Looking at CPF from the other side...[Link]
This is one of the significant responsibilities in MOM. DPM and myself spend a fair bit of time on this, and rightfully so. Sometimes, I wonder if my job would be easier if we just let people withdraw their CPF totally.
(It is their money and earlier promised to them for withdrawal at age 55. I agree early withdrawal would create other practical problems. But shouldn't the PAP have pursued a course of action to fulfil that earlier pronmise?...we will get to that a little later).
It would make things easier...for awhile. But it would be wrong.
Life expectancy is going up to 82 and beyond. One is likely to live for a good 20 years after retirement. There is a strong likelihood that many may not have saved enough.
(Here again we fall into this trap in thinking. Just like the PAP justifying the large foreign influx using low fertility rates. A large part of the inadequacy is caused by liberalisation of CPF for housing, and money set aside Medisave programs so that the govt can lower its own expenditure on health care (lowest in the developed world as a % of total expenditure). If CPF is kept strictly as a provident fund and HDB live up to its mandate is to provide affordable housing without touching the CPF, Singaporeans would have a better retirement if public housing is more reasonable priced and does not drain our CPF which is kept strictly for retirement. .
CPF pay outs would help to ensure some form of regular income stream for individuals. With an ageing population, this becomes more critical because the burden on our children's generation will be significant if older Singaporeans are not providing for themselves.
(In the ideal state, we have each generation paying for its own retirement. The issue here is not whether the those who are retiring have paid - they were setting aside 20% of their income for CPF...so did they end up with insufficent to retire on? ...We will go to the other factors later on. However, each generation paying for its retirement is a good principle to go by to we don't end up in a vicious cycle of either heavier taxation or debts with each generation. However, within each generation and the current generation,. there is income disparity. When you have disparity as large as those we have today, some people cannot have a proper retirement due to this inequality - that is where progressive taxation can help to bring some equality and provision for those who cannot afford to retire. How long do we Singaporeans have to endure the sight of 70 year old cleaners - it is a human rights issue. The PAP insists on an every man for himself system but creates a system with the highest income gap in the developed world without minimum wages and extremely pro-business policies that makes it hard for many Singaporeans to "provide for themselves").
As a citizen, I did not really bother too much trying to understand the CPF construct. (Okay, generals in the SAF are well paid so they don't have to worry about CPF). Like many, I wondered if the returns made sense, especially a number of years ago (seems like a long time ago actually!) when bank interest rates were high. Why can't I withdraw my OWN money when I retire?
Things look quite different now that I am on the other side of the fence. CPF is an important part of retirement provision for our people. For an almost risk free profile, the returns are reasonable. This is worth reading to understand how your CPF returns have fared given inflation rates over the recent years.
(There are numerous pension funds around the world that invest stakeholders money for higher returns so that it grows and beats inflation. From Chilean pension fund that return an average of 10% to Calpers to the Malaysian EPF, the people properly managed pension funds means that workers can set aside less money and still enjoy a good retirement.
What he said about reasonable return for "risk free profile" is not true. He should reflect on this. Our CPF money is loaned to GICs at a fix rate. GIC then uses this money to make risky investments. Its ability to pay us and the fix return depends on how the risky investments turn out. Hence we incur a very high risk but GIC keeps the extra return when their investments does well. It is a very bad deal. If GIC falters all the way, our CPF money will be risked and since the PAP is the govt, they might try to legislate their way out of it by delaying withdrawal age and reducing the amount we can withdraw.
Locking our money at a fix rate makes us vulnerabe to sudden increase in inflation rate (esp imported inflation) is in fact a highly dangerous strategy.
Singaporeans are only asking for their pension funds to be managed based on how successful pension funds around the world are managed.)
Higher returns would always be nice but it would entail greater risks. The challenge of any portfolio that includes equities is volatility. At point of withdrawal, you may be right in the throes of a downturn. (Pension funds manage this volatility by smoothing out over longer durations.) To provide for some balance, we had opened up the space for individuals to invest part of their CPF monies via the CPF Investment Scheme should they wish to do so. Hence, one should therefore treat the 'untouchable' part of the CPF monies as the very stable and low risk component of your portfolio.
A guaranteed floor of 2.5% on your Ordinary Account, and 4% on your Special, Medisave and Retirement Account or SMRA, and an additional 1% to the first $60,000 of the SMRA monies, represents a reasonable return for such a portfolio, especially in an increasingly volatile environment (and the current batch of retirees missed out on the spectacular investment returns of the past 25 years based on GIC's own record it is 6% per annum).
A big plus of our CPF construct is that it helps facilitate our owning our own home. This is important not just from a home ownership perspective but housing is a decent hedge against inflation. Meaning that instead of keeping our CPF monies as cash, part of this is now 'saved' in the form of housing. If needed, this can be monetized (lease buy back, rental of rooms, or adjusting accommodation to smaller units like studio flats) to release the monies. Some analysts tend to leave out this component of our CPF savings; it is actually an important feature of our savings.(Mixing retirement with housing means people have to monetise their homes to retire properly. It is better to keep the 2 separate. Home prices can also crash as we have seen in Japan, USA, Ireland, Spain. If you link retirement to housing, it is a disaster when housing prices crash down. If the PAP keeps public housing prices through its policy artificially high, it burdens our next generation.)
Some seem troubled by the CPF Minimum Sum Scheme, especially when we announce the increase. No, we have not run out of money! :) This scheme has been articulated before and the increases have been announced. At 55, you can withdraw your monies but must retain the minimum sum. Why?
The CPF Minimum Sum Scheme provides members with a monthly income to support a modest standard of living during retirement. The Minimum Sum left with the CPF Board currently earns 4% interest per annum. The interest rate is revised every yearly.
Upon reaching 55, you will be able to withdraw a portion of your CPF savings based on your available CPF balances. Setting aside the Minimum Sum when you reach 55 ensures that you have some regular income from the current Draw-Down Age (ranging from 62-65) to live on in your retirement.
The Minimum Sum was set at $80,000 in 2003 and will be raised gradually until it reaches $120,000 (in 2003 dollars) in 2013. These amounts will be adjusted yearly for inflation. If you are unable to set aside your full Minimum Sum in cash, your property, bought with your CPF savings, will be automatically pledged for up to half of your Minimum Sum. You will receive a monthly income from your Draw-Down Age until your Minimum Sum is exhausted. You may wish to start your monthly payouts later. It benefits you as your payouts will last longer.
There is probably more to talk about this in the coming months and years as we see how best to improve the system. I have not talked about the medisave component. There is also CPF LIFE which is an annuity that provides life long payouts instead of the present one which will stop when your CPF savings run out. This is important with life expectancy increasing.
(The CPF Life is an application of PAP ideology that simply refuses to move slightly away from an "every man for himself" approach. In doing so they insists on individual stretching the CPF even further to cover unexpected(unplanned) longevity. During the parliament debate, the Workers party proposed that individuals fund their retirement up to a certain fixed age and the govt starts a fund to take care of the small minority who live beyond that age. This scheme is simple and practical sharing the burden between state and individuals. Pushing CPF further using CPF Life to cover ultra-longevity, stretches and complicates the CPF making it less adequate for those who have normal or below normal lifespan. In an already unequal society, we make things even more unequal for the person who dies one yr after enrolling CPF Life - he dies younger and loses his CPF funds to others who live longer).
Please see the following links to provide a better understanding of our considerations behind this important scheme.
Check out the CPF website. Its a good site with useful explanations...try it!
Speech at Ee Peng Liang Memorial Fund Forum at NUS on 22 Aug 11
Speech at the launch of the "Are You Ready" campaign on 9 Oct 11.