The Real CPF Problem

The Singaporean government recently increased the minimum amount required for Central Provident Accounts which as caused concern among many people.  Given that I have written numerous times about CPF, I will only recap the highlights before moving on to my primary topic about CPF today.

First, the Central Provident Fund is vital to understand Singapore government finances.  The CPF pays 2.5-4% on funds from savers but then loans that money to the government who issue long term debt securities and unsurprisingly pays a nearly identical weighted amount on what it borrows.  The Singapore government then invests the money in different ways, and by all appearances, keeps whatever in excess of the 2.5-4% it earns.  The CPF is a central organization to understand Singapore public finances.

Second, despite Singapore government claims to the contrary, the CPF is imposing enormous implicit taxes or costs on Singaporean savers.  If the average Singaporean had earned the average Singaporean wage since 1980 and saved the amount required by law but earned the GIC long term average rather than CPF interest, the average Singaporean would have approximately $850,000 SGD in the bank.  This is approximately $300,000 more than they would have earned with the same amount of savings in a CPF account.  To put this number in perspective, Singaporeans pay higher fees than what the typical hedge fund would charge.  The Singaporean government is directly harming everyday Singaporeans by mandating savings into a seriously underperforming asset for the governments benefit.

Third, Singapore operates a one sided model where the tax payer assumes the risk but the government gets the benefit.  If the investments do well, the government keeps everything above the 2.5-4% CPF interest payment; if the investments do poorly, and let’s assume, the CPF collapses, the tax payer will guarantee the payment to CPF holders.  In other words, risks are socialized while benefits are privatized.

More important than the technical shortcomings of the CPF is how Singaporeans think of CPF, Temasek, and GIC.  Officially, the Singapore government holds more than $800 billion in financial assets.  Temasek holds more than $200 billion SGD and GIC is estimated to hold around $400 billion of that total $800 billion.  Despite official pleadings to the contrary, Temasek and GIC are not private companies they are owned by the government, controlled by the government, and key officials are appointed by the government.  Temasek was created out of privatizing government assets.  SingTel, the largest holding of Temasek, was created from the Singapore Telecoms and Post Office Ministry.  DBS was originally the state owned Development Bank of Singapore.  These were and still are public assets.  A similar story holds true for GIC and CPF.

The assets of Temasek, GIC, and the CPF are the assets of the people of Singapore.  Only in certain people’s imagination are Temasek and GIC assets private and separate from the people of Singapore.  The earnings in excess of 2.5-4% that the government keeps for itself that it does not return to CPF savers are directly harming Singaporeans who are on average $300,000 poorer.  GIC and Temasek assets that the government insists are private despite all evidence to the contrary demonstrate the governments disdain for the blessing of the financial bounty it has received from the Singaporean taxpayer.

Kenneth Jayaretnam has proposed privatizing and floating Temasek and GIC to then distribute shares to the public.  There are many variations of this basic idea.  For instance, CPF savers could earn some amount tied to GIC or Temasek or the social security system could be privatized like Chile with savers allowed to invest via private asset managers.  Though the government claims to seek an ownership society, the mechanism and returns of the CPF are much closer in reality to the United States social security system where the government uses contributions as a cheap pool of borrowing with extremely low rates paid for contributions.  In fact, the most recent US social security actuarial report says that low income earners receive a higher total real return than Singaporean CPF savers in nominal terms.  Giving people ownership of the assets Singaporeans created and linking their savings to the returns of those firm would create an actual ownership society.

As a matter of prudence, I support raising the CPF minimum to ensure income levels for the elderly in the future.  However, the easiest and fairest way to accomplish this objective is to pay CPF savers a fair return for the investments that they are funding.  The government should not be allowed to confiscate earnings above and beyond the rate it pays on CPF funds.  It is complete hypocrisy by the government to publicize the supposedly amazing job it does managing Temasek and GIC which supposedly earn 16% since inception from public assets and 7% in USD term over 20 years from public assets, then plead poverty when paying CPF holders a paltry 2.5%.  The wealth of Singapore which has been funded by the Singaporean people belongs to the Singaporean people.

An ownership society requires that owners of capital the CPF savers are compensated based upon market rates, have the ability to move their funds to higher earning investments, receive information about their investments, and how much they are paying their investment managers.  The Singaporean government refuses to provide any of this information hiding basic information that would be considered standard information in the marketplace or if owned.  Tragic stories of Singaporean unable to access their considerable savings they supposedly “own” demand government accountability.

The Singaporean people are the ones to demand answers and changes to how their money is managed.

7 thoughts on “The Real CPF Problem

  1. Pingback: Where Your CPF Money Is Going: Learning From The City Harvest Trial | The Heart Truths

  2. An interesting response to the CPF issue by mr baldings by another blogger economist, Economics Malaysia:

    It’s taken a while, but I think I’ve finally got a handle on SG public finances and how its structured together, thanks to some commentators and my own digging. I think Prof Balding is absolutely correct in criticising the management of Temasek and GIC – there’s no obvious benefit to the people of SG, only to the government of SG.

    Having said that, I think he’s wholly wrong in thinking there is a hole in SG public finances. There isn’t. SG public debt is used for very specific purposes that can be traced, and none of it goes to either of the SG SWFs.

    Approximately half is monetary debt, similar to the way BNM uses BNM BIlls. This is being phased out, as MAS is now authorised to issue its own debt to manage financial sector liquidity. The other half is used to finance HDB land acquisition and property development, which is then repaid through purchases (partly) financed through CPF withdrawals.

    In essence however, this makes CPF more of a credit union or building society than a retirement provident fund. In that sense, Balding has a point – I don’t see a real advantage in this approach, as while it provides a solid foundation for asset values and provides a cheap means of house ownership, it traps Singaporean retirement savings in a single asset class which is hard to liquidate, and may or may not provide adequate returns.

    It’s not quite as bad a picture as Prof Balding paints – citizens do get to keep the capital gains from house ownership – but any half trained investment manager would throw their hands up in horror at such an arrangement.

  3. Pingback: YOUR CPF: The Complete Truth And Nothing But The Truth | The Heart Truths

  4. My proposed solutions:

    1) CPF Interest Rate should be reinstated to 4% p.a. for OA which was the rate paid to CPF Members during 1G PAP Govt (before the advent of our SWFs) and 6% for SMRA – Even on worst-case basis over the long term (commensurate with the long-term locked-in nature of CPF contributions, esp if CPF Withdrawals for housing are further limited), CPF savings which are mostly used by extension by our SWFs for investment forays would yield a return to SWFs of more than 8% p.a.. As SMRA Withdrawals are limited to vital needs (medical, living expenses) and the lock-in period is mostly until death and usually from age 55-65, an extra 2% bonus should be achievable.

    2) CPF Pay-outs from age 65 should be pegged to average inflation for food, transport, healthcare, housing, insurance (typical major spends of retirees) – Since CPF Min Sum is pegged to inflation, CPF Pay-outs should be too. For the future generations of the old-old (ie, those who are currently Age 55-65), their retirement security is even more threatened because:
    (i) they (unlike the Pioneer Generation Package given to those currently of age 65 or older) would typically have 0-2 children to depend on for filial living support (be it for healthcare or living expenses);
    (ii) they suffered the deepest CPF contribution cuts under 2G PAP at the prime of their working lives; and
    (iii) in being typically conservative for this generation who would have bought their family home in their late 30s-early 40s, they also bore the brunt of HDB policy of linking BTO prices to resale prices which was purportedly suspended in mid-2011 but officially divulged by National Dev Minister Khaw Boon Wan on 1 Feb 2013.

    3) CPF Future Withdrawals for housing should be limited to owner-occupied units (deemed for one unit if bought by married couple under single name, or deemed as investment unit if bound multiple names for singles) with added rigour in verifying/changing NRIC-registered address – CPF savings should not be exposed to high-risk investment (if CPF withdrawals are not allowed for penny stocks, they should not be allowed for shoebox condos which are equivalent of penny stocks when not bought for owner-occupation). Real estate investment risks should be taken only with private savings (not retirement savings) that buyers envisage would be sufficient and sustainable over the tenure of housing loan.

    4) CPF Past Withdrawals for private non-landed housing should be protected by mandating an additional settlement option of one-for-one exchange for qualifying owner-occupiers with only 1 residential unit (whether in Singapore or overseas) based on factual parameters of (i) strata title area, (ii) floor level and (iii) geographic orientation of living room main window where the redevelopment GFA exceeds current estate GFA by more than 30% with prohibition for sub-sale or resale by exchange owners until TOP or 100% sale of relevant phase redevelopment by developer – Housing security and unlocking land value for CPF members (instead of corporate developers) for homes bought with CPF savings and without any public subsidy must be honoured, esp when majoritianism by 80% will (as opposed to free market forces by 100% will) was legislated for private property rights. By limiting the exchange option to “qualifying owner-occupiers” and applying it to redevelopments with 30% or more Gross Floor Area, it would ensure commercial viability without killing the valid (and purported) national agenda of urban rejuvenation and higher land-use intensity.

  5. ADDENDUM: To add another point to Para 2 above:
    (iv) going forward into next few decades, this group will likely face much steeper inflationary pressures with their CPF Pay-out even with full achievement of CPF Min Sum in cash in their retirement with the large-scale emergence of the huge populace of China and India into the middle-class realm amidst basic demand/supply principles.
    The above should be contextualized against the fact that consistently less than 50% of each Age 55 cohort achieved their respective CPF Min Sum and a likely miniscule percentage (undisclosed to date) achieved it in full cash as most would apply up to 50% of Property Pledge permitted by CPF Board in computing achievement of CPF Min Sum.

  6. Pingback: Support Roy Ngerng, Share This Post | I Support Roy Ngerng

Comments are closed.