Saturday, July 26, 2014

What's Wrong with CPF? (Part 2)

This is a continuation of the previous post.

Let's recap, our CPF (central provident fund aka Singapore's pension system) has four 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.

We discussed issue #1. The solution is to bring back the equal contribution policy. Since employers will cry foul if they are asked to raise their contribution to 20%. Perhaps it is much easier to drop employee contribution to match the current 15% or so. ie we see more take home pay! This also helps in a way since less of our salaries will now be locked away.

Issue #2 is the most hated policy. The dreadful minimum sum. When the amount is some crazy number like $160,000 and climbing, most people get put off immediately. But actually, as we wrote in the first post ever on this blog, retirement is expensive. $160,000 is barely enough. So on this count, our beloved Govt might actually be right. Although what's right doesn't mean what's popular.

Just to prove this point. It is also right to exercise five times a week, abstain from alcohol, eat vegetarian, sleep right and stop waking up at 4 am to watch World Cup and stop driving to curb CO2 emission. Who the hell would do all that? So the minimum sum, while a correct idea, is a bad idea.

There was also another damn good reason how it helped. In the early days when all these retirees could withdraw everything without any minimum sum restriction, they withdrew their hard earned savings of say $50,000 and bought Germany vs Brazil, betting Brazil would win (only to see Brazil fail dramatically). Or they would spend $50,000 on a Chinese prostitute. Or they would spend $50,000 buying Lehman note from DBS. Whatever. People were losing their shirts, their last shirt - the one that was supposed to last them till they go meet their ancestors. So isn't it good to have a minimum sum to stop this shit?

Which is worse? Betting World Cup vs CPF

Of course, people don't think that way. They want their money back, squander it and that's that! Anyhow, in today's situation, where there is a lack of trust, I believe the only way is to do away with the minimum sum. Sometimes people have to learn the hard way. Let them get into the same shit again. Maybe get their family members to decide whether they can withdraw or not. Like the casino blacklist.

So, while the minimum sum was a necessary idea, it would not fly in the current climate. To make things worse, we have issue #3 which forces people to put more money into their locked away CPF account if they used the monies before to buy properties, or fund their kids education or whatever. And everyone used their CPF monies to buy properties, or fund their kids education or whatever.

This following important point came from Roy. Thanks Roy!

It was a seemingly logical thing. If you took money out of CPF, you should put it back with interest. That seemed logical. After all. CPF was meant as saving for retirement. So put it back with interest.

But if the money was left there, the government paid the interest. Not us. Over a long time span like 30 to 40 years, this interest would snowball due to the effect of compounding. It is not a small sum.  Just a simple illustration, say interest in CPF now is 2.5% and we withdrew $100,000 to buy our HDB which now cost $400,000. Over 30 years, this would be like 80% of $100,000 or $80,000 that we have to put back into CPF!

$80,000! No joke! By taking monies out to buy HDB, we "lost" this amount...

I urge everyone to pay back what you owe CPF today!

Issue #3 when linked back to the minimum sum is part of Roy's argument. Most will never be able to hit the minimum sum. Imagine having to put back $80,000 just to get back to zero, and on top of this, you need to achieve the minimum sum of $160,000! And the amounts will keep snowballing. Never mind that actually we can still withdraw some money without hitting the minimum sum, as most people do. But this point is definitely worth pondering. By having money in CPF, we earn "good" interest with Govt paying us that 2.5% or 3.5%. By taking it out, we lose that interest and we set ourselves up for future problems due to the rules of the CPF game.

Of course, I do not think the Government had ill intentions designing it as such to suck our money with such a unscrupulous scheme. The HDB and education use came much earlier than the minimum sum. (and equal contribution was even earlier). It was an unintended consequence. So what's the solution?

Well, maybe we cannot use CPF for housing, education or whatever. Maybe we can have an option for people to withdraw CPF but they need not put back with interest, which they do if they hit a certain age. However, the crux of the issue, in my opinion, goes back to trust. Our Govt do not trust that Singaporeans can handle their retirement well. It has been proven with all these retirees squandering away their CPF monies. Similarly, we don't trust our Govt too! We want our money back!

This is a delicate issue. Trust takes time to build. And it would take both our leaders and the people to be humble, willing to put the differences aside and focus on what really matters: listening, understanding, un-antagonistic, unimposing, working together finding the middle ground, finding the solutions together.

Next stop: CPF returns and our sovereign wealth funds' returns.
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