A thought experiment (or a gendanken-experiment) is a structured process of intellectual deliberation to consider the consequences and effects of adopting an idea or theory into a problem domain. Thought experiments are responsible for many powerful ideas like Shrodinger’s Cat or Maxwell’s Demon that shaped the development of physical sciences.
As ordinary Singaporeans, we can conduct thought experiments of our own.
If there is a market for you to convert your real dollars into money in your CPF-OA, CPF-SA or CPF-MA, how much money would you pay for $1 in your CPF accounts?
Imagine you are a Millenial, you are unlikely to see your CPF Ordinary Account until you are 55 or when you buy an HDB flat. I would imagine that you will not be willing to trade $1 in your wallet for $1 in any of your CPF accounts. The simple reason is that a bird in your hand is worth two in the bush. For a 50-something citizen, you would be willing to pay much more because you will see your money quite soon.
Intuitively, I would ordinarily expect Singaporeans to trade more favourably for the CPF-OA followed by CPF-SA. CPF-OA is more flexible than CPF-SA as it can pay mortgages and fund children’s education. I expect the conversion rate to CPF Medisave account to be the lowest as folks would only be willing to give up $1 to for much more dollars in CPF-MA than CPF-OA or CPF-SA.
To see whether I am right about the exchange rate, I conducted a survey which saw about 60 participants respond to this question. It turns out in practice I was wrong.
The following diagram shows what preview participants were willing to pay:
In this exercise, preview participants would pay $0.53 for $1 in their CPF-OA, $0.70 for $1 in their CPF-SA and $0.42 in their CPF-MA. More interesting is that the answers cluster at three different points for each question, so it is tri-modal. I suspect that separating the audience to different age groups may result in different valuations.
I suspect that CPF-SA had the best rates because it compounds at 4% and can be converted to real money if the person has more than BRS in his CPF account at age 55.
As it turns out, the government does have two schemes that will allow a company employee to trade his dollars for CPF money on a one to one basis. But these are programs that are slanted for high paying employees because they are tax-deductible.
- CPF Retirement-Sum Topping Up Scheme (RSTU). This scheme allows a CPF member to top up into his CPF-SA provided that he has not hit his threshold Full Retirement Sum yet. Up to $7,000 can be injected into you CPF-SA every year.
- Medisave Contribution. This scheme allows a CPF member to top up into his CPF-MA up to the Basic Healthcare Sum of $60,000.
Suppose you have an income that exceeds $80,000. According to your income tax rate, you belong to the 11.5% tax bracket. So for every $1 you push into the schemes, you can save 11.5 cents. The exchange rate is, therefore, $0.885 for $1.
If your income tax bracket is a whopping 22% because you earn a hefty $320,000 annually, your exchange rate gets better, and it becomes $0.78 for $1.
The survey also suggests which account to prioritise, if you have extra funds, always contribute to the RSTU up to the maximum limit of $7,000 before committing to Medisave.
This survey may even have policy ramifications. The Singapore population may also welcome a merger of CPF-SA and CPF-MA given the possibility that the combined account may have a better “exchange rate” than keeping them in two separate buckets.