Tuesday, August 12, 2014

What's Wrong with CPF? (Part 3)

This is Part 3 of the CPF discussion, interested readers can start from Part 1.

We have come to the most controversial issue, should CPF give us 6-16% return that our sovereign wealth funds generate? It is well documented that GIC generated 6% and Temasek a whopping 16% over a long time frame like 20 years or more. So part of the argument was that why is CPF only paying us 2.5%? Isn't that unfair?

Again, this issue has been debated in depth. So just reiterating a few things.

First Temasek does not handle CPF monies. While GIC does to some extent, it is hard to segregate what's CPF and what's from other Govt sources of revenue. Remember, our Govt has a lot of revenue sources: outside of income and corporate taxes, they have casino levies, COEs, ERPs, summons, stamp duties, Singapore Pools (ok, lost a bit to Andy's Dad but still a mega money making machine), Changi Airport, PSA, Zoo, Bird Park, Night Safari etc etc. So how to segregate? Even if it's possible, it's not optimal.

Singapore Pools, Govt's mega money making machine

But what's more controversial is this: can we stomach the risk that comes with higher long term return? 

CPF rate is risk-free. The 2.5% return is guaranteed. The principal is protected. To ask for a higher return, the risk comes with it: the principal can and will fall below par. During the global financial crisis in 2009, stock markets were down 20%, in a week. At the lowest point, it was 40% decline from its peak. GIC and Temasek suffered huge losses. Can we afford to see our hard-earned CPF money lose 20-40%?

Sometimes, we don't know what we are asking for.

So if the answer is that CPF monies cannot go below par, then the next relevant question should be: is 2.5% appropriate? This is the interesting part. If the money is locked away for 30 years, then looking at insurance policies, long term government bond yield, maybe 2.5% is not right. It should be higher. This point could be valid.

However the Govt is also very wary of raising the interest rate too much, bcos the system will then be subjected to abuse. Imagine this, the Govt raise the interest rate to say 8% (yeah, yours truly's target). Now this is 8% risk free. If this ever happens, this site should be shutdown bcos its purpose in existence just vanished. Why read how to make 8% when CPF gives you 8% risk free?

Of course, this runs the risk that the 8% return cannot be met. In fact, GIC only generated 6%. Then maybe we should ask Singapore Pools to chip in a bit. Or ask Andy's Dad to return his winnings perhaps.

Just kidding, Andy.

It's always good to under-promise, so I guess that's why we are at 2.5%. Okay... just maybe a tad too conservative perhaps. Never mind that for a second, let's imagine another scenario.

CPF gives 8%, say a rich retired guy, say Marlboro Tan. At 65, Mr Tan can just put his $10,000,000 into CPF (a small amt of his huge personal wealth) and the Govt has to pay him $800,000 every year. CPF just became his personal money tree to buy a Ferrari, or 2 HDBs, every year. Yup that's why he's happy waving little Singapore flag during NDP, despite making our lives so miserable. Yes, there's a cap how much you can put in CPF to stop this shit. But there are enough rich retirees in Singapore to abuse this. Right?

So maybe the Govt can only raise it by a little, say to 3-4%. Albeit it is already 3.5% for the first $60,000 and 4% on the Medisave and Special Account, subjected to some cap. So again, maybe it calls for putting aside the differences and petty arguments, say just simplify everything to a 3.5% return.

So these would be my proposals for changes:

1) The equal contribution from employers and employees should be re-instated, say at 15% each.
2) The minimum sum should be scrapped.
3) The CPF return should be raised to 3.5% across all accounts.
4) The interest on CPF withdrawal should be stopped. Or alternatively, CPF can no longer be used to buy houses, fund education or withdrawn for any other purposes.

However, I must stressed that without mutual trust: the Govt trusting its people and vice versa, it is pointless to change anything. Since the intentions would be mis-read and there would be just more arguments.

It is worth noting that my four proposals require give and take for both employers and employees, for both Government and citizens. Like #3 requires a reduction in the Medisave and Special Account returns. #4 can be quite thorny and the alternative of not using CPF to buy houses might not work since people want their cake and eat it with the cherry and gold flakes on top as well. All this cannot be done without mutual trust.

Singapore has come a long way since being booted out of Malaysia in 1965. Our forefathers built this nation from scratch. Our parents trusted their leaders and they built Singapore. They believed that nobody owed them a living. The world does not owe Singapore a living. It is up to us to make our own living. But now, there is no us. There's the Government, which its people do not trust. There's a bunch of folks who think the Government owes them a living.

At the start of this series, I alluded to the fact that, while having some issues, the CPF is a robust system. I believe the few tweaks will make it work well again. This is not like our MRT, or our education system where major, major overhaul would be needed to make things work again. CPF had worked well and is now being politicized bcos of the few issues we discussed. 

But in the end, it's about trust. Put the differences aside and focus on what really matters: listening, understanding, un-antagonistic, unimposing. Rebuild trust and find the solutions together. 

Majulah Singapura!