IT IS disappointing that CPF Life's payout rates will not factor in inflation. According to the Department of Statistics, one in two people aged 62 in 2006 will live beyond 85, and one in seven will live beyond 95 - 20 and 30 years, respectively, from the first CPF Life payout at 65.

Using the past three years' average consumer price index (CPI) of 3.2 per cent, $1 today will be worth 53 cents in 20 years and 39 cents in 30 years, which is a significant erosion of purchasing power.

Even without inflation, health care and some other costs increase with age. Some members will require nursing care.

They will find that hospitalisation plans are far costlier (about four times as much for an 84-year-old as those for a 64-year-old), the deductible portion may be higher or coverage may not be available. They may require more medication.

Because CPF Life is an important, or possibly the main, part of retirement cash flow for less well-off members, especially in their later years when their other savings may run low, the impact of inflation and other age-related costs over an extended period of time should be addressed.

Members should not have to monetise their homes, or depend on financial assistance from their family members, charity or the Government, to mitigate their effects.

It may be difficult for CPF Life to index the payout rates to CPI, because CPI is not known until after the fact. The solution is for the Government to issue inflation-linked bonds to CPF Life to invest in.

Alternatively, CPF Life can incorporate predetermined increases in the payout rates over time. While these may not track the inflation rate perfectly, it is better than nothing.

The argument that this will result in significantly lower payout rates when members are younger to provide for higher payout rates when they are older is correct only in nominal dollar terms.

In real dollar terms - that is, after adjusting for inflation - the present arrangement will result in progressively lower real payout rates as members age, and a lower standard of living.

David Boey

This article was first published in The Straits Times.