Once upon a time, a young boy wrote 400 articles about how the CPF cheats Singaporeans of their savings and yesterday an old woman gave a dramatic appeal for the Government to return her CPF money. With so much emotion embroiled in this national savings program, I think people need to take a neutral, informed perspective at this.
Here are some of my quick thoughts:
The acronym “C-P-F” stands for “Central Provident Fund”.
I think we use the 3 letters so often, we forget what it really is. CPF is a centralised fund that provides for the nation’s retirement.
It is not an investment program. It is not a bank. It is not a business.
It is centralised and the CPF Board is the Trustee that manages the money. As a Trustee, it is charged with a few responsibilities:
a.) To protect your money against inflation,
b.) To provide social security
Why is it so inflexible?
I believe the foundation of CPF policies is grounded on two principals:
a.) People generally underestimate their financial needs, especially how long they live, rates of inflation and medical expenses.
b.) It is the last line of personal financial defence before a needy citizen turns to public funds
These principals are what leads policy makers to design a forced savings program. Where fiscal discipline fails, there is a statutory obligation.
Once upon a time, you couldn’t even use your CPF funds to buy a house, or to pay for studies.
Are we better off without it?
I don’t believe it is in the interest of the nation to do away with the CPF system completely. Singapore does not yet have a working social welfare system designed into its policies yet and if the CPF system was to be halted, the risks on the nation’s finances would be too high.
Why are we getting only small payouts from our CPF?
At retirement, CPF savings become an annuity program to fund basic living. It is the last line of defence in social security.
Remember the principals that CPF is founded on? That people generally underestimate their financial needs?
Economists at Vanderbilt University, the University of Kentucky and the University of Pittsburgh did an experiment to see what would happen when individuals who were already in financial distress were given globs of money.
They collected data on 35,000 winners of up to $150,000 in Florida’s Fantasy 5 lottery from 1993 to 2002 and used state bankruptcy records to cross-reference the data. Their findings, published in The Review of Economics and Statistics, showed that while winners had more than enough money to get out of debt, big winners were just as likely as small winners to go bankrupt in three to five years. The money only postponed the inevitable.
Research has shown that people can’t manage it when they receive a sum of money, all at one go.
Are CPF savings/payouts sufficient for retirement?
To answer this, you have to talk about inflation.
Many people underestimate the corrosive power of inflation. If you had a hundred dollars today, and you reduce it by 2% each year… how much do you think you’ll have in 30 years? Let’s see:
$100 – first year
$98 – second year
$96 – third year
…by the time you get to your 30th year you’ll have little over $20 left. Granted your money won’t actually disappear like this, but theoretically that’s how much your $100 is worth in 30 years.
CPF funds pay between 2.5-4% over your various accounts, so at the very least your money is protected against inflation. This may be enough to meet very basic needs, but you need to adopt the view that CPF is a last line of defence. You need to shore up savings on your own to fund the type of lifestyle you want.
How about the low income individuals?
If you had larger salaries in your career, your retirement payouts will be larger.
If your salary was small, your payouts will be smaller. And chances are in this case, you probably wouldn’t have much personal savings either.
Those in this income bracket will need money at all times of their lives, regardless if they’re 55, 65 or 75. Should then CPF Board allow for more liberal use of their money in this case?
Personally, I think maybe policy makers can consider allowing for more flexible use of income for this group of people. After all, they’ll be tapping on public funds sooner or later, so why not? It could even be a condition based withdrawal – you can take this money out now, but you have to be committed to active job seeking, skills building or perhaps unions can extend active assistance.
Low income individuals should be assisted via a separate set of policies and this assistance should not be confused with the intent of CPF.
Should mid-to-high income earners be able to withdraw early/in total then?
For the rest of income strata though, I do not agree with flexibility of withdrawal. If the CPF fails to provide for retirement, to give citizens social security… then it has failed its very purpose for existence. Whats the point of this fund then if it does not do what its supposed to do?
If flexibility was the intent, why spend so much resource trying to run a Central Provident Fund Board, when banks can do the same job?
Is it CPF then still “your money”?
Some politicians have repeatedly said it is, but I think it is only half an explanation. It is wholly your money, except you have limited power over it. The CPF Board is essentially a Trustee – a Board that decides how much you can spend, where you can spend and when you can spend.
At the end of your life, all the surpluses will be delivered in cash to your family. Nothing stays with the Board.
CPF – a last line of social security
If you think that after 30 years of working life, and you still don’t have enough in your CPF accounts… then you should be very concerned today. In this case, you should be looking at how to improve your salary, how to negotiate with your boss for better pay. What sort of new skills you need? Where are the new job prospects? What are the investment programs you could consider? Or maybe you’re better of being a business owner and creating jobs?
Tomorrow’s problems must be forecasted and solved today… if by the time you reach 55 and realise the status quo life you’ve been living was not adequate, then it may be a little too late.
It makes me very worried how people are arguing for the ability to use their CPF-protected funds flexibly, rather than be concerned about how to increase the size of the retirement funds in their banks.
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