I saw a comment left by a KHTan in response to an earlier article titled “Revealed: How GIC invests State funds” . I thought it might be interesting to answer questions in the comment, because that’s why the coffeeshop uncle and taxi driver normally accuses the CPF of (not) doing.
Here we go:
KHTan: Buying an insurance plan can give a return of around 3.5% after catering for expenses like dividends, bonuses, profits. Why CPF pay so little?
Me: Sure – but do you also read the fine print that these interest rates are subject to market conditions? And that they cannot reasonably guarantee you this payout for any period of time?
In the 1970s – 90s, banks were paying even 4% on savings accounts. 4%!! Look at the state that they’re in… look at how many banks folded today.
The whole purpose of CPF is that they are a Trustee – they are custodians of our money and they are charged with keeping money safe, even safe from inflation. It is not designed to make one wealthy. KHTan: Cannot understand why only 2.5%, after all they don’t have to cater for these expenses. And why we cannot use that money to buy an insurance plan?
Me: To put it straight, the Ordinary Account pays 2.5%. All other accounts pay 4%. And MediShield Life is a kind of insurance plan. Ask your insurance agent also about the different plans you can buy with your MediSave.
KHTan: If inflation is only 2.5% max why does the minimum sum increased at a much higher rate?
Me: The minimum sum is perceived to increase “much” because it is trying to keep up with previous years.
KHTan: If the money that are lock inside is getting 2.5%, there is no need to increase the minimum sum what!
Me: Salaries are increasing and continue to increase. Imagine if the minimum sum was $1000 – would it be rather meaningless to have a minimum sum then?
KHTan: Why not give us a better rate (at least higher than the insurance) so it can offset the difference!
Me: It is not reasonable to expect a basic safety net to pay better than a commercial wealth creation program. If so, the government must take risker moves and that puts national assets in jeopardy.
KHTan: When we have to pledge the house, what remain in real dollar sense after we have pass on to our children? Or they have to vacate because the part of the house will not be theirs. No one answered this question.
Me: No one has answered this question because once you answer this question, it will rock the fundamental meaning of “leasehold”.
The HDB has been observed to continuously en-bloc old estate and refreshing purchases of owners – if you think about it, how different is this compared to “freehold”? KHTan: The government ‘risk free’ is only as good as the next election; who knows what the people may choose. Even the new citizens are not happy now that they cannot bring in their dependent because of restriction of visa.
Me: Exactly. KHTan: If the insurance companies like NTUC Income and Great Eastern fail in Singapore; what do you think will be the state of our economy? Do you think anything can still be risk free?
Me: Everything can fail in life. What is important is that policies must be there to mitigate these risks. In the case of banks, there is a national insurance that if a bank fails, your money is protected by up to S$50k.
If GIC fails, there is still Temasek and the MAS to fall back on. If all these agencies fail to produce results – that means the market conditions of the world is in very serious trouble. And that we have to fall back on the reserves.
And what are bloggers asking of our reserves? To be released for immediate use. To strip it naked so that foreign speculators can attack our dollar. If we’re not careful about our state of affairs, it is rather easy for Singapore to be disregarded and opportunities passed on to more exciting countries.