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The CPF Mismatch




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By Ethan Guo

The situation with the CPF makes me sad. When even retirees who’ve trusted in and voted for the government turn up at Hong Lim Park, you know something must’ve gone seriously wrong.

So is the CPF system really screwed up or does it just have an unjustified bad rep?

Let’s first establish the basics. CPF isn’t free money. It’s a forced savings scheme.

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Meant initially as “old age funds”, it got complicated over the years, in particular due to its link to housing.

Why did the government allow CPF for housing? Simple – It’s an asset.

In any financial system, paper money needs to be backed by gold. Now there are a handful of people in the world who own so much gold that banks will be shaken if they took their precious metal out of the vault. It’s a concern most of us never have to deal with, and that’s an understatement.

For everyone else, there’s the humble abode.

The only problem is while gold’s value will remain through wars and instability, property prices have had a good run and likely passed its golden age (excuse the pun). Precious metal will always be precious. Nobody cares about a bungalow at Sentosa Cove when a country’s in ruins.

Let’s assume we keep the faith and the good times keep rolling in Singapore. Bear in mind investors have to keep investing in Singapore so there’s growth and not contraction; that helps people to have good well-paying jobs; the population needs to keep increasing  too otherwise who are you going to sell your home to?

You poured your life savings into the only appreciating asset you own. You forget that like gold, you have to sell it to get money back. Which means your home has always been a part of an elaborate scheme to help you earn higher interest on your savings.

The CPF board has tried allowing Singaporeans to dabble in stocks and such through the Investment Scheme, but let’s face it – the majority of us just aren’t natural born Warren Buffets.

Ok so people are angry. They’re mad about not being able to withdraw all their savings at age 55. They say the withdrawal age is a moving target. They’re annoyed, having lived a long life – to still be treated like babies who don’t know how to manage their own money.

Well first of all there are indeed some Singaporeans who’ve planned well enough for their retirement and saved more on-top of their CPF funds to ignore the paltry amount they have in their CPF accounts.

For the rest however, CPF money (backed by their home as asset) is very likely all the money they’ll ever have for the rest of their life!

So therein lies the mismatch. One party feels justified in using their hard-earned savings any which way they choose. It is their money after all. The other party is trying its best to prevent people from becoming a burden to everyone else.

Because I dare say most of us will blow all our money within a year if suddenly given a large amount to deal with on our own. That’s what happens to plenty of those who’ve had a sudden windfall, such as lottery winners.

The cost of living in Singapore is admittedly high, but that’s part of being a globalized city subject to market forces.

There are those who argue that many of these Western countries enjoy perks with their higher taxes like free healthcare but there’s always two sides to every story. Free might not mean good. Or “free” could mean borrowing against the future and increasing national debt.

None of us would like a system in which our contributions are not proportionate to the benefits. I certainly do not wish to pay higher taxes because retirees spend all their CPF on holidays and end up relying on welfare and public assistance afterwards.

People forget the CPF is also about personal responsibility – forced, but nonetheless.

It’s fair. I don’t make anyone finance my old age needs, and I don’t expect to pay for anyone else’s either. But this only works if everyone buys into the idea. What I’m afraid of is the current fracture being caused by an increasing number who no longer subscribe to this concept.

Placating the unhappy is one issue. Perhaps people just need to be told the bare facts like Lee Kuan Yew used to, enough with the PR-speak.

On the flip side, a large number of us have reason to be fearful of surviving our twilight years. The CPF ordinary account interest rate is the surest bet there is, and even then is looking increasingly insufficient. That in itself is based upon the government’s investments – they’ve made some good bets, and some bad, but generally done well enough to keep everyone happy. Can this be sustained 10, 20 years from now? Your guess is as good as mine.

At the root of it all is the desire for assurance. We want our money to lead the good life after working hard all these years. We want enough of it to last through our remaining days and varied needs. It’s a tall order, and the government’s got its work cut out for it.

Do the people have reason to be angry? Yes. The government created this system and failed to anticipate its inadequacy. At the same time, the CPF appears to be a victim of its own success. It’s worked so well in letting Singaporeans think money wouldn’t be an issue upon retirement that we’ve become detached from active preparation for old age.

We’ve seen enough warnings from financial planners. We don’t care until it’s too late. We think our future’s secure despite research showing we need a million dollars in the bank to maintain a middle-income lifestyle through our retirement years.

The CPF makes us feel misguidedly invincible. I wouldn’t go so far as to say the Emperor has no clothes. But he certainly doesn’t have enough on to last through a single rainy day.

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