This article highlights some inaccuracies in a post by Roy Ngerng on his blog The Heart Truths.
The central contention in the post is regarding the rules governing the return of CPF savings withdrawn for housing. Mr Ngerng wants to have the right to decide whether to return the savings withdrawn for housing upon sale of the property because you should decide how much to “put into the bank”. He also takes issue with the need to return CPF savings inclusive of accrued interest because he sees this as interest that Singaporeans are paying to the Government for the use of their own money.
There are several problems with his arguments. First, the CPF is not a bank account. The purpose of the CPF is to provide a mechanism through which Singaporeans can save up for their retirement needs. Funds left in the CPF account earn specified rates of return. Some funds can also be withdrawn for investment in property or in other investment assets under the CPFIS scheme. The returns made on investments using CPF funds should contribute to the pool of savings being set aside for retirement. This includes the returns made on investments in property.
The accrued interest on the principal amounts withdrawn for housing comes from these returns. It ensures that monies in the OA grow at the same rate of return regardless of whether the money is left in the CPF account or withdrawn for housing. If the property purchased using CPF does not appreciate in value, the individual is only required to return whatever is the residual from the proceeds of his sale after paying off any outstanding mortgage. This could be less than the principal value of the CPF sums withdrawn.
It is not correct to describe the accrued interest on principal sums withdrawn for housing as interest paid to the Government and to equate it to the interest paid on a mortgage. This is because the accrued interest on the CPF savings withdrawn is part of your pool of savings which you will be able to drawn upon in your retirement years. Since the money is returned to the OA, it can also be used to finance your subsequent housing purchases.
It is also strange that in the example Mr Ngerng uses to explain how the value of the accrued interest grows over time, the value of the HDB flat remains the same. In fact, based on the Resale Price Index from 1990 to 2014, a 4-rm HDB flat purchased 24 years ago would be worth about 6 times its purchase price today. This would mean that Singaporeans selling their flats today would very likely enjoy cash profits on top of any CPF sums that would have to be returned to their CPF accounts. In addition their CPF savings would have grown and they would be in a much stronger position to meet their retirement needs.
The article also questions why the Minimum Sum has been increasing annually and why these increases are higher than the inflation rate. It alleges that the reason for doing so is to allow the government to retain more CPF monies in order to earn more from its investments.
This is not true either. The MS increases are necessary for two reasons:
1. Since 2003, the MS has been growing from $80,000 to reach a target of $120,000 in 2003 dollars in 2015. The increase in real value caters to Singaporeans’ rising expectations of what is considered a basic standard of living in retirement. (For similar reasons, from 1995 to 2003, the MS was increased from $40,000 to $80,000.)
2. The MS also increases with inflation to preserve its purchasing value.
The MS is not sized based on the government’s desire to retain more CPF monies in the system. Rather, it is sized to provide for basic retirement needs. If you have the full MS in cash at age 55 today ($148,000), the payouts that you receive from draw-down age should be able to cover the expenditure needs of a two-member retiree household in the 2nd quintile (in other words, between the 20th percentile and 40th percentile of households).
The article further claims that “you will never have enough in your CPF and will never be able to retire”. Yet, if we look at MS attainment rates, the figures are more encouraging. Among active CPF members who turned 55 in 2013, about 49% met their Minimum Sum in cash and property pledge – a significant improvement from 38% five years ago in 2009. For today’s new entrants who contribute to the CPF consistently, we expect that about 70% will be able to attain the inflation- adjusted MS fully in cash savings, if they make prudent housing choices.
An Illustration of some Misleading Points in the Article
In addition to the arguments above, several of the other pieces of data used in the article are erroneous, outdated or misleading. We have tried to explain this in the following examples:
1. Chart 1 misleads by suggesting that members’ CPF savings have gone missing.
He claims that a median income earner should have accumulated $700,000 in his OA and SA account by the age of 55, and questions why this is not happening. In doing so he seems to suggest that Singaporeans are being short-changed because they are not accumulating as much in retirement savings as they rightfully should given the CPF contribution rates.
The chart is misleading. First, many Singaporeans do not have such high balances in their CPF accounts because they have withdrawn a large part of their CPF savings for housing. This means that even though the money from an individual’s CPF contributions does not sit in his CPF account, it has been used effectively to secure a roof over his head and gain an asset that can appreciate in value over time. This is a good thing, as in many other countries retirees must worry about paying for rentals out of their retirement income because they cannot afford to own housing.
Second, there had been an MOM commissioned paper on retirement adequacy done by NUS and published in 2012, it takes into account housing withdrawals so we can get a more realistic picture of retirement balances. This then enables us to determine what a reasonable contribution rate might be to help most Singaporeans accumulate enough in their CPF balances to meet their retirement needs.
2. References to international studies are outdated.
Charts 2-4 refer to several overseas studies and their conclusions on the adequacy of Singapore’s pension system. His references are in some cases outdated. For example, he refers to the 2011 OECD
Pensions at a Glance Report. In fact in the there are more recent versions of these reports with updated figures on the level of retirement adequacy provided by the CPF system. In the latest OECD report published in 2013, Singapore’s reported net Income Replacement Rate has increased from 16% to 42% after OECD took into consideration that OA savings also contribute towards retirement income.
3. Singapore’s social security contribution rates are high, but they include contributions that can be used to provide for housing and healthcare, in addition to retirement.
Chart 6 refers to Singapore’s social security contribution rate as being one of the highest in the world. However, the comparisons are inaccurate because the social security contribution rates of other countries are meant exclusively to provide for pension benefits in retirement. In Singapore’s case, the 37% overall contribution rate includes contributions to the Ordinary Account which can be used for housing and the Medisave Account to meet healthcare needs. These are unique features of Singapore’s social security system where the Government has provided an avenue for Singaporeans to save to meet these critical expenditures, and these monies can be used even before reaching retirement. Only the contribution to the Special Account is ringfenced for retirement needs and the maximum SA contribution rate is 9.5%.
4. Chart 9 misleads by suggesting that the Government is paying 2.5% on all CPF savings. Chart 9 also compares the returns on pension funds in several other countries.
The 2.5% interest rate quoted for Singapore is the minimum return that is provided on OA balances because OA funds are liquid and can be withdrawn for housing. The return on the SA and MA account currently stands at 4% and an extra 1% is provided on the first $60,000 of CPF balances to boost the savings of lower balance members. Monies in the Retirement Account and the CPF LIFE fund also earn 4% interest.
In the recent Budget Debate the Ministry of Finance provided some important considerations that we must bear in mind when comparing returns on CPF funds with returns on other pension funds.
First, such returns must be looked at in the context of the performance of domestic currencies. Interest rates are typically higher in countries whose currencies have tended to depreciate over time because higher interest rates compensate for weaker currencies. Second, pension funds abroad especially in emerging markets, are predominantly invested in their domestic capital markets and are exposed to market risk in those markets. Should the markets underperform, Governments may find they are unable to deliver on their obligations to pensioners. This has happened to several pension funds and has led to uncertainty for pensioners and the need to undertake significant structural reform to pension systems.