EVEN highly educated people can fall for scams — proof that financial literacy alone is no guarantee against bad economic decisions. Mr Stephen Greenspan, a professor emeritus of psychology at the University of Colorado, came to this conclusion after personally falling victim to Mr Bernard Madoff’s Ponzi investment scheme.
That is why a psychological understanding of how individuals make decisions is important, in the view of economist Mukul Asher — and it should be taken into account in financial counselling, as well as embedded in financial literacy programmes. The Professor at the Lee Kuan Yew School of Public Policy was one of the panel speakers on “Financial Education and Literacy”, at the Reinventing Retirement Asia Conference.
According to Mr Greenspan, said Prof Asher, many people made their decision to invest withMr Madoff on the recommendation of friends or relatives.
“Financial education is required not just in terms how to accumulate it in the best possible manner, but also how to ‘de-cumulate’ the payout in a financially sound manner,” Prof Asher stressed. This is critical because studies around the world show that most retirees spend their pension money within three to five years, he noted.
It is why he disagrees with how pension boards in South-east Asia allow lump-sum pension payouts, because he feels individuals do not have the self-control to make their savings last into advanced old age.
“These funds were set up in the first place because it is assumed that the individual will not save for retirement, because the cost of saving is immediate and the benefits are long term. Now, at retirement, you tell them to take the money (as if) suddenly, when you’re 60, you become wiser. I can tell you from my own experience that I’m older but not wiser,” quipped Prof Asher.
He recommends a one-time payout of between 25 and 30 per cent instead, and subsequent phased withdrawal of pension funds.
He also pointed to shortcomings of provident fund schemes set up by some governments in South-east Asia — such as the fact that these funds do not factor in inflation risk and life expectancy.
In addition, none of these funds have an independent financial board as a “check and balance”. “There is no robust database. Most of the civil service pension schemes do not have actuarial studies that they put on their board. How many of us know independently verified replacement rates in South-east Asia for our provident and pension funds?”
In his speech earlier, Prime Minister Lee Hsien Loong noted how some CPF members have complained that investing CPF savings in risk-free Singapore Government Securities yields “too low returns”.
“But in the current unstable financial markets, I believe many are relieved that the Government has been prudent rather than adventurous with their retirement nest-eggs,” said Mr Lee.
To allow members to grow their savings beyond the board’s interest rate, in 1997, the CPF Investment Scheme was set up. Part of their Ordinary and Special Account funds could be placed in shares, bonds or other investments. In 2001, the Supplementary Retirement Scheme was launched, where members could put their money into a wide range of shares, bonds, unit trusts and other investments.
