Thursday 29 May 2014

Why it’s so hard for S’poreans to understand CPF

By Devadas Krishnadas, Published TODAY, 28 May 2014

Minister for Manpower Tan Chuan-Jin has published a lengthy blog post on the Central Provident Fund (CPF) to dispel some misconceptions about it.

Mr Tan points out that as the lifespans of Singaporeans lengthen, our retirement needs will grow, and hence the need to raise the CPF Minimum Sum and retirement age. He also reminds us that CPF monies are commonly used for housing needs.

Yet, his well-intentioned effort at communicating a complex phenomenon that is the CPF model may not have silenced the critics or comforted the anxious. Why is this so? Primarily because of some complications that make the CPF model difficult to understand. And what does the angst over CPF say about Singapore’s political system? Maybe it is time to rethink the social compact.


First, the CPF system is trying to do too many things. It originated as a simple contributions model to address the retirement needs of workers.

But today we can use our CPF money to pay for housing and to make investments. These additional options have bundled the notion of retirement financing with the emotional issues of home and the pecuniary desire to grow monies. The three are not easy bedfellows.

Over the years, housing prices have grown much faster than CPF interest rates or wages.

The first significant growth spurt came in the 1990s when the government liberalised CPF rules to permit higher withdrawals to finance housing and to make investments.

The second major growth spurt in housing prices has been in recent years due to demand and supply mismatches brought about by rapid population growth, easy credit conditions and discouragement from savings due to extremely low interest rates.

The use of CPF monies to chase fast-rising housing markets has meant that while the “net asset growth” strategy has technically worked, Singaporeans have in fact traded fungible cash for a relatively illiquid physical asset, namely their homes.

CPF monies were and are in fact an important source of liquidity for the property market. The curiosity that perplexes many Singaporeans is the idea of treating CPF monies used for housing needs as “borrowing” since it is their own monies, as pointed out by the minister.

Of course, the confusion is caused by the Government’s logic that the money is for retirement purposes while at the same time reassuring Singaporeans that it is also to meet their housing needs. The reconciliation of these two needs is proving to be a political problem.

To many Singaporeans, homes are more than assets. They are strong emotional attachments. Thus, the technically sound suggestion that retirement needs can be financed from the sale or lease-back of homes may be hard to accept.

Many Singaporeans have used CPF monies to make investments in shares or funds. Some have also used their CPF savings to finance serial mortgages to speculate on the property market despite stricter controls by CPF on the use of funds for the purchase of multiple properties. As to be expected with speculative investments, some have made gains while others have suffered losses. While the intention was to give workers the chance to improve on the returns on their CPF monies, not a small number of them have suffered losses and worsened their retirement outlook.


Second, the tension between a political philosophy and a policy challenge. While CPF contribution rates were largely the same across the labour force, actual contributions depended on the salary of each worker. Upon retirement, originally set at age 55, workers would withdraw their CPF monies to finance their retirement. How and for how long they did so was a matter entirely of their concern.

The approach today is different with the Minimum Sum Scheme (MSS) and CPF Life, both of which help to provide cash flow during retirement. Both also reflect a lack of confidence in the average Singaporean to manage his or her own retirement affairs adequately.

To be fair, the Government is trying to provide certainty and simplicity in retirement financing. This is laudable. However, it also masks an undeclared desire to avoid assuming contingent liability for Singaporeans who, due to a mix of longer lives and inadequate savings, may not have sufficient retirement financing. In such circumstances, the family, the Government or both, would have to step in unless we are to accept that people should suffer harshly in old age. Hence, the Government’s emphasis on the MSS and CPF Life is consistent with the much espoused principle of self-reliance.

The Government issues Special Singapore Government Securities or SSGS to the CPF with a coupon rate matching the rate of return on CPF monies. The SSGS is non-tradable and the CPF is the only purchaser of these securities. According to the Accountant-General’s Department, SSGS amounted to nearly S$250 billion as of March 2013. What happens is that the CPF monies are transformed, via this mechanism, into investable capital. This capital, when variously invested, then earns a return which permits the paying of the coupon, which in turn allows the CPF to pay interest to its members.


Given these complications, how can the concerns of both the Government and anxieties of ordinary Singaporeans be addressed? In other words, how could we revise the CPF?

The first challenge is to refocus the CPF on its primary purpose, which is retirement adequacy for members.

The easiest step is to limit withdrawal amounts for housing purposes, especially for purchases of second or third homes. This would help to keep more money in CPF accounts and dampen speculation.

A second, more radical step could be to raise the interest rates paid on CPF monies to be a more flexible model tied to inflation. Doing so grows the purchasing power of these monies and increases the incentive for Singaporeans to top up their CPF accounts. The trade-off is that less capital may flow back into past reserves from each year’s investment performance as a greater share would have to go to meeting the higher coupon rate during periods of elevated inflation. The converse would happen should inflation be especially low.

The second challenge is to relook the principle of self-reliance to make it more realistic. The first step is to improve the labour share of gross domestic product — in simple terms, this means boosting real wages. This is the best way to boost retirement adequacy. The economic restructuring plan and workfare are already powerful forces at play in this direction. This will take time and the outcome is uncertain.

The second, and again more radical, step could be to consider supplementing the CPF with a modest state-provided pension. Deciding on how to finance the high costs involved will be challenging for both the Government and Singaporeans as it would involve considerable trade-offs.

An obvious outcome would be increased taxation, optimisation of the reserves and/or changing the Net Investment Returns Contribution formula as well as resizing the distribution of expenditure across competing public policies. Such collectivist approaches may appeal to the liberal instinct but each and every choice carries trade-offs that affect every Singaporean.


This commentary can only be a limited response to the major challenge of retirement adequacy. But it is an attempt to move the discussion beyond vitriol, cloudy thinking and casual allegations of malice.

This is an issue where most parties have the best intentions but the challenge is so complex, there are not going to be perfect solutions. This does not mean that there are no good solutions. Identifying, accepting and implementing them require not only technical competency but also a willingness to revisit fundamental assumptions as well as an ability to think in system terms. Singaporeans need to be prepared to engage with the complexities of the challenge and to be prepared for a protracted period of solution discovery in which they have an important part to play with their feedback, ideas and, finally, democratic endorsement.

When one steps back from the debate on CPF, it is possible to see the root of the angst as reflective of a disappointment in the Singapore model. The implicit social compact between the ruling People’s Action Party (PAP) and Singaporeans has historically been that in return for support, the PAP would deliver growth, well-being and a better life for each generation.

One can argue that the good days of strong economic growth ended in 1997. But the social compact has never been openly renegotiated. The very high standard of political legitimacy the PAP sets for itself is proving less possible to upkeep with today’s global economic uncertainties.

Singaporeans are not fanciful people — they expect and respect realism, honesty and a willingness to deal with challenges head on.

In the final analysis, the debate over CPF is not only an issue about Singaporeans’ retirement but more deeply a matter of retiring an outdated social compact. Any discussion about CPF must be contextualised in a recalibration and perhaps reconfiguration of the social compact between the government and the governed.

Every political party, including the incumbent, should put forward to Singaporeans a future social compact that is practical, durable and suited to the times. Then the discussion will not just be about “constructive politics”, but more significantly about what it is that politics can construct for the people.

Devadas Krishnadas is the Chief Executive Officer of Future-Moves Group, an international strategic consultancy and executive education provider based in Singapore. He is a third-generation Singaporean.

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