WE HAVE just over $333 billion invested in our CPF accounts, including housing and investments. It's an incredible $333,000 per household and makes up most of our savings.

TEXT & GRAPHICS: LARRY HAVERKAMP AND MAROO

Here are the basics you need to know about your CPF money.

Retirement schemes around the world fall into two groups: 'Defined contribution' and 'defined benefit' plans.

CPF is a defined contribution plan, which means how much you get at retirement depends on how much you contributed and how much your money earned.

Earnings depend on your investments and the CPF interest rate, which is now 2.5 per cent for your ordinary account.

We have been sitting at that rate for the past 10years. It isn't a lot, but it's more than you will earn on a fixed deposit. (The highest rate there is 1.2per cent for CIMB's 12-month FD.)

Your CPF 'special account' is more restricted. You can't use it for risky investments like home payments and most unit trusts.

On the plus side, it pays a high 4 per cent interest plus you get an extra 1 per cent - 5 per cent total - for the first $60,000 minus $20,000 in your ordinary account, which also earns an extra 1 per cent - 3.5 per cent total - for the first $20,000.

Those are the highest risk-free returns you will find anywhere.

With CPF Life, we seem to have moved towards a 'defined benefit' system. It means your payout depends on how long you live and is unlikely to match your contribution to the fund.

With people living longer, this usually results in a big deficit to the company or Government. CPF Life has overcome this with annuity insurance. That, along with flexible payouts, will keep the scheme from being over or under-funded.

Worldwide, defined benefit plans have been the most popular. Payouts depend on how long a person lives. Of course, that is uncertain, which results in over or under-funded pensions.

If the plan is over-funded, companies typically close it down, switch to a 'defined contribution' plan and keep the surplus. Workers dislike this since they see it as the company taking their retirement money.

The other outcome is when a defined benefit plan's payouts exceed its assets. This makes it under-funded and the company has to pay the difference, which can be huge.

Fifty years ago, about two-thirds of all the world's retirement plans were defined benefit and one-third defined contribution. Now, that ratio has reversed as the world has moved toward Singapore's defined contribution model.

Retirement woes in the US

THE US social security is the world's largest retirement system with US$2.6 trillion ($3.6t) in savings. The problem is the scheme's 162 million workers are owed even more.

This makes it under-funded, but no one is sure what to do about it.

Many Americans are concerned social security will go broke and they will lose their retirement income.

Actually, that is unlikely since the US government can raise taxes or print money to pay for the benefits.

But neither of those will work. The other option is to cut benefits, which is the best of three bad choices.

The US has begun this painful process by gradually increasing the age at which a person receives 'full' retirement benefits. It hits age 67 for persons born after 1959.

Retirees can receive their pension before age 67 only if they agree to lower monthly payments for life.

The problem in the US and elsewhere is that people are living longer. The solution is to spend less during working years in order to save more for a long, long retirement.

 Back to Columnists