% on the CPF

savings. And saving money leads to some Singaporeans having no income nor savings in their old age, and living with little dignity.

It becomes a moral question. The viatical industry remains controversial in the US for moral reasons. Should a similar concept, applied on CPF, be acceptable in Spore?

 

 

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Tay Leong Tan

Tay Leong Tan is a collective of 3 writers. Tay, Leong and Tan. (Who were you expecting?!) We are enthusiastic about labour issues, economics and current affairs in particular.

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