“Our Money” – minding the gaps in MOM’s CPF blogpost

Minister for Manpower Tan Chuan-Jin published a defence of the CPF scheme on the MOM Blog yesterday. It was logical, factual, and puts paid to many of the rumours and gripes about the CPF scheme out there. Many, but not all. Bottom line, though, is that the minister merely repeated stuff from the CPF website and other repositories of G information, quashing only the most outlandish and uninformed speculations.

There’s plenty of ground left to be covered, really, but even at this stage (and even ignoring a lot of the content on Roy Ngerng’s site), gaps remain in the CPF scheme and the communication thereof.

1) Minimum sum and the shifting goalpost

Minister Tan said it himself in the blog but didn’t show how CPF addressed this. The minimum sum is designed to “meet the expenditure needs of a lower-middle income retiree couple” who will be turning 55 in that year.

It’s a problem of poorly managed expectations again, from what I can tell. We’re looking at 20 or 30 more years of disappointment for me as the minimum sum goalpost keeps moving further and further away with each year closer to retirement that I get.

Honestly, the retirement plans from major insurance companies are much more well-presented, giving you a proper hard target based on some fair assumptions for whenever it is you turn 55 or 60 or whenever you want to “retire”. You know that if inflation goes off-track, you’ll have to re-jig the plan, but not by very much. You know how much you should be saving. You know that you can do whatever you want with your lump sum payment, including investing it to match inflation.

What do we have instead? A target made for people turning 55 THIS YEAR, which doesn’t increase in line with inflation, which means that I have not a bleeding clue how much money I’ll be getting every month when I turn 55, or if I’ll have to make any alternative plans for retirement, which I should be doing when I’m 25, not 55.

2) What retirement?

When will I retire? (Personally I hope I never do). Perhaps in 10 years, given the fact that we’re living longer and being supported by fewer youngsters with each passing year, we will only get to unlock some of our CPF monies at age 65. Or ‘retirement’ will only be allowed at age 75. What the heck is retirement anyway?

Everyone has a different expectation of what their silver years may be like, and the fact is that CPF won’t be able to make all these dreams come true. People have their own ideas of what their retirement savings should be used for. CPF isn’t really a retirement fund per se. It’s the “welfare” system that we don’t want to have – the thing that will keep you financially alive when everything else goes to hell in a basket.

It would be nice if we could hear that more often.

3) Why is minimum sum still a bridge too far?

If, according to the Ministry, 50% of “active CPF Members” cannot meet the minimum sum (needed for a semi-decent retirement) today, then the CPF scheme has failed to provide for Singaporeans. The burden for the shortfall may have to fall on the G’s current account, which means taxes.

With a 50% success rate, might we have been better off trying to implement a national pension plan funded by taxation? Trade one drawback with another? We could have a whole other debate about what really causes national pension funds to succeed or fail.

If CPF is the backbone of our national retirement plan, then I’d say that an estimate of 70% is pretty dismal. 50% is a nightmare. This is for basic living standards here, and mind you, CPF payouts don’t increase with inflation. $1,200 may seem decent today, but what will it buy when my dad turns 85?

Looks like the minimum sum is best used as an indicator of how screwed you will be if you stop working now.

4) “My money”, but out of my hands

The G has always been selling CPF as “your money” (and the blog post says so), but we don’t have flexibility to spend it even after we retire, let alone before. Sure, we have a couple of options like pre-approved shares and housing, but with that ever-increasing minimum sum in place, we can’t depend on “our money” to get us out of a fix. In other words, it’s “my money” with a long, long list of caveats and miles of fine print.

Take this old blog post from Gintai, for example. If you run into financial trouble, and need cashflow to staunch or prevent short-term financial loss, you can’t use your CPF, even if it is a very savvy long-term financial move, and would help secure your retirement. This means that we should plan our lives remembering that CPF money is all but untouchable, but since that is the case, PLEASE don’t go around telling people that it’s “your money” – they’re going to get the wrong idea.

5) This comment:

CPF - the fund manager's nightmare.

CPF – the fund manager’s nightmare.

ZY Ong: “Hi Mr. Tan, I am curious why does CPF invest all the money in Singapore Government Securities? Why can’t part of it be invested with fund managers? Investing all our money in bonds (even if they are AAA-grade) for the long term is simply not what any good financial planner tells his or her client.”

Why is the CPF board going 100% into government bonds? Sorry, 100% into government bonds from only one country. Perhaps there will be an explanation down the road, but I don’t think it will be convincing. Triple-A? There’s many other Triple-A investments out there – diversification is advisable.

Still, 2.5%/4% interest hasn’t kept up with inflation over the last decade, but the minimum sum is sure hard at work staying out of reach. Maybe that’s also what people are upset about.

6) Mismanaged expectations

The G has always touted CPF as the best solution for a retirement fund. It has never in my living memory ever really said anything bad about CPF, which is a bad thing because it raises expectations WAY too high to be met.

Face it – CPF is a system. It may even be a good system. We hope it is the best system. But even the best system has its weaknesses and limitations. The G doesn’t talk candidly enough about these limitations. Even the Minister’s blog post talked up the CPF and its sub-schemes to no end, with no criticisms of the scheme. No acknowledgement that it is a “nanny state” system that locks up your money, presumably for your own good. No discussion of alternatives.

A robust defence of the CPF scheme must include a comprehensive and honest evaluation of its failings and weaknesses, so that everyone doesn’t have inflated expectations about what we can or can’t do with “our money”.

 

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11 thoughts on ““Our Money” – minding the gaps in MOM’s CPF blogpost

  1. Daily SG: 27 May 2014 | The Singapore Daily

  2. Frankly, I find it puzzling that Singaporeans (well, 60%) have willingly allowed the govt to do as it pleases with their money. That in my books is carrying belief to a fault. Very unwise and unhealthy. That has to be the reason why the govt has always been acting so presumptuously all this while. Given an inch, it has helped itself to a mile! I hope the citizens are now savvy enough to see the goodies being handed out right now to all and sundry, esp. the ‘pioneers’, are laced with the same stupefying drug that would make donkeys out of the voters like in the Pinocchio story.

    • I suppose that if we wanted some sort of assurance of a pension, the alternative would be higher taxes – maybe 15-20% more income tax? Thing is that CPF caps off at $4500 so the upper middle and rich will be contributing more to society if it was a progressive tax.

  3. I agree with some of, or actually, most of your points. Except for minimum sum’s shifting of goalposts. Its a fact that people are living longer and longer. If the withdrawal age is remained at 55, and people from my generation live to 100, the minimum sum will definitely not be enough to cover my retirement of 45 years.

    But then again, one thing very few people has addressed so far about the CPF system is the fact that Singaporeans are earning way too little. Yes, the minimum sum is a very good goal to have. But the problem lies in the fact that many, a whopping 50% is unable to achieve that. I agree with shifting the withdrawal age and the increase in minimum sum. BUT! The govt must at the same time help us by increasing our wages! We already know we need that amount to retire, but that’s just one side of the story, the problem is many of us cannot reach that target. If wages rose with inflation, there would be no problem with citizens meeting the minimum sum and this debate would never take hold in the first place. The govt, and even the opposition has gotten the debate wrong, there is nothing to argue about the min sum or the shifting of goalposts, what we need is an increase in wages and the govt and opposition should look at ways to get this done.

    • Spot on about the miserable wages. How many % of active CPF members do we expect NOT to be able to retire comfortably, even with a scheme like CPF in place? 5%? 10%?

      This would account for part timers and such, but when folks who hold down a regular job their whole lives don’t make enough to retire on when their body can’t work any more… the system has failed.

      What I meant by the shifting goalposts is that they appear to shift every year. What the G should do instead is to tell a 25 year old what he needs to aim for at age 55, or a 35 year old what he has to put away over the next 20 years. What’s the point of telling a 55 year old how much he should have saved in retrospect? This way we don’t feel like the goalposts are moving so much.

      Of course, with wages the way they are, that 30-year minimum sum target is going to look all but impossible to most. But it will help the G plan for contingencies.

  4. For anyone who is familiar with rates of return and has invested a significant sum of his or her net worth, it is safe to say that the returns given by cpf are not life changing, but they are not insignificant too.

    Should the cpf have invested into more equities in the bid for higher returns to cpf members, it would not have been able to pay the promised returns during crises like the one in 2008 and thereafter the euro crisis. The number one priority that a system like cpf should have is that cpf members get what they are promised whether the sun rises or not. If the cpf board tells us that returns are higher at say 3.5%, and delivers as said for a decade, it only takes one year of financial turmoil for them to fail to deliver the promised return. An event like this would destroy the trust between the people and the government in totality.

    The cpf scheme is a far far more complex system than what 99% of the online warriors think it is. It is a fund that has to deliver returns even if aliens attack earth, it has to account for an infinite combination of random withdrawals through medisave, hdb purchases etc and it too takes part in the same asset markets that most countries are exposed to.

    People must stop comparing cpf fund management to that of retail fund management. Retail fund management is voluntary; u buy and invest on your own accord. Cpf is mandatory and the aim is to keep costs low and to deliver what it promises. FYI, I have been in the financial planning industry and most financial advisers use cpf as a cash cow to milk for hospitalisation/eldercare insurance policies and lump sum investments. They will always say that cpf is not enough for retirement to create a need. The public must not take the financial markets for granted. In the short term, anything is possible. Even in the long term, depending on your luck you might be hit with a crisis just when you need to liquidate your funds for personal use. That the cpf can guarantee you the prevalent rates, that is no trivial feat.

    • Which is exactly my point that it isn’t really “our money” and so the G must stop trying to tell people about it in those words. It’s a mandatory scheme that we don’t have a say in. We can’t adjust it to match our risk appetite. We can’t liquidate, only transfer.

      Sure, CPF is complex, but

      CPF returns are not guaranteed. They are guaranteed by the SG government. AAA now, but as you say, who knows what the future will bring? AAA governments in Europe have also had to cut welfare.

      If aliens attack earth, I’m sure there’s some escape clause somewhere. God knows what the SGD will be worth anyway. Might as well trade in bullets.

      You presume that the investment returns from a year like 2008 pay in the same year. This doesn’t have to be the case. Long-term profits can be kept in reserve for bad years, but having a retirement fund return rate that bleeds to inflation isn’t a great plan, and hearing that GIC/Temasek made a killing over the decades while half our CPF members fall short of the minimum sum? Well, why wouldn’t a bonus be in order?

  5. Hello Daniel, I’m a Singaporean in Melbourne who has spent the last decade working in the financial industry here, dealing with pensions and investments. Back when I left Singapore I was deeply unhappy with the CPF scheme. However over the years, I’ve come to appreciate how it is run and currently believe it’s one of the best systems worldwide.

    Allow me to answer some of your (and your readers’) questions:

    1) >> “I suppose that if we wanted some sort of assurance of a pension, the alternative would be higher taxes – maybe 15-20% more income tax? Thing is that CPF caps off at $4500 so the upper middle and rich will be contributing more to society if it was a progressive tax.”

    Using Australia as a guide, the aged pension costs 13.25% of the budget.

    Singapore’s guiding philosophy has always been that everyone pays their own way, as much as possible. Over the long run, progressive taxes are just a recipe for class warfare due to moral hazard. It splits a society into two. Human talent/investment is a lot more mobile in Asia too. In my experience Singapore can’t afford such a measure.

    2) >> I agree with some of, or actually, most of your points. Except for minimum sum’s shifting of goalposts.

    The minimum sum isn’t really shifting the goalposts, it’s reflecting how the goalposts have changed. The direction of casuation is different. You’ll notice that the increase is about a constant 7% per year.

    Many are upset that this is above the CPI rate. What they don’t understand is that the CPI rate is an estimation for a typical member of society (typical basket of goods). In contrast, the minimum sum is tailored for retirees, in particular healthcare.

    In other words, the Government has consulted its actuaries and expects retirees to experience a 7% rate of inflation rather than the 2-3% CPI. Hence the forced increase in the minimum sum. Again, you see the same philosophy of self-reliance in play.

    3) >> But the problem lies in the fact that many, a whopping 50% is unable to achieve that. I agree with shifting the withdrawal age and the increase in minimum sum. BUT! The govt must at the same time help us by increasing our wages!

    I wish the Government could just wave a magic wand and increase everybody’s wages. But we all know that’s not how it works.

    Part of the problem is location. Singapore is an Asian country and our competitors command a huge wage advantage (less so than in the past, but still significant) over us. Suffice to say that Singaporeans are already the most expensive workers in the region. In the past we possessed a comparative advantage because our neighbours were relatively backward, but they have caught up since. There is no easy “fix” here.

    4) >> This would account for part timers and such, but when folks who hold down a regular job their whole lives don’t make enough to retire on when their body can’t work any more… the system has failed.

    Then let me inform you that the system has pretty much failed everywhere.

    I think everyone (not only Singaporeans) have to re-adjust their expectations. Times have changed. If one wants to retire, working your entire life is no longer enough. One needs to take the responsibility to learn to invest, to purchase assets. That’s a reality no amount of politicking can change. Sure, citizens can demand that the Government pick up the tab, and in some countries they actually do – until the money runs out.

    CPF at least guarantees you a roof over your head and income from an annuity. Yes, it’s not inflation indexed (one of my biggest complaints), but look, if you want the Government to bear inflation risk, then the returns will be lower for everyone, simple as that. Better to let each individual fight their own fight instead of complicating things with cross-subsidizing.

    I have younger Australian colleagues who were renting, are renting, and will be renting their entire lives. They will never retire, and will never own any assets, not even a HDB lease.

    5) >> What the G should do instead is to tell a 25 year old what he needs to aim for at age 55, or a 35 year old what he has to put away over the next 20 years.

    As I’ve previously explained, the Government has already told Singaporeans what to expect. Whether Singaporeans will happily accept this reality is another issue.

    7% per year is the minimum, or else one isn’t prepared for retirement. And if one is not prepared for retirement, one shouldn’t be allowed to withdraw one’s CPF monies. After all, a responsible Singapore shouldn’t unnecessarily burden his fellow citizens.

    For the 25 year old: The current MS of 150K * (1.07 ^ 30) = 1.14 million.

    In the end, it really does boil down to whether Singaporeans are willing to continue with this philosophy of self-reliance, or whether they will selfishly demand more benefits for themselves at the expense of their fellow citizens, perhaps fracturing society.

    Many are upset that Temasek earns 14-16% (BTW those are historical averaged rates, I seriously doubt they still earn those rates), but where do they think the money goes to?

    Of course those monies eventually benefit Singaporeans – for example, the 80% hospital bill subsidies, our kids’ education, and the fact that most Singaporeans pay no income tax, amongst others?

    There is no free lunch. If Singaporeans demand more pension benefits the money must come from somewhere – most likely your fellow citizens’ pockets.

    I hope I don’t come across as too harsh. If you have any further questions, please feel free to ask and, using my experience, I’ll try to answer them as best as I can.

    • Hi Melbourne,

      Thanks for chipping in. I can see that the math comes easily to you, which is probably why you are in this line (or perhaps the other way around). The CPF is a system, for better or worse, and better than no system at all. It is better than most, and worse than some, but it’s all hard to say because different people have different expectations. My main point is the fact that COMMUNICATION about the CPF is bad. So we have a nanny state forced personalised retirement investment plan – so be it. Just say so. Be transparent about it. Communicate properly.

      I don’t think a lot of 25 year old Singaporeans know, without prompting, they they will need 150K * (1.07 ^ 30) = 1.14 million, although you can pull the math off. I don’t think that they even know that you should put the rate to the power of the number of years. I don’t even think they could do it without a calculator. I’m not even sure they think about this whole “retirement” thing much, especially since there’s this automated, no brain CPF thing that everyone assumes will save our asses, but nobody realises is not quite that yet. We need our nanny state to simply give us the big number at the end and show us the backward math. This they have not done. The shifting of goalposts is “perception”. Of course goalposts shift. I do not criticise the minimum sum changing every year. They shift all the time, but if you communicate properly and manage expectations well, then you save a lot of angst. Has the CPF board mentioned 1.14mil to our 25 year olds? No. Why not? They should.

      Many Singaporeans also have no idea why or how the rate for MS changes. They have no concept of the CPI or of how to determine how much you need for retirement, or why the MS change is 10% this year, 5% the last, and why it should be annualised.

      I maintain that CPF is a sort of regressive tax. This is because the majority of profits above the bond rate from the management of CPF funds goes into the G current kitty rather than back into the CPF’s coffers, which it rightfully should do. The current account doesn’t just pay for welfare – it pays for the overall running of the G machine. Those earning under 4.5k pay a larger proportion of their CPF profits foregone to run a machine that benefits the whole of society. They also pay for their own welfare, in a small way. Progressive taxes split society into two, but I believe that this is a better way of splitting society into two than splitting society into two via regressive taxes. Society will always be split. Split it for the right reasons and on justifiable grounds.

      The failure of other systems is no excuse for our failure, and no pat on the back for our mediocrity.

      Wages, and the larger economy, are way to complex to get into here.

      But let me restate myself, other than one or two questionable aspects of CPF, it is, all things considered, a pretty good system. The communication about how and why it is a pretty good system, however, is complete and utter garbage.

      So, if I may ask – why hasn’t the CPF board communicated many of the things you are communicating? Even Minister Tan’s blog post opportunity did nothing more than lay out all the old facts and figures, which, while true and useful in some way, do not address the real threats to communication in the current environment – the criticisms being levelled at

  6. Just a few further short comments:

    1) >> Which is exactly my point that it isn’t really “our money” and so the G must stop trying to tell people about it in those words. It’s a mandatory scheme that we don’t have a say in.

    Forced saving is typical of pension systems all over the world. Australia’s superannuation system or the UK’s National Insurance system, for example.

    >> We can’t adjust it to match our risk appetite.

    CPFIS. Yes, the offerings can be somewhat limited. Which is why there have recently been some rumblings about allowing retail investors to buy into Temasek directly.

    >> We can’t liquidate, only transfer.

    Technically not completely accurate. You can liquidate if you meet the Minimum Sum, the rationale for which has already been covered. But again, this is typical. The UK doesn’t allow you to withdraw everything either. You have to buy an annuity too.

    BTW, this was a recent change to the UK system and at that time I was amazed that Singapore had the foresight to prepare for an aging population ahead of the UK.

    2) >> CPF returns are not guaranteed. They are guaranteed by the SG government. AAA now, but as you say, who knows what the future will bring? AAA governments in Europe have also had to cut welfare.

    Sorry, but that’s as safe as it gets in reality. CPF liabilities are denominated in SGD anyway. The truly cynical would claim the Government could merely inflate everything away.

    BTW, that is the reason why Malaysia’s EPF, for example, gives higher returns. Not because the Malaysians make better investments, but because it’s riskier to lend to their Government. Not many understand that.

    As you state, AAA European governments have had to cut welfare. Which is why Singapore prefers not to make promises (say a 6% CPF rate for everyone?) it may not always be able to afford.

    3) but having a retirement fund return rate that bleeds to inflation isn’t a great plan, and hearing that GIC/Temasek made a killing over the decades while half our CPF members fall short of the minimum sum? Well, why wouldn’t a bonus be in order?

    What Singaporeans need to understand is that CPF is not the be-all-and-end-all for retirement. Perhaps it was marketed as such in the past (wasn’t around back then!). If so, that’s something the PAP has to step out and publicly correct.

    It’s merely a safety net meant to provide the bare minimum for those incapable of planning for retirement.

    There were a few interesting statistics in the ST recently. Apparently only about 12% of OA funds are ever independently invested via CPFIS, and 20% of SA funds. Of those investors, 50% lost money, 35% earned the OA rate of return or less (2.5%), and only about 15% were competent enough to make decent money out of it.

    The ugly reality is that the vast majority of Singaporeans don’t have the initiative or knowledge to adequately prepare for retirement. Keeping in mind that CPF needs to be a one-size-fits-all system, under those circumstances, I don’t think that the current scheme is unreasonable.

  7. The CPF Conundrum | Inenet Consultancy Pte Ltd

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