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.

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.