Articles in the Straits Times 29 Sep 2007:
Forum : Govt Investments de-linked from CPF funds.
Insight Pg S10: CPF Returns : As good can get (1st para talks about Low Thia Khiang)
Insight Pg S11: CPF as Cheap Funds:"Wrong & plainly misleading".
Insight Pg S12: CPF Changes a fair deal so why the hesitation.
Now that is a alot of good explanation from our world class govt. I suggest you read, no study, each of these articles to get a good understanding of our govt thinking on retirement and the wonderful plan the PAP govt has for you for your retirement.
I've identified a number of important points in the articles for discussion.
Point 1 : The rate of 2.5/3.5% is risk free and guaranteed.
Well at first sight nobody can disagree with this statement. But think harder. ....
The govt has mandated that a large portion ($60K) of Singaporeans' CPF funds be set aside to earn a "risk free return of 3.5%". We are required by law to do this an have no choice....we are locked on to this strategy of earning a return on the bulk of our CPF for a period of 40 years ...now how is that for a strategy.
Such a strategy is sure to guarantee one thing for most people - insufficiency. I haven't found a single qualified investment advisor who will go tell a 25 year old to lock his savinsg up at a fixed deposit type of rate of 3.5% for 40 years for the purpose of retirement. In fact all other asset classes real estate, equities have always out performed this 3.5% rate over any 40 year period. Also, within a 40 year period we can expect periods of high inflation, the so-called risk free rate only guarantees that the buying power of the CPF money will be badly eroded.
So the basic strategy of locking up a minimum sum earning a rate similar to treasury bonds for 40 years is a risky one - it is vulnerable to inflation, guaranteed to underperform, guaranteed to be insufficient ...as a result we will see our retirement shifting and the quality of our retirement dropping under this strategy.
Simply google "retirement plan" to see what a plan should look like. or what watch Ben Stein's video on retirement here. Or read about Chile's pension plan for its citizens. ..or Calpers which hires professional managers to handle public servants money and they don't keep the returns for themselves but give it to the pensioners who need it.
Why is hiring a group of top professionals OR outsourcing to selected low cost asset management companies OR allowing investments in index linked ETFs/no load funds so unattainable? Just let the person choose whether he wants 3.5% or have his money managed for higher returns/risk. The fact that money is guaranteed at risk free 3.5% is meaningless because buying power of the money is not guaranteed. The best plan to preserve buying power has been to invest prudently.....why put millions of citizens on a plan that is not the best plan?
Why does the PAP mandate that we follow a plan that will not work properly? I think they want us to work longer and harder so we don't retire and become useless. It is for our own good to lead useful productive lives.
Point 2: GIC deserves its return of 9.8% for making risky investments.
CPF minimum sum is only allowed to have low returns whereas GIC deserves its higher return for making risky investments.
Again think hard.
GIC invest money of the citizens of Singapore, why is it allowed to take the type of risk that CPF holders cannot take for their minimum sum? You mean it is okay for GIC to lose citizens' money and but not okay for citizens lose their own CPF money?
Point 3: GIC can raise more cheaply by issuing treasury bills and govt securities...they don't need your money for "cheap" funds.
Singaporeans have their CPF locked up for about 40 yrs. Gee, I have never seen a 40-yr treasury bill before, I don't think any govt has issued one. Also, the withdrawal age can be changed, so its like a treasury bill with a shifting maturity. So far the Singapore govt has been able to issue small amounts of securities with 10 yr maturity at a lower rate than 2.5% however try borrowing $50B, the borrowing cost will go up. The articles actually suggest that CPF funds are "expensive" for the GIC.
Yes, the GIC does not need the "expensive" funds from CPF it has other cheap sources of funding. But somehow it doesn't tap the cheaper source of funding much preferring use the more "expensive" funding - you don't see the GIC rushing to the securities market for billions. If you're a competent fund manager and have 2 sources of funding one more expensive the other one cheaper - which would you choose?
Point 4 : 83% of CPF members who invested their OA savings in the CPFIS from 2002 to 20006 realised less than the 2.5% returns -the base rate of the OA. Half of all members who invested experienced experienced negative returns.....(forum article "Govt investments de-linked from CPF funds").
I was SHOCKED by this statement by the director from MoF....oh Singaporeans are such INCOMPETENT investors they should not be allowed to invest their own money!!!
Strangely, I was just sitting with a large group of people for lunch on Friday and everyone was talking about how well their investments which the made in the past few years did.
If you look at the STI Index, Global Indice, Regional Indices for Europe/US/Asia.... you cannot find a single day in 2002-2006 that youcan buy a unit trust linked to this hold it until today and not perform better than the 2.5% that CPF OA gives out! For example, look at the STI from 2002 until today:
...now tell me how can one return less than 2.5% when they invest between 2002-2006. If you pull out every single major equity index, they look similiar. You can buy on any one of well diversified unit trusts on any one of the 1500 trading days in 2002-2006 and beat the 2.5% given by the CPF.
So how did Singaporeans become so incompetent. Well, look at that statement again. ...it says "realised less than 2.5% returns", they probably only computed investments that were sold off during that period and does not included then majority of investments which are held on until today! Even for myself I've sold off 1 or 2 loss making investments during that period but those I've bought in 2002-2006 and held until today have double and this is not counted. ...so I'm one of the 83% of incompetent investors. This is a wonderful piece of data mining, we all should be thankful for because it helps us to feel so much better about the 2.5-3.5% we are getting on our CPF.
The 2.5/3.5% is a guarantee...a guarantee of insufficiency. This insufficiency is showing up in withdrawal age being pushed, a diminished quality of retirement ($200 per month) and extended working life. It is also guarantees underperformance compared with other asset diversified classes which outperform risk free assets with 100% certainty. Risk free rate is meaningless because it does not guarantee buying power - it is not peg to the rise in oil prices, rise in bus fares, rise in milk....etc.
It is a challenge the PAP put before us to retire on such a plan that no financial advisor will ever recommend for retirement. We should be thankful for such challenges as it is chance to strengthen our work ethics to the point we don't ever have to retire. Retirement is a awful thing anyway we lose the chance to contribute to Singapore Inc wasting our time instead on walks in the park and looking after our grand children.
The GIC does not need our CPF money for its investments. It is reluctantly using it as a form of service to Singaporeans and giving them this return that is "as good as it gets"....although they get better returns, we should begrudge that it is not returned to the CPF account holders. We do see a small fraction of it just before General Elections to encourage us to make the right decisions and keep the status quo. All this is done for our own good, we have to believe what is good for the PAP govt is also good for the people of Singapore.