CPF reform: Nudge people to make optimal choices

CPF reform: Nudge people to make optimal choices

IT IS a simple fact of life that we're all getting older. Not just older as individuals, but also as a nation.

With more of us living longer, pressure is building to make sure that we can look after ourselves in what is (rather tweely) referred to as our golden years.

The challenge is deciding where the boundaries of responsibility lie. How much is down to the individual, and where - and how - should the Government step in?

Here in Singapore, the government advisory panel reviewing the Central Provident Fund (CPF) system has touched on some inevitably sensitive issues. A particularly thorny one is regulation of lump sum withdrawals and the Minimum Sum scheme.

How then should the Government approach this?

As an economist, I'm inclined to oppose restrictions, or at least be in favour of minimising their application. Restrictions create market distortions and inevitably invite pushback as individuals seek ways to get around them.

But giving people options also requires the Government to devise mechanisms to "nudge" people into choices that are optimal for them and for society.

In other words, rather than increasing regulations saying to savers more and more about what you cannot do, say instead what you can do, explain what makes it the better option, and thus nudge and guide them towards doing so.

However, the Government does, to a degree, need to take a paternalistic stance - particularly towards older adults who, my own research has shown, have a greater tendency to make more suboptimal financial decisions.

Looking at the issue of lump sum withdrawals, for example, there is certainly a risk that more seniors will take out large sums from their funds, leaving little left to provide a liveable monthly income.

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