Wednesday, June 11, 2014

Singaporeans' misconceptions on the CPF System

Last Saturday, there was a protest against the Central Provident Fund (CPF) system, drawing almost 3,000 people at Hong Lim Park. During the protest, the speakers demanded amongst many things, a better CPF interest payout, the allowance to draw out their CPF savings at 55 years old and to be able to opt out of CPF Life. The protest highlighted certain misconceptions on the CPF System which I find worrying for fellow Singaporeans. Obviously most Singaporeans don't understand how to manage their monies.

Higher returns, higher risks
According to the CPF website, an additional 1% interest will continue to be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA). The additional interest received on the OA will go into the member’s Special Account or Retirement Account to enhance his retirement savings. If a member is above 55 years old and participates in the CPF LIFE scheme, the additional 1% interest will still be earned on his combined balances, which includes the savings used for CPF LIFE. Savings in the Special and Medisave Account (SMA) currently earn either 4% or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is the higher. The interest rate on SMA savings is adjusted quarterly, based on interest rates on 10YSGS over a preceding 12-month period. The average yield of the 10YSGS plus 1% from 1 March 2013 to 28 February 2014, works out to be 3.19%. Accordingly, the SMA interest rate payable to CPF members from 1 April 2014 to 30 June 2014 will be maintained at the current floor of 4%.

Detractors of the CPF Scheme failed to realize that the golden rule in the world of investment is that to expect higher returns from your investments, you must bear higher risks. Singaporeans don't realize that putting their money in the banks is also a form of investments. Because when you deposit your monies in the banks, you expect a certain amount of interest payouts. The banks, in turn, would use your monies to invest in instruments that can help them make money. Currently, the local banks' interest rates are 0.21%, less than 10% of CPF guaranteed 2.5%. Now, if you ask, which banking institutes give you this sort of interest payout, assuming you are able to draw out your CPF monies? And which financial institutes are willing to guaranteed returns of 2.5% per annum for any of their financial products? By taking out your CPF savings and putting them in the banks, you are in fact, making huge losses because of the pathetic bank saving interests. In good times, Singaporeans demand high interest payouts for their CPF savings, but is it fair to demand such interest payouts during economic crises? Sometimes, Singaporeans need to understand that you cannot have your cake and eat it.

Why you should not touch your CPF Savings
Remember the Malaysian Indian cleaner who was killed at Changi Budget Terminal due to a freak accident last year? Kind-hearted Singaporeans donated S$1 million to his family, hoping that they can cope financially with the loss of their sole breadwinner. Last week, I read from a local Chinese newspaper that the family had squandered away all the monies and ended up homeless within a year. When I come across such article, I am not surprised at all. Human beings, in generally, cannot handle financial windfalls because of our human nature to spend. 

Most people don't have the financial will and discipline to manage windfalls. I have read many articles of Americans ended up as bankrupts after winning hundred of millions of jackpots. Most squandered away the monies within 5 years. My colleague also told me that in the nineties, there was ever a murder case related to money dispute after the family member got to know that the winner won the lottery. The same goes to our CPF monies. There have been far too many reported cases of senior Singaporeans squandering their CPF savings on mistresses after collecting their CPF monies. Most Singaporeans really cannot handle it when given a big sum of money and thus, ended up spending away all the monies. This is the hard truth most Singaporeans stubbornly refused to accept. Most Singaporeans claimed that they want the right to manage their CPF monies but the reality is, most Singaporeans are really incompetent to do so. By not releasing the CPF monies to you, the government is actually protecting you.

Magically yours

4 comments:

  1. Exactly! That is why I am shaking head whenever I read the news about that guy's point (you know who I am talking about) ;-)

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  2. So in order to protect the citizens from squandering their "windfall" you lock it all up? Why can't the govt pay a certain sum every month at the age of 55; just like a pension scheme instead of raising the minimum sum so that the perception is they'll never be able to get their money back as long as they live?
    The CPF is a retirement fund and should not be used for health schemes, investments and even housing actually (for housing at least there's some merit, but that's a subject for another time). It is precisely that the government extended the usage of the CPF money for citizens that their savings have been diluted and therefore find difficulties in having the minimum sum.
    The big question is ...Why the minimum sum scheme???
    If this is a failure, admit it and revise the scheme.

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  3. Fred, you fail to see a lot of things.

    1. If the govt don't lock it up, what happens what those people squanders all the money away? They come to govt for financial assistance. Who's footing the bill? Tax payers, to fund those people who carelessly squander their windfall away. Then the tax rates will have to increase, will you be happy?

    2. The govt is paying a certain sum monthly, not at 55, but at the retirement age. This monthly payment, by the way, has no relation to raising the minimum sum. So that's that.

    3. You want the govt to stop raising the minimum sum? Do you know what is inflation? Say they remained the min sum at $80k since 1980. Those folks who turn 62 this year will have only $80k of savings to spend for the rest of their lives. Does 80k then worth 80k now? Min sum needs to be raised to beat inflation. Even at the current min sum, assuming you meet them, you get $1.2k per month. That's "average".

    4. CPF was enhanced to allow Singaporeans to use them for health, housing. Now you want to go back? What do you need for retirement? Being old, you need money for health needs. You need a house, so govt allow you to buy a house so that you don't sleep on the streets when you retire. Aren't these logical? Btw, the same fact that you use your CPF to purchase house, this minimum sum can be reduced up to 50% of your house valuation. Do you know that? Rationale behind that is you "save" on rental by owing the house, so govt reduces the min sum.

    A failure, is someone who argues and complains, without even knowing how the system works.

    Fail.

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  4. thanks for this. at least there are sensible people. i have no wish, and no wish for my children to be saddled with the burden of financially unsavvy people who withdraw everything at 55, spend it finish at 65, can't find a job at 65 and depend on pay outs from the government. taxes go up, and my children bears the costs. if people want to take out money at 55, please sign a letter of undertaking saying that you will not take one cent from the system in the form of donations or otherwise - don't give the arguments that you got cheated by a business partner, a mistress, your son, your daughter or you fell into ill health or the hospital bills are too high. i love singapore and my children too much for them to have to pick up the slack for people who spend so lavishly and think everyone else should pick up after them.

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