7 Jul 2005

The Truth About The CPF System

Financial analyst
Dan Fineman


When the PAP became the government in 1959, it increased the CPF contributions through the years, raising them to as much as 50 percent in 1984 and 1985 before the 1985 recession forced the government to bring the rates back down.

The original intent of the CPF was to help workers save for their old age and for them to be less dependent on the state when they are no longer economically productive. Few quarrelled with this notion. Since then, however, the system has allowed members to use their savings to finance their homes, pay medical bills, service insurance policies and even punt on the stock market.

The use of the CPF for extraneous purposes triggers the question of whether the savings are being diluted. In 1997, the mean balance was less than $30,000. As this is only the average, it does not take into account the many who have savings well below the $30,000 mark. Economist Mukul Asher at the NUS was already warning that because of the way the CPF system is run, "many currently near retirement and with low balances may not find it possible to make individual or family provision for social security needs." The subject was also one of the central issues on which the SDP campaigned during the 1997 general elections. It wasn't until 1999, however, that an inter-ministerial committee set up by the government finally admitted that many Singaporeans "assume that their CPF savings are enough for retirement" when in fact they are not.

The question that is screaming to be asked is: What has happened to all the CPF money then? The simple answer is that most people have used their savings to finance their houses. Financial analyst Dan Fineman observes: "CPF financing has contributed to high land prices, the government gains from home purchases, while pension balances dwindle...CPF will prove grossly inadequate for meeting individual retirement needs."

The way CPF balances are being invested by the government has also been called into question. In fact, Asher calculates that returns to CPF members between 1987-1998 was zero percent, with five of the 11 years actually registering negative returns.

Even the World Bank commented on this outrageous situation. In 1999, it noted that on average CPF's interest rate was in fact lower by 0.4 percent than those of the four Singapore banks to which it was pegged. India, Malaysia, and the United States on the other hand have done much better for their people. This finding was reinforced by an economist at SG Securities who noted that the average real return on Singapore's financial reserves is one of the lowest in Asia. "We have a problem in Singapore," he cited. NUS business school professor Koh Seng Kee pointed out that "Should there be a financial or political crisis, the wealth of Singaporeans will dissipate quickly."


Anonymous said...


Mr Wang Says So said...

This article is not very insightful. Your CPF money is meant for your retirement, but no one ever said that your CPF money is supposed to be ALL the money you will ever need during your retirement.

The following part of the article is also misleading:

"The way CPF balances are being invested by the government has also been called into question. In fact, Asher calculates that returns to CPF members between 1987-1998 was zero percent, with five of the 11 years actually registering negative returns."

The CPF pays a fixed rate of interest on your CPF money. You cannot actually get negative return on your CPF OA or CPF SA, unless the Singapore government becomes bankrupt, which has not happened.

If you register a negative return on your CPF money in any given year, this means that you chose to withdraw your OA/SA money; and to invest your money under the CPF Investment Scheme, in stocks or unit trusts of your own choice; and you had lost money. Loss however is just part of the investing game. Some win, some lose - if you want to play, you have to accept that.

The following part of the article is also misleading:

"Even the World Bank commented on this outrageous situation. In 1999, it noted that on average CPF's interest rate was in fact lower by 0.4 percent than those of the four Singapore banks to which it was pegged."

Actually the CPF pays you very well today, compared to the Singapore banks. You get 2.5% on your OA and 4% on your SA, from a triple AAA-rated organisation known as the Singapore government. In contrast, you currently get something like 0.25% (10 times less than CPF OA rates) on your savings account with DBS, OCBC etc. If you shop around, you find Stanchart offering 1.88% right now, but that is still clearly less than CPF OA.

As for this part of the article:

"This finding was reinforced by an economist at SG Securities who noted that the average real return on Singapore's financial reserves is one of the lowest in Asia. "We have a problem in Singapore," he cited. NUS business school professor Koh Seng Kee pointed out that "Should there be a financial or political crisis, the wealth of Singaporeans will dissipate quickly."

-- the simple rejoinder is that whatever the real return is on our financial reserves, the fact is that you still get a fixed rate of return on your CPF OA and SA (2.5% or 4%). If GIC has a bumper year and rakes in real returns of 50%, you still get 2.5% and 4%. If GIC has a horrible year and rakes in real returns of 7%, you still get 2.5% and 4%.

I do not know what kind of returns other Asian governments get on their financial reserves -

but note firstly that Singapore has huge financial reserves compared to say, Thailand or Malaysia, and a mediocre return on a very, very large sum will still mean more, in absolute terms, than a very good return on a very, very small sum.

Secondly, note that Singapore government is AAA-rated. Which means that it is a lot less likely than practically all its Asian neighbours to default and be unable to pay what it owes.

Steve, your article looks outdated. Is it very old.

soci said...

The article appeared recently on the Sg Democrat website. All articles are here for me, for my archive.

lee hsien tau said...

Negative return can come about not just from negative investment return. You have to take into account the effect of inflation. I can't remember the math.

My shrinks are all on overseas study leave ...

Anonymous said...

The CPF is a British creation which the PAP kept. Originally it had only one purpose to provide for retirement.

However, the PAP modified to the point that was used to boost the fund management industry, and the property sector. This no doubt helped the banks and developers to make huge profits but left Singaporeans unable to retire.

We are seeing old folks serving youngsters at MRT, cleaning the floor at an age when they should be enjoying retirement.

This is a mess....that nobody is seems willing to clean up.

Mr Wang Says So said...

Lee Hsien Tau said: "Negative return can come about not just from negative investment return. You have to take into account the effect of inflation. I can't remember the math."

The maths is very simple. In any given year, you take the rate if return on your CPF money (2.5% for OA; 4% for SA) and you deduct the rate of inflation for that year.

If the return is negative after you take into account the effect of inflation, then note that you get even more negative returns on all your deposits with DBS, OCBC, UOB etc.

lee hsien tau said...

The Garhmen uses exchange-rate policy to fight inflation. This is a very significant statement.

This means bank lending rate is influenced by what goes on in the international money market, but bank borrowing rate is tied to Garhmen treasury policy.

Watching the bank and CPF rates mr wang is talking about move is harder than catching a dead-cat bounce.

That means your wantan mee and bus fare adjust for inflation while you pay to keep your money (if you have money) in the bank.

My shrinks are all on overseas study leave ...

lee hsien tau said...

The math is simple, but if you want to get technical, it is not as simple as mr wang says so.

I think it is:
I stand corrected.

My shrinks are all on overseas study leave ...

lee hsien tau said...

I wish my daddy was a banker
For sure I would be sitting on the board
Then I can spend many happy 24 hour
With two naked ladies on my bod
One would be sitting on my face
The other would be sitting on my cork
The bank would still be making manoloh
Never mind that I didn't do any work

My shrinks are all on overseas study leave ... rejoice

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