Title: Mandatory annuitisation, wealth transfer and utility enhancing policy: Singapore's CPF Life scheme

Authors: Boon Seng Tan

Addresses: Institute of Singapore Chartered Accountants, 60 Cecil Street, ISCA House, 049709, Singapore

Abstract: We estimate the wealth elasticity of longevity in Singapore and discuss its implication for the CPF Life policy in Singapore. Using data from 220 obituaries in 1989 and controlling for the trend of improved longevity over the century, we found a statistically significant wealth elasticity of longevity. Despite weaknesses of the research design, this result suggests that a mandatory life annuity is a regressive wealth transfer but not always a bad policy. When consumption and bequest are perfect substitute, there is no insurance benefit from annuity, and the policy is inefficient if administrative cost is positive. For the other extreme case that bequest has no value based on Brown (2003), the small elasticity of 0.0126 means that utility improvement from insuring longevity risks more than compensate for utility loss from the regressive transfer even for the poor, resulting in Pareto improvement. The plausible case that bequest and consumption are imperfect substitute most likely result in Kaldor-Hick efficiency meaning the policy is utility enhancing but requires compensatory redistribution of wealth towards the poor.

Keywords: differential mortality; wealth transfer; central provident fund; CPF Life; economic efficiency; mandatory life annuity; utility enhancing policy; Singapore; wealth elasticity; longevity; consumption; bequest.

DOI: 10.1504/IJPP.2015.070561

International Journal of Public Policy, 2015 Vol.11 No.4/5/6, pp.143 - 151

Received: 08 Jun 2014
Accepted: 01 Dec 2014
Published online: 10 Jul 2015 *

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