Tuesday, July 15, 2014

What's Wrong with CPF? (Part 1)

CPF refers to Central Provident Fund, Singapore's pension system.

I must first profess that I am neither pro-PAP nor anti-PAP. In this post and the posts in the future (hopefully I get the time to write them), I will try to provide independent analyses on our pension system, touted as one of the best in the world, and hopefully readers will find them useful.

I also hope that readers would also have read Roy Ngerng's wonderful analysis. I must say it's quite thought-provoking. Though bearing in mind that he had an axe to grind. A lot of the discussion here would also be easier to understand after browsing through Roy's arguments. 

By and large, I would say that CPF is a pretty damn good pension system, for both Singaporeans and the government. Well, after all, it was the brainchild of our forefathers: a bunch of really cool guys, although they are quite misunderstood nowadays. Mr Lee Kuan Yew is really quite awesome, seriously. But the late Dr Goh Keng Swee was the coolest of them all. This site has a post dedicated to him. Sadly, very few people today actually know how great Dr Goh was, and how much we owe it to him.

The CPF Logo

In 1965, when we got kicked out of Malaysia, Singapore, as a nation, had no friends and definitely no place in the world. Needless to say, as a nation, we also had no income, no savings, no nothing! Mr Lee, Dr Goh and their team saw it as their mission to make sure that Singapore can stand on its own. He did a bunch of really cool things, and CPF was just another piece of the puzzle.

Dr Goh first saw the CPF as a great scheme to help citizens save some money, build up the nation's wealth to fund the nation's growth. It was an ingenious scheme! Actually it still is, just that now that it is now pretty much over-politicized. This is going to be one huge election pain point which could bring down the Government!

Anyways, to understand CPF, we have to go back to its beginning.

When CPF first started, the system was simple enough. Part of our salary would be with-held from us and the employer/government will contribute a proportional amount. These monies will be kept away in our own segregated accounts and when the time comes, we can withdraw them and use it for our retirement. This is far superior vs the old pension system where new workers support pensioners which would ultimately fail bcos the payout was too generous and it depended on an ever increasing young workforce to support an ever increasing no. of pensioners.

A lot of developed countries are still on this destined-to-fail system. But our own CPF got complicated as well and culminated to today's nuclear issues. It's gonna blow or meltdown if we don't do anything quick.

So what went wrong with the CPF? I believe the following would be the key issues.

1. The equal contribution rate (employer vs employee) was violated.
2. The minimum sum was a total disaster.
3. Interest was imposed on fund withdrawal.
4. The interest rates are compared to returns of our sovereign wealth funds.

Equal contribution: as most people who followed the discussions would know. One sacred rule about CPF in the very early days was the notion of equal contribution. In fact, when it first started, since both our salaries and the government coffers were so small, we could only start at an equal contribution of 5% ie someone drawing a $100 salary would put $5 in the CPF and the government would also put $5. And everyone's happy!

This notion was maintained until 1985, for reasons unclear to me now, the contribution became 25%! This means that there is 25% contribution from our salary and 25% from the government/employer. Then the economic crisis hit and the government abandoned the equal contribution to save the economy. The government dropped the employer contribution to 10% but kept the employee contribution at 25%. That was the first major breach of trust.

Well this happened some 30 years ago but it was significant. To this day, employer contribution is still lower. Trust once broken is very hard to reclaim. We all know this. Between spouses, siblings, friends. All the more so between the employer and the employee. Between the government and its people.

In fact, trust in our government is pretty low today, according to Catherine Lim. Trust forms the most basic tenet of relationships. When there is no trust, all other discussion are futile. Just imagine this, tomorrow, the government gives in to all the demands of netizen and naysayers of CPF. The equal contribution will be re-stablished. The minimum sum will be scrapped. Interest rate will be pegged to 10%, average of what our Temasek and GIC can earn.

Even if this happens, because there is no trust, people will second-guess the intention. People will demand even more. Why 10% and not 18% - the higher return that Temasek is earning. There is no end to this.

The solution is to rebuild trust. It is not easy. For couples, apologizing is always good way to start. Maybe netizens and officials can try that too.

Part 2 is out.


  1. IS CPF so very good?

    Why is that the Ministers and Top Civil Servants are on Pension Scheme?

  2. The main issue is the widening income gap. Even if Ministers are on CPF and Medishield schemes, the public already perceived them as high income earners with much more money to spare. Hence the anger that someone on a different level of the playing field is setting the rules of their financial planning. Our pioneers grew up poor together but once riches are to be distributed, dissatifaction is inevitable.