Are there systemic problems in our CPF system?

lotus999 SG

without any transparency from the govt, we really have no choice but to suspect there are systemic problems in our cpf system:

Are there systemic problems in our CPF system?
By Leong Sze Hian
Posted by theonlinecitizen on August 29th, 2007

I refer to the article Flexible, basic and cheap annuity scheme (Today, Aug 27).

Instead of spending the $750 million a year to pay the additional 1 per cent interest on the first $20,000 of the CPF Ordinary Account, and $40,000 of the Special, Medisave and Retirement accounts, growing these sums at say 5 per cent interest will accumulate to $67.7 billion in 2042 (the first year that the compulsory annuity will start at age 85, for those who are below 50 years old now).

This amount can at 5 per cent interest provide $300 a month from age 85 to 100, for 1.79 million Singaporeans.

By age 100, about 99.9 per cent would have died.

In fact, as many will die as they grow older, beyond age 85, more than 1.79 million people can receive the $300 life annuity.

Even if the resident population grows at 3 per cent per annum for the next 35 years, will there be 1.79 million or more Singaporeans over age 85 in 2042?

According to the Cremation Association of North America (link), the life expectancy for White (race) Both Sexes, at birth, age 55, 65 and 85, is 77.7, 26.2, 18.2 and 6.4 years, respectively.

In other words, the 50 per cent survival probability for someone at birth is 77.7 years, and someone who is age 85 has a 50 per cent chance to be alive at age 91.4.

Therefore, under the proposed deduction of the compulsory annuity premiums at age 55, the percentage still living at age 85 may be less than the stated 50 per cent, because the 50 per cent probability would have been reached at age 81.2 for this cohort.

Only the age 70 cohort has an almost 50 per cent probability level of survival of 14.7 year, at age 84.5.

It was reported in Parliament on 27 August (Minimum Sum : Figures show many dont meet the mark, Straits Times, 28 August), that :

Only one-third of CPF members who turned 62 last year met their Minimum Sum (MS) requirement when they reached the age of 55 in 1999. Manpower Minister Ng Eng Han said that of the 22,600 CPF members who turned 62, 7,600 - or 34 per cent - were able to meet their MS, which in 1999 was set at $ 60,000. The remaining 15,000 members who did not meet the MS had a median shortfall of $ 49,300.

Does this mean that despite the 4 per cent accumulation, and new CPF contributions for those who were working beyond age 55, 66 per cent could not meet the $ 60,000 MS, and 33 per cent had less than $ 10,700 at age 62 ?

He (Manpower Minister) noted that one important reason why many members fell short of the MS is the current rule letting them withdraw half of their CPF savings at age 55.

Phasing out the current rule letting them withdraw half of their CPF savings at age 55, delaying the MS monthly payouts to 65, and the compulsory deferred to age 85 life annuity purchase, may just be reactive ad-hoc measures, to address a fundamental core problem.

Are there systemic problems in our CPF system ?

Are HDB flats priced such that they are eating up too much of the average Singaporeans CPF ?

Are there too many Singaporeans who lose their CPF life savings, when their HDB flats are foreclosed ?

Are we paying too low an interest rate on CPF ?

Why is it that according to the AXA Global Retirement Study, Singaporeans are the highest savers in the world, but have the lowest income in retirement ?

de_middle SG

u must understand that our healthcare system is top notch aka world class....u cannot compare other countries motality rate against ours.

We are going AND WILL live longer so get prepared to enjoy annuity....our government is so thoughtful, i love them so much Laughing

HyperFocal SG

My opinion is that IT IS fund-amentally FLAWED.

And problems within are for THEM to know, and for US to NEVER find out....

For me, I just fark it, uproot and demand every dollar and cent back..!!!

Jontst78 SG

Extract taken from[url=http://jaundicedlenses.blogspot.com/2005/04/letter-to-tony-blair.html] a letter to Tony Blair[url] some years back.

That the CPF scheme has been 'successful' here so far is entirely because of several reasons which militates against your implementing it in Britain. What are they?

Firstly, it is a 'good' scheme only if you've no other scheme to begin with. If you already have a comprehensive National Health Service and Unemployment Benefits, replacing these with a "Pay Everything Yourself' Compulsory Saving Scheme like the CPF is a retrograde step. And one that the Conservatives will have a field day picking out the drawbacks.

This CPF 'Pay Everything Yourself' scheme pre-supposes one critical condition -- that there will be full employment to start with and full employment in the next 10-15 years of implementation. If you cannot achieve that, you cannot adopt the CPF scheme. This is because the scheme is based on forced contributions from salary. Meaning that if you've no salary, you drop out of the scheme and its intended benefits. With your unemployment rate hovering about 6%?, this means that 6% of your labour force or several millions will be unable to contribute any forced savings.

It will also fail if you ever have a prolonged recession that throws millions out of work. That it hasn't happened yet in Singapore does not mean it never will. Also, creeping or recession-inflicted 'sudden' unemployment will hit our CPF scheme less than it will hit you. The reason is, most households in Singapore are double-income. Both husband and wife work, contributing to their CPF which pay for their house, while maids or grandparents look after the children. When one is out of work, the other can continue the house instalments.

Then, too, the Scheme has been around for decades, so most Contributors have enough savings. If you're just starting out, at a few percent, you do not enjoy this luxury. There is also the question of social justice. Every civilised society has tried to tax from the rich to give to the poor, the basis of your Robin Hood legend. The CPF scheme is the opposite, 'every man for himself', in that you look after yourself because nobody will. What kind of statement about a society's values this says, will be interesting comment from your philosophers.

There is another insidious effect of the CPF. By forcing so many percent of the peoples' salaries into the CPF, then allowing their CPF money for housing, people tend to buy better housing than they can actually afford if they have to pay in cash. This may be good for property developers and the Government housing authority but it means that CPF distorts spending. People, knowing they cannot touch their money until the age of 55, use much of their CPF money for housing while using their cash savings for cars. There is also the 'pyramid' effect. As long as there is full employment, as long as people contribute to their CPF, everything is fine. But once there is unemployment, the 'pyramid' collapses.

Anecdotal evidence: My father's tiny 2-bedroomed flat cost just $7,800 in 1969. He sold it in 1995, 26 years later, for $100,000. My present 3-bedroomed flat cost $89,000 in 1985. Today, 12 years later, it is worth $450,000. This, despite the official inflation figure of about 3% a year. Thus, the CPF scheme leads to two effects. One, people buy bigger houses, thereby spiralling up property prices. Two, they spend all their spare cash on the other desirable, a car. This is why car ownership here is the costliest in the world and leads the Government to impose bigger and bigger car taxes, to no avail.

Thus, the net effect of the CPF is that money is diverted into housing and cars, leaving the retail, insurance and other sectors poorer and less dynamic than they could be. If you have a developed insurance industry, for instance, it will weaken because the CPF will force contributions into health care and retirement savings, reducing the need for private insurance. Your retail sector will also suffer because CPF will reduce discretionary spending there.
How does the CPF scheme really work in practice as against theory?

Firstly, everyone must work. If you've no salary, you don't have CPF contributions to make. Since the contributions are compulsory and their use controlled, it is as if you pass legislation on how a large part of every worker's take-home salary and savings may be spent i.e. a certain part on housing, others on health insurance and even some on certain 'approved' shares. I think you have many economists who will tell you that 'forced and controlled' expenditure is bad.

Then again, unemployment must be measured not only in percentage terms but also in absolute terms. Remember that Singapore's total labour force is only 1.6 million people. Your unemployed alone is several times that. This means that you have several millions who will not contribute to CPF and hence cannot enjoy its benefits. This several millions will not only have no salary to live on but cannot pay for housing or medicine. This can be a huge social problem that your present system addresses well enough.

Also, if they have a job then lose it, the blow will be harder because they will not only have no CPF but also no cash to pay in lieu, a Double Jeopardy situation. Your present Unemployment Benefits are a lot more humane in that it allows that unemployment is not necessarily the fault of the person unemployed, which is the underlying basis of the Singapore system and explains why the Social Welfare pittance for the destitute person is set, punitively, at just $180 a month -- if you can qualify under the harsh conditions.

(Just as the notoriously severe laws on everything from spitting to drug use is indicative of the Paragons of Virtues' inability to understand anyone different from themselves, which has led to their pitiful attempts to legislate human behaviour into unthinking, robotic versions of what they imagine human beings should be).

This letter must come to an end eventually and this is as good a place as any. So, to conclude, I hope you will analyse the CPF scheme and the social and political context in which it can be successful and not just be swayed by the PAP's bragging. But before I end this missive, a disclaimer. This letter is born not out of research or the grapevine of privileged connections. It is entirely the result of what has been reported in the papers but interpreted between the lines, through a jaundiced eye, if you will. In the future, some academic will produce a scholarly tome on the evils of the Lee system and it will be a damning indictment of the PAP. Until then, this letter must serve as a mere introduction.

kilua SG

Singapore has one of the highest savings rates in the world (40%) and yet most Singaporeans cannot retire comfortable. This is partly due to the poor returns by CPF funds of about 5-6% in general. ( including housing returns) Western countries with pension plans, invest members contribution in the stock market and delivers an average of about 12% returns. With a combined contribution of about 20-25% and most westerners would draw 40-60% of their last drawn salary compared to the Singaporean average of 25-28%.

CPF is also a system that encourages Singaporeans to over invest in properties. This exposes Singaporeans to a disproportionate amount of investment risk by investing only in one asset class. Given a large sample of buyers, there would definitely be some who are caught on the higher side of the prices. The other form of risk is when property prices collapse for a prolonged period. In both scenarios, when Singaporeans try to convert their property to annuities, it may not be enough to see them through retirement.

googoomuck SG

The CPF scheme perished and it cause the retirees to perish.

googoomuck SG

Still remember my late uncle told me his point block 5-room unit cost 3K when char kway teow cost less than a dollar and HDB flats were between 8K and 30K.

Employer/employee CPF contribution was 50% then. It gets less with every economic downturn, sometimes it was restored but now its less than 40%and housing costs went sky high.

Today, govt cant guarantee jobs for the middle aged group and yet want the retirees to keep working. Keep pushing the back the date for the release of CPF money. "V Bonus" for those who defer draw-down of CPF Minimum Sum.

The CPF vault has to be faulty.must be some kind of crisis lurking.

Fingolfin_Noldor SG

I am no economist, but the way I look at the CPF is that it is a form of tax or at least has the effects of a tax with regard to how people spend their money. It is quite a hefty tax if one looks at it, in addition to income tax. The trouble is, that CPF as it is does not generate much by way of returns if one were to at least invest in funds to get returns. Of course, one might argue that CPF gives guaranteed returns, but those returns are pathetic. Also, it is curious that all these schemes to grow CPF money through unit trusts do not perform well. I do not comprehend how banks can so badly manage these funds, which speaks ill of the banks in question, or is it there is some attempt to fudge the statistics I have no idea.

Regardless, there are many ways to look at it, it is a form of tax. We could then relabel a lot of things as welfare subsidies. The difference is, the amount of benefit one gets is proportional to the amount of tax we pay. That is the big difference. Whereas a social welfare system is obligated to help its citizens, our system is not obligated to do so. The Govt, i.e., is under no obligation to take care of its citizens if one does not pay enough of this tax.

Now to add in the perspective of controlling people from using monies put into this "fund" and channeling it into only approved uses does distort the nature of the economy. In a sense, we cannot call the housing industry a free market in every sense of the word because of this control. Not least it gives the Govt a sheer monopoly on the control of land prices. The Govt in turn generates revenue. This feels like a monopolist squeezing his customers like nobody's business as he so wishes.

kilua SG

Your point of CPF as a form of tax was mentioned by another economist Mukul G. Asher. He has writing extensively about the CPF system. Google his name and you can find lots of his views on the Singapore's CPF system that you would never find in the 157th ranking paper.

Its an open secret that the govt invest CPF money with GIC and other form of investments. Asher describe CPF as a form of regressive tax as most of the lower incomes group's wealth are in the CPF.

some excerpts from his power point slides

1.The CPF balance sheet states that all of $96.4 billion is invested in non-marketable government securities. l The interest paid on securities is a weighted sum of fixed deposit and saving deposit interest rates; and is
determined quarterly.

2.In actuality, as the government has been consistently enjoying budget surpluses, proceeds from bonds sold to the CPF Board are turned over to Singapore Government Investment Corporation (SGIC). The operations of the SGIC (and other government investment holding companies) do not have to revealed because of statutory provisions. The proceeds however are widely believed to be almost wholly invested abroad.

3.There is thus a disconnect between the administered interest rate paid on CPF balances and the actual investments and returns obtained. The political risk inherent in this arrangement is very high. This arrangement has also not resulted in realizing the potential of the power of compound interest for members as shown in figure 3.

With regards to the poor investment returns by CPF members, i did some research because the poor returns goes against the understanding of the "efficient market hypothesis" where investors would be "price protected" against bad returns. EMH is one of the empirically strongest theory in finance.

i found out from a research paper that 80% of the CPFIS money was invested in insurance. My own theory is that the loss could possibly be due to the exorbitant sales charges which the CPF board did not reined in initially, not due to failures in stock market.

Among those that invested in unit trust,the high income group invested up to 50% in equities. For the lower income group, only 20% of their wealth was invested in equities with the balance in insurance.

Its a real puzzle how one can lose so much money investing insurance.

The CPF board should also release data of returns up till 2007 instead of using old data till 2005 as the stock market has risen a lot over the last 2 years.

Fingolfin_Noldor SG

I found a powerpoint presentation done by him and as I said, I am no economist, and I do not fully understand all the terms.

Regardless, the mystery of the poor returns given for the CPF is probably because the Govt would rather keep the bulk of the returns for itself and for other possible reasons. It is gnawing that there is no transparency behind all this and that the Govt could go on to use the money as it so wishes. And also to mitigate the sudden release of all these monies due to the early baby boom, it resorts to ways to control the release of the monies; by giving incentives to CPF holders to release it in small sums vs large down payments.

The effect of the CPF on spending is quite simply immediate. That the lower income segment is penalised more so than the high income is apparent since they have less confident and willing to use the monies for equities which would have generated more cash for them in the long run.

What can be done? Well, one should remember, that this amount of money should never be relied upon for retirement. It is up to us to invest what money we have and hope to create a retirement nest egg. As for the domestic economy? Tough luck. Everyone is taxed badly enough, and there won't be much money to spend around once everything goes to equities.