During Tuesday’s parliament session, Deputy Prime Minister and Minister for Finance Tharman as well as Manpower Minister Tan Chuan Jin attempted to explain some of the myths around the CPF system. It is a good effort, but more needs to be done on educating the public about the CPF system. We bust some of these CPF myths.
1. Your Minimum Sum Keeps Going Up
The explanation here is that once the Minimum Sum is set for you, your Minimum Sum doesn’t go up anymore even as you grow older. That’s a valid point, however most of the public’s concern is not this but that the Minimum Sum keeps going up every single year and the rate of increase is astounding to most people.
Firstly, Minimum Sum will have to increase for sure due to inflation. If the Minimum Sum is meant to provide part of the retirement income, it cannot stay the same when expenses keep going up. For example, if you need $4,000 per month today, in 20 years time based on 3% inflation you would require $7,224.
Secondly, there is a fear among many that they would never be able to save enough to meet the Minimum Sum, hence they will not be able to withdraw from the CPF at age 55. I will attempt to illustrate in another article how the CPF account changes based on the median wage based on certain assumptions to see if the fears are unfounded.
2. If You Don’t Meet The Minimum Sum, You Must Top Up The Difference
This is another popular myth, which is easily answered. Basically, you do not have to top up, but your retirement income from CPF life will be lower.
3. Minimum Sum Must Be Set Aside In Cash
Here, not only can you use a property to reduce up to half the minimum sum, a private annuity can also be used to get exemption from the minimum sum. See How To Get Exempted From The CPF Minimum Sum
4. CPF Monies Are Managed By Temasek
Whether it is Temasek or GIC, actually most people do not really bother. Furthermore, the structure is just too complicated for the man on the street to understand, if some things can be made simpler, then they should. They just know that the government manages the money, which brings us to the next point.
5. GIC Should Manage The CPF Money Separately
Now, there seems to be some unhappiness over this, but does it really matter how the CPF Money is managed under the hood? Anyway, basically the CPF Money and Returns are both guaranteed, that’s all that matters. However, for those who want to know, basically investment managers have to invest based on the risk profile and objective of the investors, which is basically us the CPF account holders. In general, CPF accounts have to be invested in low risk, low volatility assets since they are for long term retirement, so if they are invested on their own, it would be difficult for any investment manager to guarantee a return of 2.5% to 4%.
By combining with other riskier investment assets, the investment manager can go for higher returns and still generate enough returns to meet the guaranteed returns of CPF. Think of it as an insurance, basically the manager pools together all the different assets, takes all the risk and guarantees a certain payout. Like an insurance plan, it doesn’t work well if it doesn’t pool together multiple people.