Analyzing the CPF is fascinating. It’s so opaque, you feel like an engineer trying to guess the workings of a flying saucer from a bad photograph. And if you keep trying for a year or more, you end up inventing whacked out conspiracy theories. I’m amazed we haven’t started blaming Yetis for the low interest rate, or trying to predict the next minimum sum raise by measuring the Pyramids. Here’s what we think about it, and about Roy’s observations:
1. The Whole Misappropriation Issue
I don’t understand how the CPF is related to the City Harvest case, because I didn’t study the City Harvest case (I break out in hives when I step near holy ground). So I’ll just skip to the bit about misappropriation:
There’s no evidence that the Prime Minister misappropriated the funds. Okay?
And frankly, I don’t think he would. Have you seen how much money the guy makes? It’s highly improbable that he’d risk outright crime – it’s about as likely as Richard Branson deciding to buy a ski mask and rob a bunch of banks.
Conspiracy theories are exciting, but let’s not turn our local blogosphere into the Salem Witch Trials.
(And to some people out there – you know who you are – please don’t e-mail me asking if the PM is really guilty. The closest I’ve ever come to solving a crime is losing three consecutive games of Phoenix Wright: Ace Attorney.)
2. The CPF Interest Rate is Too Low
Compared to other financial products in the market?
Let me put it this way: if my office ceiling were the returns of a moderately well performing hedge fund, the CPF wouldn’t even be the floor. The CPF would be a piece of hair caught under a PVC mat, in the office three floors below me.
Even endowment policies touted by insurers project returns of 3.75% as a low estimate. And there are blue chip stocks that provide annualised returns of 5% to 9%.
Given a typical inflation rate of 3% (I am being generous), the CPF grows money at the amazing rate of NEGATIVE 0.5%. It’s guaranteed alright; guaranteed to provide crap returns.
However…this next point is important:
3. The CPF Should Pay Out It’s Full Returns, Because It’s Our Money That’s Being Invested
While I think the CPF interest rates are too low, I’m ambivalent about whether it’s truly “unfair”. What’s unfair to me is that it’s mandatory, not the way its run – how can anyone judge the latter, when we can’t even see what’s going on?
Anyway, say we operate the CPF like a kind of mutual fund instead, where the returns to the investors are tied to market returns. In that case, if the CPF investment makes 9% returns, then we should get 9% returns as well, right?
But what if the returns are negative that year? For example:
Imagine a mutual fund that’s pegged to the ST Index: If the ST Index goes up 5%, you get 5% returns (minus any fees). But if the ST Index falls to – 2%, then your returns are negative 2% as well (minus the fees, which just makes it worse).
The CPF doesn’t work like that. It provides its stated return of 2.5% regardless of market conditions. Even when things go downhill, you still get 2.5%.
Is that necessarily a bad thing? It’s subjective. Some people might not mind the poor returns, because they are psychologically assured by the security. After all, people still put money in bank fixed deposits, which have an interest rate even lower than the CPF.
Also, one possible reasons we don’t get the full returns (I am guessing) could be that excess returns are held in reserve. So on good months, the excess returns are saved up. On bad months, that saved up money is used to ensure the interest rate remains the same. Your insurer does pretty much the same thing with your endowment policy.
4. Raising the Minimum Sum is a Way to Trap More Money in Our CPF
Yep. That’s because the government seems convinced that we’re all stuck at the mental age of 12. If we have our own money, we can’t possibly resist blowing all of it on alcohol, cigarettes, 4D, etc.
That may not be the exact way they choose to express it, but let’s just call a spade a spade.
5. GIC and Temasek Have Used the CPF to Become Large Sovereign Wealth Funds
Once again, we’re playing “guess the engine without lifting the hood”. It’s a little unfair to make assertions about how the money is used, when we have no real details.
It might be better to complain about the lack of transparency, and fix that issue first.
6. Make the CPF an Opt-Out Scheme
In our opinion, the CPF should be opt-in by default. If you want to opt-out (and there are opt-out clauses, just not many), you should be able to.
Couple it with a consultation, that ensures the person opting out is capable of handling their own finances. And issue a test, the same way we need to pass one to buy complex financial products.
(There probably won’t be a massive rush to leave the CPF scheme, because people not interested in finance almost certainly won’t bother).
The fact is, there are people for whom the CPF is merely a mandatory and inferior financial scheme: People with multiple properties who don’t need a pension plan. People who manage million dollar portfolios as their job, but are ironically not allowed to manage their own retirement fund. People in their 50’s who worked hard and were diligent with their money, who have saved up enough to buy most of Liberia, let alone provide for a quiet retirement.
Once again, there are opt out clauses, and situations where you don’t need to put down the minimum sum (we’ll explain those in a future article). But ways to escape from the CPF are few and far between.
How do you feel about Roy Ngerng’s blog post? Do you think he’s gone over the top? Or are there some valid points? Share your thoughts with us here.
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