Trying to understand a complicated G policy is like trying to put together a 1,000-piece jigsaw puzzle (which happens to be one of my hobbies right now). You try to find pieces that fit together and sometimes you get so frustrated you actually “force’’ pieces together. Then sometimes you go blind looking for a specific piece because there are so many pieces of roughly the same shade. You get angry. You throw the whole puzzle out of the window. Or you decide to leave it alone for a while and come back to it later.
So I’ve been calling around and reading up about this CPF puzzle, which is so complicated that whenever people can’t fit pieces or find them missing, the temptation is to throw the whole thing down the rubbish chute. I don’t think I’ve pieced the puzzle together but I’m giving it a go here.
So what really is the problem with the CPF scheme that a few thousand people turned up at Hong Lim Park on a Saturday to hear people thrash it? Not too long ago, people were actually quite pleased with the system because it assured them of money for retirement, allowed them to buy their own home and pay for medical bills. Remember how our parents and grandparents looked forward to turning 55?
Now the argument goes like this:
The CPF is actually our money and we’re FORCED to give it to the G which puts up all sorts of rules that seem to PREVENT us from getting our money back. In fact, we’re not even clear about what it does with our money…It went to line some people’s pockets? Enrich some government-linked companies? Lose it in bad investments?
Then there’s the interest rate…so low. Only 2.5 per cent for Ordinary Account and 4 per cent for Special. But you know what? That CPF money is supposed to have gone to GIC to be invested and you know how much GIC makes? More than 6 per cent! So why are we getting so little back? And how come we can’t get it all back at age 55 but have to put aside a Minimum Sum? And this minimum sum keeps going up all the time, now $155,000 (!), which goes to show that the G DOESN’T want to give us our money back. It wants to keep as much money in the CPF for as long as possible. Now why would it want to do that? Insert favourite conspiracy theory here…
The G is answering these questions in financial gobblededook. Lots of jargon and acronyms like SGS and SSGS and some very fine numbers with decimal points. You need a degree in finance and a great deal of patience to cut through the tangle.
So I came up with this…
Yup, yup, the CPF is our money, even the employer contribution part. The CPF scheme is the Singapore version of the pension plans in other countries – and yes, some of them do make MORE than the CPF interest rate. Except that some of us forget they can also make LESS – and even go bust. That’s because the plans are put on the market to make money, and you know the market goes up and down.
If no one GUARANTEES the money will be returned, you might end up getting less or even nothing back if the market is bad. Even if someone plays guarantor, he’d better make sure he has enough money when the time comes to cough it up. He’s got to be Mr Moneybags. Or, he can just make the working people pay him more so that he can make sure he can fulfill the guarantee. Rob young Peter to pay old Paul. So one way out would be to tax the young, to pay the older people whom he owes.
About those rates..
So why is the CPF interest rate so low? That’s because of the way the rate is calculated. It’s based on what the banks pay on fixed deposits and savings account. The rate is actually 80 per cent tilted toward FD rates, which we know is higher than savings account. It used to be 50/50.
Going by this calculation, the CPF rate for the Ordinary Account is actually 0.21 per cent. But it is written into the CPF Act that the rate cannot be lower than 2.5 per cent, which is why it is 2.5 per cent now.
Of course, we can ask why this sort of formula in the first place and whether this formula should change. But it’s worth noting that it’s higher than what we would get if we put it in the bank in FD or savings account. When bank’s interest rates go up, the rate will go up too. That’s why in some years, the CPF rate has gone as high as 6 per cent. But what will never happen (unless Parliament says so) is that it will never go below 2.5 per cent.
What about the Special Account?
This is a little more complicated. It’s set higher than Ordinary Account because the money doesn’t move at all, like for 30 years or so. This is unlike the OA which is used for all sorts of things such as housing, so balances go up and down. You can think of the OA as a savings account and the SA as a fixed deposit.
Now, about its rate.
Seems the G looks at what its 30-year G bond will earn for indications. But since these bonds are quite new, it looks at what a 10-year bond will earn and add 1 per cent. Going by this calculation, it should be 2.19 per cent plus 1 per cent or 3.19 per cent. So why is it now 4 per cent? Because that’s the lowest it can go by law.
(NOTE) Again, we can quarrel about the formula but, hey, I’m just the messenger.
(Something that people don’t know is that those with little in their CPF actually get an extra 1 per cent. Say you’ve emptied out your OA and only have $10,000 in your Special Account. You earn 5 per cent instead of 4 per cent on this. Who gets this extra 1 per cent? About 60 per cent of the 3.53 million CPF members.)
Not fair you say? Why calculate this way when rate should be linked to what GIC can make? Good point, except that the GIC can also make less and lose money. Apparently, something like this happened during the 2008 global financial crisis. GIC returns were lower than the CPF rate. (Sorry, I can’t find exactly what the figures were) So if CPF rate goes up when GIC makes good money, should it also come down when it doesn’t? Or better to have a guarantee backed with a floor?
Okay, the next argument will be that the CPF rate can STILL be higher – even if not pegged to GIC returns. That’s something to think about I guess.
About where CPF money goes…
That’s that whole business about what REALLY happens to CPF money when it’s NOT in our hands. How is it invested ecetera. (Frankly, I think it’s a bit like asking your bank what it does with your deposits to learn such low interest…we don’t think about doing that, do we? I suppose we do so for CPF money because we don’t have a choice of where to park it, whereas we can always take money out of the bank and place it elsewhere…)
The G went into all sorts of contortions about borrowing, spending, bonds and yields etc to explain the process. Well, someone knowledgeable gave me a really dumbed down version which I will use. Don’t get annoyed if you already know how it works.
I have $50 in my CPF. CPF gives it to the G in return for an IOU with guaranteed interest. This IOU is the Special Singapore Government Security. The G mixes this CPF money with other G money (say, money saved by earlier terms of G), and hands them over to GIC to invest in something long-term.
So let’s say $100 in all is passed to GIC. GIC takes some risk and over time, grows the pot to $150. But the G’s IOU to CPF has also grown from $50 to, say, $80 because of interest. This means $80 of the 150 will be put aside – must make sure can pay debt first! That leaves $70. By law, up to half of the expected investment returns on this $70 can be funnelled into the Budget for spending, known as Net Investment Return Contribution. That amount was $8.1 billion for FY2014.
That’s why the G keeps saying it doesn’t SPEND the CPF money. BUT the CPF money and other G money earn INTEREST, and a bit of that interest goes into healthcare and other G spending. Given the NIRC (ugly term) is a half of a half of a half of something….that base must be pretty big. So when the time comes for me to withdraw my CPF, CPF goes to the G with the IOU and says pay up – and the G pays up.
But you can do better you say?
We can manage our own money better, so return our CPF! Hmm, I’m not sure. Because those with enough CPF balances and who used the money to invest don’t have a very good record.
Here are the statistics:
About 47 per cent of them made losses between 2004 and 2013. Another 35 per cent made about equal or less than the OA rate of 2.5 per cent. Only 18 per cent made more than the OA rate.
Sad. Means that even if you do have spare change in the CPF that you can invest, it might be better to just leave it there…
There’s another question: If we’re in dire straits or unemployed, why can’t we take out the CPF money to tide over bad times? It is, after all, OUR money. This issue has been raised in Parliament as well.
The way I figure this: if money is taken out, should it be taken out altogether or should it be returned in better times with interest? Just like for housing when you sell your house? Because when old age comes, there might not be enough. Plus the CPF is already a useful instrument to cut wages in bad times. Cut contribution rate. Take out money to tide over bad times. Nothing much left. How?
Intuitively, it makes perfect sense to use our own money to keep body and soul together, but that would be grafting yet another use for the CPF. Methinks it might well be better to find other ways to help the distressed than have them dip into their retirement savings.
And about that minimum sum…
Trouble is, we are used to this idea that when we turn 55, we get money. A windfall or at least a tidy sum. In fact, past generations got ALL or MOST of their CPF money at 55, much like the Malaysians and their Employer Provident Fund. Those old enough will remember the fuss created when the Howe Yoon Chong report proposed pushing the age back. So the age has NOT been pushed back but the sum dribbles out instead of coming in a flood.
We’ve been tricked you say? Actually, it’s the norm in developed countries to have the sum slowly released. The Netherlands, Denmark and Finland are actually thinking of raising the age their people can start getting their pension pay-out…
I guess what’s unstated is that the G doesn’t trust us to manage our own money. We’ll blow it on a round-the-world cruise and we’ll have nothing left for later days. In which case, old people will turn to their children for support or the G will have to find some way to make sure they are cared for. And one way would be to tax the young people again…
But that minimum sum of $155K is still too high, no? Apparently, it’s calculated to give about $1,200 a month payout to a retired couple for the rest of their life. That’s through CPF Life, the annuity scheme, which kicks in from age 65. According to the G, it has to go up because it needs to keep pace with inflation. If it doesn’t go up regularly, then there will be some unlucky cohorts who won’t have enough for later. Again, don’t shoot the messenger.
So, we DON’T have enough for retirement then….so much for the CPF system…
I reckon that the problem is that people think about retirement funds in terms of cash. They don’t think about the house. Put together, the G says there’s enough. People don’t buy this because it would mean selling the house to “unlock’’ the cash and moving into a smaller one. The term is “monetise the asset’’. Thing is, old people rather not sell their home; most prefer to age in place. There are some conflicting signals here: we’ve been told that our house is an asset, and we keep upgrading (using the CPF). And although it’s rational to sell the asset if we need money, we won’t because it would be a downgrading. To have to do so because of want of money is too drastic a step to take. We want to age in the comfort we’ve achieved while we were working…
I’m going to stop here. I’m just going to say that the CPF scheme is so complicated that I cannot see the whole puzzle properly although I’m trying to. So I’m sorry if you found the above hard-going.
I think everybody who was supposed to collect their CPF over the years, got it. If they didn’t, their beneficiaries did. As for whether the rest of us will as well, the G says it has more than enough money. Outsiders believe it. Which is why the G has a triple A credit rating. That is, international agencies declare that the Singapore G can pay whatever it owes.
Has the G “lost’’ our CPF money, “spent’’ it or somehow “swallowed’’ it? I don’t think so. But like most of its policies, the scheme is criss-crossed with all sorts of things such that you can’t see the whole puzzle or even piece together a portion that makes sense. What’s “worse’’ is that the G usually has an answer for almost everything, very rational, practical and efficient. Dressed in words that make the rest of us feel stupid. Very dis-likable. But not, I think, evil.
NOTE: It’s not by law. It’s a commitment made by DPM Tharman in 2007.