CPF review: Here are my three wishesRaise minimum withdrawal amount, inflation-proof savings, boost returns
By Toh Yong Chuan Manpower Correspondent
MANPOWER Minister Tan Chuan-Jin has been busy defending the Central Provident Fund (CPF) system this week.
In a lengthy blog post on Sunday night timed for the Parliament debate which started on Monday, Mr Tan wrote: "Money in your CPF account is your money."
It was a stout defence of the CPF system, amid criticisms online of Singapore's national pension fund.
The former school debater turned army general and politician is not one who goes around picking fights, but neither is he known to shy away from a robust debate.
But his comments became a lightning rod.
An angry reader e-mailed me on Monday: "CPF money is your money? No it is not!" Another charged that the minister was stating the obvious, without addressing the real issues such as CPF returns.
It was an uphill task for Mr Tan from the onset.
Those who are already persuaded that the CPF system is sound would be indifferent to his blog post.
But for those seduced by the simmering online criticisms that decry the CPF system as a scam and the Minimum Sum a ruse, the blog post is not going to change their minds.
To put things into perspective, it is implausible that the majority of Singaporeans are unhappy with the CPF system.
The CPF Board's annual report published last year showed that more than 910,000 Singaporeans are using their CPF savings for housing mortgages. Without the CPF, their ability to own homes would have been severely limited.
Even so, it is not difficult to understand why some are unhappy with it.
First, some people feel that the CPF is not really their money because they do not have unfettered access to it.
This argument is difficult to refute. After all, the CPF is indeed a compulsory retirement savings scheme. It forces people to save for their retirement and medical bills.
While some agree that there is a role for the Government to play in helping Singaporeans plan for their retirement, others object to such nannying by the state.
Apart from these general sentiments, two specific aspects of the CPF draw the sharpest criticisms - the rising Minimum Sum and the less-than-stellar returns.
The Minimum Sum will increase from $148,000 to $155,000 from July 1. It is set to go up again in July next year but the amount has not been determined.
The Minimum Sum, in some instances, represents the bulk of cash savings for those who turn 55. It must be painful to see it locked away.
Other than the Minimum Sum, the issue of returns has also raised questions.
The interest rates are 2.5 per cent per annum for CPF Ordinary Account savings, and 4 per cent per annum for the Special, Medisave and Retirement accounts. An extra 1 per cent is paid on the first $60,000 of a CPF member's combined balances.
These returns, although guaranteed and higher than what banks are offering for deposits in the low-interest rate environment of the past few years, barely beat inflation in some years.
In 2011 and 2012, when inflation peaked at 5.2 and 4.6 per cent, the bulk of CPF savings shrank. The erosion is less severe when measured against the core inflation rates of 2.2 and 2.5 per cent in both years respectively.
What then can the Government do in the face of such unhappiness? It cannot shrug off the debate, for doing so means accepting the view that the CPF is a fraud and flop, which it is not.
It also must not dismantle the CPF scheme or remove the Minimum Sum. These are still based on valid and sound principles of ensuring some measure of retirement adequacy.
But apart from these two sacred cows, all other aspects of the scheme should be open to discussion, as part of the review now underay, the findings of which are expected in August.
Here is my wish list.
First, raise the minimum withdrawal amount. What is not so widely known is that those who cannot meet the Minimum Sum at age 55 can still withdraw at least $5,000.
This amount has not been adjusted for at least a decade, not even for inflation. Raising it will give those turning 55 something more to look forward to, be it repairing their flat or even taking that long-awaited pilgrimage.
It should be acknowledged though that the trade off in doing is that this will leave less of the account holder's funds left to be invested, resulting in lower payouts for the rest of his life.
Next, inflation-proof CPF savings.
Since it is a forced savings scheme, public expectations are naturally that it will yield higher returns than bank fixed deposits. It is not enough just to provide higher than the already-low market returns.
One way of doing so is to issue inflation-indexed bonds.
It is not a new idea. During the Budget Debate last year, Minister Lawrence Wong, speaking in his capacity as a board member of the Monetary Authority of Singapore (MAS), said the central bank had studied the feasibility of such bonds and concluded that they were too costly for investors.
The MAS should keep studying the matter because the call to ensure that CPF savings are not eroded by inflation will not go away.
Apart from raising the minimum withdrawal amount and keeping pace with inflation, a third key area of improvement is to boost CPF returns, a call that several MPs made again this week.
For example, the extra 1 per cent interest for the first $60,000 in CPF balances has not been adjusted since it was introduced in 2008. A review is timely.
And since Temasek and the Government of Singapore Investment Corporation (GIC) have been held up for their high returns to shareholders, why not also have both manage a portion of CPF funds for the CPF members who are willing to take higher risks? That gives them more choices, and a shot at higher returns.
While CPF members who are willing to bear risks already have the option of investing with private fund managers, few come close to the stature and reputation of Temasek or GIC.
On its part, Temasek has signalled that it may sell bonds to individual investors.
I hope that when it does, ordinary Singaporeans with savings locked up in CPF can have a decent slice of the pie.
These moves can take some sting out of the unhappiness over CPF, even if it does not soothe all the anger or silence the critics.
Ways to improve CPFOnce meant to provide a pension, it now helps fund housing, education and health care. Amid rising costs of living and other pressures, Insight looks at what could be done to ensure CPF still provides peace of mind about retirement.
By Alvin Foo, Andrea Ong And Nur Asyiqin Mohamad Salleh
OVER mahjong or a casual chat, when Madam Susan Tan meets up with her fellow MacPherson seniors, one topic often crops up - their future. Specifically, how to afford it.
At 65, Madam Tan still works to boost her Central Provident Fund (CPF) payouts. But the part-time bus attendant is happier spending time with her grandchildren.
Admin clerk Celestine Chong, 53, has been working since she was 16 but worries she will not have enough to meet her CPF Minimum Sum requirement in two years' time.
Madam Margaret Chng, 66, is not on the CPF Life scheme and withdrew her CPF savings at 55. Now the money has run out and she relies on her family.
These MacPherson residents are some of the many faces of the CPF system now under the spotlight.
From its colonial roots in the 1950s as a fund purely to meet retirement needs, the CPF is now a multi-headed beast that helps pay for housing and health care, and has a life annuity scheme.
The pressures on it will only grow amid a rapidly ageing population that is living longer.
Acknowledging the challenges ahead, Prime Minister Lee Hsien Loong promised in Parliament this week that CPF Life would be enhanced so payouts would keep pace with the cost of living.
Lower-income groups who have little in their CPF will also get greater assurance, said PM Lee, who will disclose more during the National Day Rally.
But these two aspects of the CPF system are just the tip of the iceberg when it comes to tackling the complex issues surrounding an institution that is older than the nation itself.
Add to that the emotive nature of the subject - Singaporeans' hard-earned retirement money - and it is clear that the issue, if not managed well, could well become a political minefield.
Just this week alone, at least eight MPs of all political stripes rose during the debate on the President's Address with critiques of the CPF.
A defamation suit filed by PM Lee against blogger Roy Ngerng has also drawn attention to the latter's posts about the CPF system.
How can CPF be improved? Insight looks at some of the issues.
Rebalancing CPF and housing
THE current CPF system takes on too many functions, say some observers. However, solutions they propose to ensure cash flow in the golden years strike at the very heart of Singaporeans' aspirations - property ownership.
Ang Mo Kio GRC MP Inderjit Singh and CIMB regional economist Song Seng Wun want the CPF to return to its 1955 founding goal of ensuring workers can support themselves with dignity in retirement.
Mr Song wants to simplify the system, with 80 per cent of funds set aside for pension purposes. "All the other goals such as housing, education and health care should be dealt with through separate agencies or schemes."
But tell that to Singaporeans who have poured their funds into the hot property market over the past decade and seen their assets appreciate each year.
On the other hand, this over-commitment of CPF savings to property purchases is a key reason many are unable to meet the Minimum Sum, points out finance professor Benedict Koh from the Singapore Management University (SMU). The Minimum Sum is intended to be enough for the basic retirement needs of those in the lower-middle income group.
A 2007 study that he led found that almost 44 per cent of cumulative CPF savings have been in invested in properties, based on CPF data from 2005. And longer home loan tenures have meant that more Singaporeans are likely to be still servicing their mortgages when they turn 55.
Prof Koh is among those who favour capping the amount of CPF one can spend on property.
However, UOB senior economist Alvin Liew cautions: "If the amount is significant, it will have a direct impact on the public and private housing market." A sharp drop in home values could impact retirement drastically, especially for those who have already bought property, he warns.
Mr Christopher Tan, chief executive of financial advisory firm Providend, favours using other levers such as raising CPF contributions and salary ceilings.
However, moderating property prices is the key, says Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy, who notes that the Government is moving in this direction by delinking the prices of new Housing Board flats from market prices. "As long as HDB prices remain affordable, people's CPF withdrawal will also likewise be reduced," he says.
But while the CPF and housing systems find a new equilibrium, there is a generation who may find themselves asset-rich and cash-poor and feel "worse off", he says. The Government has indicated it is looking at more ways to help them monetise their homes.
Schemes already exist to do this, such as the Silver Housing Bonus and enhanced lease buyback. But MPs and social workers cite obstacles such as seniors' emotional attachment to their homes, the disruption of relocating and the Asian culture of parents wanting to leave something for their children.
Beefing up retirement adequacy
TWO particular sources of angst involve CPF's key aspects of providing a sustained source of retirement cash: the Minimum Sum and the CPF Life annuity.
Many like Madam Celestine Chong from MacPherson worry that yearly increases in the Minimum Sum are a harbinger of future trends, though CPF has stressed that there are no plans to revise it further in real terms in the near future.
Another elderly CPF member who declined to be named tells Insight: "Every time they raise the Minimum Sum, I suspect that it's because Temasek or GIC lost money overseas."
Given such comments, it is no wonder that in a blog post last Sunday, Manpower Minister Tan Chuan-Jin was at pains to say that increases in the Minimum Sum are necessary because of longer life expectancy, higher cost of living and quality of life.
He also explained that the recent announcement that it will rise to $155,000 in July is part of a series of adjustments already announced in 2003 (see other story).
At the same time, the increases in drawdown age - it will rise to 64 next year and 65 in 2018 - have upset some. The Workers' Party, for one, has criticised the move regularly over the years.
There may be some lessons for policymakers, in better managing communication with the public.
Or the unhappiness over CPF may, as Professor Euston Quah from Nanyang Technological University puts it, arise "simply from the lack of complete control over one's mandatorily state-imposed savings to do whatever the saver wants". Madam Susan Tan shares a commonly voiced sentiment that she should be able to get payouts earlier if she wants to, as "CPF is our money".
MPs and economists have floated several ideas to reduce the sting from the Minimum Sum and drawdown age requirements. Dr Intan Azura Mokhtar suggests a tiered Minimum Sum for the lower-income, while Prof Quah suggests greater flexibility in withdrawal for those who want to retire earlier, to take into account "some people's expectation of what constitutes retirement age and at the same time protect the greater needs of society".
Another issue is whether Singaporeans can meet the Minimum Sum requirement when they turn 55. Last year, 49 per cent of active CPF members who turned 55 reached the Minimum Sum then of $148,000. While the proportion has gone up by 12 percentage points since 2009, it also means that just over half are still unable to hit the target.
Prof Hui Weng Tat cautions that the 49 per cent includes those who pledged their property to make up half of the Minimum Sum - which translates to lower payouts in the future. Only 20 to 30 per cent can meet the Minimum Sum fully without pledging property, "which means retirement adequacy is much worse than what we anticipate".
A 2012 study commissioned by the Manpower Ministry and done by National University of Singapore dons Chia Ngee Choon and Albert Tsui estimates that 70 to 80 per cent of new entrants to the workforce will be able to meet the Minimum Sum for their cohort.
But Prof Hui says the study underestimates inflation, housing aspirations and wage patterns.
Another piece of the puzzle in boosting retirement adequacy is CPF Life. One improvement unanimously raised by the observers Insight spoke to is for payouts to be adjusted for inflation. PM Lee indicated on Wednesday that the Government is looking into this.
Some also question if the CPF Life payouts are enough to support retirees in the future.
Those turning 55 from next month with the full Minimum Sum of $155,000 can expect a monthly payout of $1,200 for life, the CPF board tells Insight.
But for Mr Palaniappan Muthukumar, 54, who works in the training industry, $1,200 is a "pittance". He hopes for higher payouts but acknowledges this will mean raising the Minimum Sum.
Providend's Mr Tan is in favour of higher CPF Life payouts that are inflation-indexed, but notes that raising the Minimum Sum "may be political suicide for the ruling party".
One urgent priority, however, is to provide for the vulnerable in society who cannot pay for CPF Life, through a basic pension. Prof Chia highlights groups such as the lower-income and homemakers.
The gender imbalance is seen in CPF's latest annual report. There were 11,753 more women than men aged above 60 as at end-2012, but their total CPF balances were about 32 per cent less - $5.7 billion - than the men's.
Prof Chia suggests setting up a Basic Pension Endowment Fund - similar to the fund for the Pioneer Generation - to ensure that such a scheme, which can be means-tested and will not require contributions, is sustainable without leading to future tax increases.
Making other such provisions may become even more pressing as it is likely that Singapore will see higher and longer periods of unemployment in the future, says economics professor Hoon Hian Teck from SMU.
Making money work harder
CRITICS say the Government is being too conservative and can get higher rates of return on CPF funds, given the performance of GIC and Temasek Holdings.
The CPF Ordinary Account (OA) yields a market-related rate pegged to the 12-month fixed deposit and month-end savings rates of the major local banks, with a minimum rate of 2.5 per cent. This means the OA rate can be higher if these rates rise beyond 2.5 per cent.
Savings in the Special and Medisave Accounts earn either 4 per cent or the 12-month average yield of 10-year Singapore Government Securities plus 1 percentage point, whichever is higher.
Providend's Mr Tan notes, though: "It is not fair for CPF members to ask for the rates of returns similar to that of GIC and Temasek. If you want to have that kind of return, you must be prepared to take the risk. Currently, our CPF monies are not invested in GIC or Temasek."
Some experts suggest the investment mandate of CPF be widened so that the Government can afford to pay higher returns. Now, funds are invested solely in risk-free Special Singapore Government Securities.
Singapore could take a leaf out of the book of Norwegian and Canadian pension funds, which invest in a wider range of assets including stocks, bonds and real estate, says CIMB's Mr Song.
Economist Chua Hak Bin from Bank of America Merrill Lynch notes that CPF returns are "barely keeping pace with inflation". In comparison, Malaysia's Employees Provident Fund, which is comparable in size to the CPF but uses a more active approach, delivered a dividend rate of 6.35 per cent last year and 6.15 per cent the year before, he says.
He suggests offering CPF members - with savings above a certain threshold and with a greater risk appetite - the option of investing directly in a GIC or Tema-sek-managed fund. "Returns may be more volatile than the guaranteed rates, but will likely outperform over the longer term."
In Parliament this week, Chua Chu Kang GRC MP Zaqy Mohamad mooted a government-backed investment plan offering higher interest rates and taking into account inflation. Nominated MP Tan Su Shan, a senior bank executive, suggested having regular savings plans tied to bonds or fixed-income unit trusts.
Rebuilding public trust
THE CPF debate poses questions about the trust and changing expectations Singaporeans have of the Government and how it should manage their retirement money.
In a Facebook post this week, presidential candidate Tan Cheng Bock said the changes to the CPF and "the constant reminder that they may not have enough disposable income when they grow old" have created a sense of insecurity.
Some Singaporeans may also want clearer answers on how CPF monies are invested, he said.
SMU's Prof Hoon Hian Teck sees two big issues going forward. One, how the Government should redistribute its revenues and carry out its social spending. It can channel the returns from investing Singapore's reserves either to the Budget or to paying higher returns on CPF savings. There is a trade-off.
Paying a higher rate of return on CPF is a "general distribution to every working person" - including the higher income - but there is a greater element of risk.
In contrast, the Government's current approach is to tap the investment returns of the reserves for Budget programmes that give more targeted help to the needy.
Two, whether Singaporeans are comfortable with the CPF as a social security system applying to all, or whether they take the view that "I am my own master, I can manage my own funds and beyond the minimum, I can provide for myself".
Sociologist Tan Ern Ser of the National University of Singapore says if Singaporeans are allowed to opt out of the system, the next question is: "Who should shoulder the risks of losing CPF savings drawn out in full - the Government or the individual?"
The challenge is finding the right balance between giving greater autonomy to CPF members who are savvy enough to plan their own retirement finances, and ensuring CPF provides a sustainable stream of retirement income for everyone else.
What the Govt does with the money that goes into the CPF
The Ministry of Finance responded to queries from The Straits Times on what the Government does with the money that goes into the Central Provident Fund (CPF) and how it determines CPF interest rates, These topics have been hotly debated online following speculation that CPF monies are invested by Temasek Holdings and GIC as well as comparisons between their returns and CPF returns.
Here is MOF's reply in full.
Q: How are CPF monies invested? What does the Government do with the monies?
CPF monies are invested by the CPF Board (CPFB) in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Singapore Government. This assures that the CPF Board will be able to pay its members all their monies when due, and the interest that it commits to pay on CPF accounts.
As the Singapore Government is one of the few remaining triple-A credit-rated governments in the world, this is a solid guarantee.
The proceeds from SSGS issuance are invested by the Government via MAS and GIC, just as it invests the proceeds from the market-based Singapore Government Securities (SGS).
No CPF monies go towards Government spending. Government borrowings, whether via SGS or SSGS, cannot be used to fund expenditures. Under the reserves protection framework enacted in 1990 in the Constitution and the Government Securities Act (enacted in 1992), the monies raised from government borrowings cannot be spent.
When government securities are issued, the proceeds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. However, as a major portion of these assets are of a long-term nature, such as those that provide backing for long-term Government liabilities like SSGS, such assets are transferred to GIC to be managed over a long investment horizon.
The Government’s assets are therefore mainly managed by GIC. GIC is a fund manager, not an owner of the assets. It merely receives funds from Government for long-term management, without regard to the sources of Government funds, e.g. SGS, SSGS, government surpluses.
The SSGS proceeds are not passed to Temasek for management. Temasek hence does not manage any CPF monies. (See also FAQ 8 on the Temasek website). Temasek manages its own assets, which have accrued mainly from divestment proceeds from sale of its investments and reinvestments of dividends and other cash distributions it receives from its portfolio companies and other investments. Temasek also has its own borrowings and debt financing sources. The Government’s relationship with Temasek is that of its sole equity shareholder.
The information above elaborates on that provided on the MOF website.
 Special Singapore Government Securities (SSGS) are non-tradeable Government bonds issued to the CPF Board.
Q: How are CPF interest rates determined?
CPF interest rates are pegged to risk-free market instruments of comparable duration, with a current floor of 2.5% for OA and 4% for SMRA.
a. The OA is a liquid account. The monies in the OA can be withdrawn at any time for housing. Many members withdraw substantial amounts from their OA.
b. The SMRA are for longer-term retirement and medical needs. The interest rate on the SMRA aim to be equivalent to what a 30-year SGS would earn, as 30 years is the typical duration for which SMRA monies are held. As 30-year SGS did not exist when the Government made changes to the interest rate structure in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1%. The 1% spread is in fact higher than what international bond markets have paid on 30 year bonds. The current yield on the 30-year SGS, which is not widely traded, is around 3%.
The OA and SMRA currently earn interest of 2.5% and 4% respectively. However, many members in fact earn higher interest rates on their OA and SMRA accounts, because they benefit from the extra 1% on the first $60,000 of CPF balances. Many earn 3.5% on their OA account. The majority of SMRA balances earn 5%.
The returns that CPF members receive are risk-free, and significantly higher than for equivalent market instruments.
There is no link between CPF interest rates, and the returns earned by GIC, as the CPF monies are invested entirely in risk-free assets.
It is the Government that takes the investment risk in managing SSGS proceeds.
GIC has delivered creditable results on Government assets over the long-term. However over the short-term, returns can fluctuate widely, depending on global market cycles and shocks. This is indeed what happened during the Global Financial Crisis and its aftermath. GIC’s returns over the last 5 years were affected by the sharp market downturns during the crisis, and the lagged recovery in illiquid assets such as real estate and infrastructure (See GIC’s annual report).
Ultimately, the investment returns that the Government expects to make over the long term by taking the risks of long-term investments are not hoarded away in the reserves.
a. 50% of the returns from our reserves flow back to our annual Budget through the Net Investment Returns Contribution (NIRC).
b. The long-term returns therefore help to fund spending which benefit our citizens.