Friday, June 7, 2019

How to raise CPF returns

[Note date of publication]

Jun 6, 2014

Hui Weng Tat, For The Straits Times

WHETHER or not the amount in a Singaporean's Central Provident Fund (CPF) account is adequate for retirement does not just depend on the amount saved. The rate of return on the savings is also important. At the very least, the rate of return on CPF savings must be enough to offset increases in the cost of living.
To find out how CPF interest rates have fared relative to inflation in Singapore, I computed the annualised rate of return on CPF savings over five-year periods. This was done using the respective CPF interest rates applicable for the Ordinary, Special and Medisave accounts starting from 1960 onwards. This computed rate of return, which takes into account the apportionment of the savings over these three accounts, was then compared with the corresponding rate of inflation over the same five-year periods.

The analysis shows that except for the high inflation arising from the oil-price hikes of the mid-1970s, the CPF system has managed to enhance the real value of CPF savings. But the average rate of increase in the real value of CPF savings has been falling. From 2.1 per cent for the past four decades before 2008, it has fallen to an average of just 0.7 per cent in the last five years. The calculation takes into account the additional 1 per cent interest on the first $60,000 of a member's combined CPF savings since 2008. For CPF contributors with more than $60,000 in combined CPF savings in 2008, the real value of savings in excess of this amount has in fact remained stagnant.

[This opinion piece is a proposal for a tweak of the system - increase the interest rates to raise CPF returns. ]

There is an urgent need to raise the CPF nominal rate of return to make sure it stays above inflation as much as possible. What will it take to beef up the returns on CPF savings? I have two suggestions:

Implement a 1 percentage point across-the-board increase in the interest rate on CPF savings. This will bring the real rate of return closer to the long-term real return of 2.1 per cent.

Based on the $259 billion of total CPF members' balance in March, this could mean additional returns of $2.6 billion per year for the benefit of 3.53 million CPF members. This sum may seem large but it is less than a third of the Net Investment Returns Contribution (NIRC) from the Government's investments.

[Not sure if drawing on the NIRC would be necessary, but the a third of the NIRC is NOT small. In any case the govt has partially implemented this "suggestion" by giving an additional 1% interest but only to those above 55 for the first $30k (IIRC) in their RA.]

Alternatively, raise the extra interest on the first $60,000 to 2 per cent. This would involve a payout of less than half of the previous amount. The additional interest return should be ring-fenced in the Retirement or Special accounts to ensure it contributes to building up the Minimum Sum for long-term retirement adequacy.

To shore up confidence in the CPF system, it is not enough for the Government to give an assurance that it can meet its national social security obligation.

[And he is barking up the wrong tree.

SC's concerns about or confidence in the CPF system is NOT whether the system can meet their retirement needs. They DON'T SEE the CPF as their retirement savings. NOT after they have been allowed to use CPF money to buy flats and even private property, not after they have been allowed to use it for their children's education, not after they have been allowed to use the money for investment.

No. Their main concern is whether the "promise" that they can withdraw ALL their CPF at 55 will be kept by the govt. And the signs and messages they have been receiving is that the govt DOES NOT INTEND TO KEEP THAT "PROMISE"!

SC wants ownership and control over their lives and the decisions about their lives. 

Maybe the Minimum Sum is a logical and right thing to do. Maybe we should all have $176k in our Retirement Account (RA) to get an annuity that can pay us $1380 a month. Maybe we need $1380 a month to be adequately provided for.


And yes some, maybe many people will make the wrong decision. They will choose unwisely.

So at 55, if there is enough or more than enough in the Special Account, no problem. The CPF member will get their "full pension", or "basic" pension.

BUT if there is not enough, give the member a choice. The choice to
a) Do nothing. But the sum in the SA will only generate $X in monthly payments. Let them know that. Let them agree to that. Let them choose to live with that. Perhaps they do not need so much. Perhaps they are sure their children or family will care for them. 
b) Choose to top up the sum for a larger monthly payment from the Life Annuity. And here, the govt can incentivise them. Provide a 1 for 1 grant up to a cap if concerned about the budget. If capped at $20k, the member may choose to transfer up to $20k and the govt will match his top-up. And this will definitely benefit only the low income because the low income will be the ones that is least likely to meet the minimum sum.
Alternatively, instead of an absolute cap of say $20k, set a target of say $160k in the retirement account. So if the member only has $100k, the govt will match 1 for 1 grant until there is $160k in the retirement account, so if they member puts in $30k, the govt will match $30 for a total top up of $60k to the $100k already in the SA for $160k. If the member still wants to top up beyond that, that would be his choice but may not be matched by the govt. (Or the govt could if this is something it wants to incentivise.)

Note: in 2014, the news about CPF was that CPF would be reviewed, so various opinions on how the CPF scheme could be improved were written and published. 

See this link "CPF Special", and "CPF is just one part of Retirement Financing"]

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