CPF and Behavioral Finance






CPF : A Noble but Overstretch Objective ?

Legislated in 1955, the CPF system was originally designed only to provide post-retirement security. The model chosen was a fully-funded compulsory savings scheme in which individuals receive benefits directly related to their contributions. Under scheme of 居者有其屋 , it has been extended to meet the requirement of home ownership , then to healthcare and education.


No doubt, the system is built on the country’s fundamental socio-economic philosophy of promoting self- reliance and the ultimate objective in retirement planning is noble .

Ways to enhance and increase the amount left to meet the retirement requirement been discussed widely in publics and blog-sphere . Methods like transferring money from Ordinary account (OA ) to special account (SA ) to gain more interest and doing voluntary contribution (V.C )to MS ( minimum sum )  to enjoy more tax relief been used extensively . Of course, depending on individual’s circumstance whether you will need the money in near future or not , as the transfer is irreversible .


Increasing demand or withdrawing the fund for property’s mortgage payment made members nervous and worried about the adequacy of fund for retirement ( not be able to meet the Minimum Sum ). (钱不够用).






This has prompted government to review the scheme recently and came out with various 
recommendations and one of the changes is the CPF MS ( CPF Minimum Sum Scheme ) to RSS ( Retirement Sum Scheme ).


What to do with changing CPF scheme and Behavioral Finance ?


The topic has been hotly debated among public and I shall not elaborate further here , you may find a very good analysis about the new scheme in below link . ( A Blog post from SG Yong Investment )



Also, how to make use of CPF for better retirement planning from AK’s blog :




But what I would like to highlight here is the adding of new tier in setting aside higher retirement amount called ERS ( Enhance Retirement Sum ) in this new CPF review recommendation.




Your monthly payout* for life from 65
Retirement Account savings required at 55
If you own a property and choose to withdraw your Retirement Account savings above your Basic Retirement Sum (subject to sufficient CPF property charge/pledge)
$660 - $720
Basic Retirement Sum (BRS)
$80,500
If you do not own a property or choose not to withdraw your Retirement Account savings above your Basic Retirement Sum
$1,220 - $1,320
Full Retirement Sum (FRS)
$161,000
The FRS is 2 x BRS.
If you wish to put more savings in CPF LIFE
$1,770 - $1,920
Enhanced Retirement Sum (ERS)#
$241,500
The ERS is 3 x BRS.​
*Payouts are estimates based on CPF LIFE Standard Plan parameters in 2016
#Available from January 2016


From Behavioral Economist perspective, this small changes of adding ERS will have big impact on our perception on amount need to set aside for our retirement.

In setting this higher level amount as ERS , it also "reconfigure" and “set our mind “ to have comparison between  FRS (which is previous MS ) to new ERS level that the FRS is lower and acceptable .  Such “ framing and subsequent “anchoring” of certain amount  is important and key in behavioral science to change one’s perception on particular issues .



People will feel more comfortable in amount set aside under new FRS if there is options ( ERS) which is higher than the amount they set aside. ( in fact FRS is just same as MS in previous scheme )

Behavioral Economist Richard H. Thaler has a very good book title “ Nudge “ in explaining these concepts and biases.  










Allow me to quote few of the examples in his book :

a     a)    Suppose that you are suffering from serious heart disease and that your doctor propose a grueling operation. You are understandably curious about the odds. The doctor say, “ of one hundred patients who have this operation, ninety are alive after five years.” If we fill in the facts in certain way, the doctor’s statement will be pretty comforting and you will probably have the operation . But suppose the doctor frames his answer in somewhat different way ,that he say “ Of one hundred patients who have this operation, ten are dead after 5 years .” the doctor’s statement will sound pretty alarming an you might not have the operation,

< People react differently to the information that “ ninety of one hundred are alive “ than to “ ten of hundred are dead “.

b      b)    Energy conservation is now receiving a lot of attention, so consider the following information campaigns : 1) If you use energy conservation methods , you will save $350 per years ; 2) If you do not use energy conservation , you will lose $350 per year , It turn out that information campaign (2) framed in term of losses is far more effective than information campaign (a).

< This is some how related to another bias call “ loss aversion “ where people feel hurt more in loss than gain . This can also explain why investor’s are keeping to “loss stocks “  and sell the profitable one.  I may consider writing a blog post on this matter .:) >


As for “ anchoring “ effect , allow me to quote from Wikipedia :

 Quote // Anchoring is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth. // unquote


In stock picking , we often refer to 52 week high or low as our referent point and “anchor “ it to judge if a particular stock is high or low , but in actual fact , it is meaningless to looking at these figures as both reference points does not reflect the current value of the stocks.

A small alteration of the wording or process in certain aspect may have great impact on our perception / framing to certain issues (like the case of CPF RSS ). Behavioral scientist is helping policy maker to design a more effective policy by using “ nudging  “ through framing as a tool.

Better understanding of various “ biases “ in Behavioral Finance will increase our chances of making better financial decision including “ stock investing “ .


In most of the cases, “Investors are their own worst enemy “ !! 知己知彼,百战百胜 !!













“I have known men who could see through the motivations of others with the skill of a clairvoyant; only to prove blind to their own mistakes. I have been one of those men.” 



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