Much has been said about our national savings system CPF. As a Singaporean and an avid proponent of good personal finance, i decided to dig deep into this topic and try to shed light and clarity on this much debated but also pretty misunderstood scheme.
Many Singaporeans are very unhappy with being forced to save for retirement. They believe everyone should have a choice and that CPF forces the choice on them. While it is true that more choice is usually better in a democratic society like ours, it depends on whether having that freedom causes much more problems for society as a whole.
Singapore has a rapidly aging population. Within 20-30 years, we will have a clear inverted population pyramid where a smaller base of workers have to support a larger top of retirees. If we have no CPF scheme or equivalent, what will happen is that future government will need to either let the elderly who fail to save enough live in poverty or use government funds to provide housing, food and medical care. And the government money will come from higher taxes or investment returns.
So it is wise to start forced saving for everyone so that at least there is a minimum standard or base of savings to leverage off. Even with current numbers, it is clear we will need to spend more and more on elder care and subsidies on healthcare. There is nothing wrong with this. In fact, we must do this as a caring and ethical society.
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2) Truth 2 – CPF is still your money ….. with some restrictions
Think of CPF as a long term structured note that is principal guaranteed but which you cannot withdraw. The only way a citizen can withdraw CPF is for mandated purposes like housing and education or when you change citizenship. However, this principal guaranteed note does offer a 2.6% to 4% risk free interest rate. This is equivalent to a 20 year USA treasury note return. So we are not being shortchanged.
Now, some of us will argue that since the government takes this money and invests via MAS, GIC and Temasek to get better returns, we should partake in those returns directly. However, we need to realize that if we want to participate in those returns directly, we must also accept the risk if those returns turn out to be negative. There is no such thing as a risk free, high return instrument. That is what we call a scam.
Anyway, there is a way for us to get higher returns. We can always invest our CPF money in approved mutual funds over the long term to get equity like returns if we really know what we are doing when it comes to DIY investing via funds.
3) Truth 3 – CPF is not a perfect system
Of course, CPF is not a perfect system. Can the CPF board pay us more interest? Of course it can. The government can decide to pay 3.5% interest rate to CPF board if it wants to. But is this good? It is highly debatable. Paying more interest will only benefit those wealthier Singaporeans who have loads of cash in CPF. Also, paying more will mean that we add less to our reserves since I do not think Temasek and GIC should take even higher investment risks to maintain same extra returns. But perhaps small tweaks upwards to help Singaporeans save for retirement via CPF is practicable. To set the right tone that the government is in it with the people on this topic of retirement savings.
Another idea is that we can we give citizens a well run fund that thinks over a 15 to 30 year time horizon to help invest their CPF money? I think this is quite doable? If GIC can give 5-7% returns over such a time horizon, I can imagine them setting up a mirror fund where citizens can invest directly to do the same? The logic behind this is that the current approved mutual funds are too short term and profit driven in their approach and the average Singaporean does not buy them with the right mentality.