Tuesday, 3 June 2014


If you're here to read about why the CPF is the worst policy ever, why the government should just #givebackourmoney, and how the government has swindled your CPF, you're at the wrong website.

If you want a more reasonable critique of the CPF scheme, well, I will try to provide one.

First, the government has a terrible PR department. Or the CPF has a terrible PR dept. Just look at the response on Govt Factually website on CPF. The answers will make you want to pull your hair out, and possibly kill someone. Or a small kitten.

For example, it cites as "Myth #4: The CPF Minimum Sum prevents us from using our money." And the answer? "This is not true."

Right. With this sort of delusion, why should we trust anything else on the website?

The simple fact is that if CPF members are not allowed to withdraw the sum designated as "The Minimum Sum" it is in effect preventing the CPF member from using what they consider as "their money", and what Ministers have said is "their money".

There are two problems with the CPF.

The first is that it is there.

Or rather, the money is there. The members get a statement every now and then, and the statement tells them that somewhere out there, someone is keeping all these money for them. The statement basically tells them, "this is YOUR money. You should feel RICH". And then unstated, is the "subtle" suggestion - "vote for PAP".

Or something.

Then there is the minimum sum scheme that basically tells them - as MC Hammer says, "Can't Touch This!"

And that is why the people don't trust the govt or the CPF. It tells you one thing and then, it tells you a contradictory thing.

And don't try to tell me that it is all consistent, and there are reasons for it. Yes, liars can explain anything; rationalise anything. But at the basic level, when all is said and done, what you have told me is, "This (minimum sum) is YOUR money, but you can't touch it."

And that breaks faith with the people.

Compare this with a pension scheme. There isn't any account that says, "this is your money". So there is no question of "give us back our money". The social security scheme or pension scheme basically says, if you meet the criteria, when you reach a certain age, we will provide you with a pension/social security payment.

So it is not "your" money. And you can't ask for it before it's time.

The second problem with CPF money, is that it is not real money.

What do I mean?

Take some money out of your pocket or your wallet or from under your mattress. Wherever you keep your money so the CPF cannot get it. Say you're holding a $50 note. If you use all that to buy beer, you can't use it to buy food, or watch a movie, or maybe get some clothes. Spending that $50 has opportunity costs. It means you can't use the money for other things.

Now look at your CPF statement. Maybe it reads $50,000 in your Ordinary Account.

What can you use that $50,000 for? Buy property. Maybe the down payment for a HDB flat, or maybe even a private condo. What is your opportunity costs of buying property with that $50,000? No opportunity costs, because you can't use the money for anything else.

(Actually, there is an opportunity costs - your retirement. But that is so far in the future that you "discount" that costs. Google "Hyperbolic Discounting" for an explanation.)

Because CPF money can be used for property purchase (and ONLY for property purchases - well actually no, but just go with this), and because we do not impute the opportunity costs of using our CPF money for property purchase, we use ALL the CPF money available to buy property. And because we do this, the price of property does not reflect the "true" (uninflated) costs. If you were using cash to pay for your property, you would be less cavalier. But since it is CPF money which you cannot use for any other purpose now (again, just go with it. It is mostly true), you pledge your entire CPF to buy a flat regardless of the true value of the flat. Or rather the true value has been inflated by the available CPF.

The property market is addicted to CPF. It may have seem like a great idea at the time, unlocking the CPF and channelling all that sweet sweet funds towards property, so that home ownership becomes a dream, nay a Right of every Singaporean. But it has created its own problems.

First property prices became too high. It was particularly bad because at one time BTO prices were pegged to Resale prices, and Resale flat prices were inflated by CPF funds. So by delinking BTO prices from resale prices, the "circular referencing" was broken, but without a curb on the use of CPF funds for resale flats, resale prices will still rise.

Same for private property. Allowing CPF members to use their CPF funds to buy property makes a lot of sense. Politically.

The only thing that can win more political favour is to allow CPF money to be used to bid for COE.

Try to imagine that: if people could use CPF funds to pay for COE, how much do you think COE will rise to?

Fortunately, I don't believe that will happen. However, it is proof that CPF funds is driving the increase in Resale flats prices, as well as private property (condo, usually) prices.

Try to imagine the property market without CPF funds.

And that explains why, even though the CPF funds has an inflationary (if not "bubble") effect on the resale and private property market, it may have been allowed to continue - it boost growth figures, it keeps the property market bouyant, it provides people with an attainable dream (private property ownership), and as the property market grows steadily, it provides a return on investment for CPF members who invested in property. This gives property owners the illusion that they are richer. After all, they bought their flat at $100,000 and now it's worth $300,000. Or more.

Of course, the problem is most Singaporeans are single-property owners - their own home. The problem with realising the profit on their $300k flat is that, they will need $300k for a similar flat for their replacement home. It's not profit if you cannot realise it.

Perhaps the point is for older retirees to liquidate flats in mature estates and but cheaper flats in non-mature estates? Or downgrade? Well, if that is the plan, it is not working.

The exacerbating problem is that Singapore has no hinterland. In most other countries, when you retire, you sell your apartment in the city or the suburbs, and you can retire to the countryside. We do not have a true suburbia, at least not a suburbia with a sufficient discount on homes.

But there's no point wishing for things we do not have.

So the second problem is that unlocking some of the funds has led to possible property bubbles at worst, and a dependency on CPF funds to prop up property values at best. Or vice versa.

BUT... you can use CPF money for one other thing: investment.

The problem is, most people do not know how to invest.

A 2008 study found that only 12% of Ordinary Account and 20% of Special Account funds was used for investment. All things being equal, people should use more funds from the OA to invest as the OA only pays 2.5% interests. So it would be easier to earn better interests than that. SA funds earn 4% interests and while it is possible to earn more than 4%, it would also be a lot easier to leave it in the SA for 4% returns, risk-free!

But more funds from the SA is used. Because the SA can ONLY be used for investment. The OA can also be used for property purchase, so members leave the amount available for property purchase.

However, investors do not do very well. about half lose money and 30% makes only as much as if they had left their funds in the CPF. Less than 20% make better returns. This is better than about 10 years ago (IIRC), when only about 10% made better returns. BUT it still means that 80% should have left their money in the CPF.

[Note: Not all investors may have intended to "invest". When I bought my flat (more than 10 years ago), I knew that the entire OA balance would go towards the down payment. My monthly installments were slightly more than my contributions to the OA. So prior to the purchase I invested a few thousand (about $5k), planning to liquidate and return the funds to the OA after the deduction for the down payment. This would allow me a buffer to draw down from. I didn't eventually liquidate and the invested amount lost money, and I just left it there.]

And that is only from those who were tempted or persuaded to invest. The other 80% of SA funds were not invested at all. Those members did not feel confident enough to invest or perhaps were satisfied with the CPF interest rates (at 2.5% and 4%, these are higher than commercial interests rates).

So here we are.

What are the issues and how do we address them?

#1 "Our Money". We'll start with the visceral issue of "our money". CPF members sees the figures in their account and Politicians have been telling them that it is their money. BUT then the govt tells them that they cannot touch the minimum sum. This needs to be resolved.

#2 Maximise returns on CPF. Growth, Interest rate 2.5% 4%. Financial wisdom is for younger investors to take more risk, and older investors to take less risk. BUT, what studies have found is that older members actually take greater risks. I believe it is because as their retirement looms closer, they realise that they do not have enough, and tries to make up for the retirement fund shortfall by taking more risks.

#3 Low income members. Some members may never be able to make the minimum sum once you take into account housing and other expenditures. How can they be helped?

Our Money

The govt can make one simple adjustment - separate CPF into two sources. The Employee's contribution is what the worker puts into his account and it goes into the ordinary account, which the employee can draw upon for property purchases, subject to the prevailing restrictions.

The Employers' contribution (currently 16%, but due to go up to 17% from Jan 2015, and it was at a max of 25% in 1984.) would go into the Special Account and the Medisave account. This would be like a "payroll tax" on the employer that would go towards the pension fund of the employee.

The current arrangement for the SA and MA is for 6, 7 and 8% and 7, 8 and 9% to be contribute as one gets older. (For a total of 13, 15, and 17%)

If only the Employer's contribution will go into these two accounts, there is only 17% (from Jan 2015) and it could simply be held at 8.5% each, until the MA ceiling ($45,500) is reached, and then funds flow into the SA.

In the CPF statement, the CPF account will reflect the Employee's contribution as the Ordinary Account ("Your Money"), and the Employer's contribution is reflected in the SA and MA as "Your Retirement Account" and "Your Medisave Account." That would be "Your Pension Fund".

"Your Money" is for you to use for housing, education, investment, etc.  "Your Pension Fund" would be for your retirement.

To relieve the CPF member of ONE worry, there will be no mandatory minimum sum top up. At 55, if there is more than sufficient in the Retirement account (currently called SA), the excess will be transferred to the OA. If there is less than the required amount for a full "pension" or life payout, the CPF member can either a) do nothing. His life payout will be correspondingly lower and he will be informed what will the actual payout. Or b) top up the Retirement Account from his OA. To incentivise this, the govt can match his top-up 1 for 1, up to a cap (say $20,000) if the govt needs to manage costs. Or employers of high-income staff could help to contribute. See below "Low Income".

It may be more accurate to simply call the Employer's contribution, a "Payroll Tax". But I leave it to communications experts to decide if a "payroll tax", or "Pension tax" or "social security tax" or "CPF contribution" sounds better or plays better to public perception.

Maximising Returns

The current returns are 4% for SA & MA accounts and 2.5% for OA. There is the other 1% extra for the first $60k. We can leave that as it is.

Most CPF members are not financially savvy investors. What the CPF can do is offer members some investment options.

But isn't that what the CPF is already doing?

For OA & SA, CPF members can invest in various investment instruments ranging from stocks to bonds, and even insurance-linked products.

However, while the CPFB will shortlist the investment options, there is no guarantee that the investment will give greater returns. There is still risk.

One way to manage risk is to invest in index-linked funds. But...
"...in the CPFIS, very few are low-cost passively managed index-linked funds.

There are also no target maturity-date life-cycle funds or inflation-protected instruments. Life-cycle funds may appeal to financially less savvy members as these funds automatically rebalance asset allocations between investments such as bonds, shares and fixed deposits as an investor ages."

But what CPF members really want is High Returns - No Risk.

And that is unrealistic.

Low Income

Currently, the CPF is only applicable on the first $5000 of monthly salary. So employers contribute CPF up to $5000 monthly salaries. For staff with more than $5000 salary, employers are in effect enjoying a concession on CPF for high income staff.


A payroll tax of 10% for salaries in excess of $5000 could be imposed on Employers, and these contributions can go toward topping up the retirement funds of low income employees.

So for an employee with $6000 salary, the Employer would contribute 17% or $850 to the staff, and $100 to the Low Income Pension Supplement (LIPS).

For a CEO with a $50,000 monthly salary, $850 would go to the CEO's CPF, and $4,500 would go to the LIPS.

The LIPS service could be phased in, say 5% for the first few years. so businesses and employers would have some time to adjust, before eventually being raised to 10%. But businesses with $5000 employees would not be small businesses.

Still this may affect profitability and attractiveness of SG as a business centre, so maybe there should be a further cap. Again, I leave it to the experts to sort it out.

If there is more cash in the LIPS pool, the cash top-up for the low-income with insufficient fund in the retirement account could be increased (2 for 1 matching top-up for the first $5k, for example). This will depend on the LIPS pool of funds. 

No comments: