CPF and Behavioral Finance
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 the scheme
of 居者有其屋,
it has been extended to meet the requirement of homeownership, 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 are noble.
Ways to enhance and increase the amount left to meet the retirement requirement been discussed widely in public and blog-sphere
. Methods like transferring money from Ordinary account (OA ) to the 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 an individual’s circumstance
whether you will need the money in the 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 the government
to review the scheme recently and came out with various recommendations and one
of the changes in the CPF MS ( CPF Minimum
Sum Scheme ) to RSS ( Retirement Sum Scheme ).
What to do with changing CPF scheme and Behavioural Finance?
The topic has been hotly
debated among public and I shall not elaborate further here, you may find a
very good analysis of 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 ( Enhanced 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, these small changes of adding ERS will have a 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 a comparison between FRS (which
is previous MS ) to the new ERS level that the FRS is lower and acceptable. Such “ framing
“ and subsequent “anchoring” of a certain amount is important and key in behavioural
science to change one’s perception of particular issues.
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZPKD7z1p3n4XZ4nO9hg4XMQLudc-EDUA-EOMqpEWvpynBQAStQlIWADtWGk92CmnZc-31e4OT1wWhPtOutna3bwQ6-EyCfwCLFdRX7RKi67zrqmHAi3mUH4Qpc8mNmB76FLdPoKfG5og/s200/20160801_114124.jpg)
Behavioral Economist Richard H. Thaler has a very good book
title “ Nudge “ in explaining these
concepts and biases.
Allow me to quote a few of the
examples in his book :
a) Suppose that you are suffering from serious heart
disease and that your doctor proposes a gruelling 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 a 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 a different way, that he said “ Of one hundred patients who have this operation,
ten are dead after 5 years .” the doctor’s statement will sound pretty alarming 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 turns out that
information campaign (2) framed in term of losses is far more effective than
information campaign (a).
< This is somehow related
to another bias call “ loss aversion “ where people feel hurt more in loss than
gain. This can also explain why investors are keeping to “loss stocks “ and sell the profitable one. I may consider writing a blog post on this
matter .:) >
As for the “ 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 weeks 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 look 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 a great impact on our perception /
framing to certain issues (like the case of CPF RSS ). The behavioural scientist is
helping policymaker to design a more effective policy by using “ nudging “ through framing as a tool.
A 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 !!
Quote Of The Day:
“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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