Many people have written about CPF issues over the years and most of them concentrated on the few perspectives on why minimum sum keeps rising, where do our CPF go to, why are we getting so low interest rates from CPF, is CPF enough for our retirement financing etc etc.
CPF is a BIG issue and it requires a lot of effort in studying how it works. I remember that during my NUS Econs Honours year, I have to spend quite a few weeks to study the whole CPF system and its changes over the years to fully understand it.
A lot have been said about "how safe" our CPF monies are but PAP government has countered such argument that "government provides guaranteed returns to CPF" to address the point. When people question the safety of our CPF in view of the massive losses made by GIC and Temasek Holdings, PAP has gone overdrive to try its best to dissociate the notion that what GIC and Temasek invested have "nothing to do with CPF".
This come as a shock to many people, especially people like me who have gone into detailed study of the mechanism of CPF during my Econs classes in NUS. We have been taught and believed that CPF money has always been invested in our sovereign funds like GIC and Temasek through the government. Yes, technically speaking, CPF uses the money contributed by Singaporeans to buy some fixed interest rate bonds from Government which are "non- tradable". But in Singapore's context, the government cannot just print money to pay CPF the interests. Our government has more budget surpluses that it doesn't need to borrow CPF money for its budget spending. So, it must be the case that CPF is invested in some investment instruments and the sovereign wealth funds like GIC and Temasek are the natural choices.
Thus it is totally misleading for PAP government to claim that our CPF is not being managed by Temasek or GIC based on some "technical definitions". It is just like the following illustrations I have written on my FB:
The mystery of CPF money...
Aiyah, it is like that one. You have coffee powder (CPF), give it to PAP government, then it just mixes with water (SLA revenue from land sales), sugar (Budget Surplus) and milk (Trade Surplus), stir it and then, serve it to Temasek and GIC. But when you ask, where is my coffee powder, PAP government acts blur but say We sure guarantee to give you back your coffee powder lah, Temasek and GIC also act blur and say we only drink Coffee given by PAP government but didn't take your coffee powder!
If PAP still insists that GIC and Temasek Holdings did not invest any of our CPF money, then please tell us WHERE THE HELL HAS OUR CPF GONE TO? What have they done with our CPF money?
No matter how we look at this issue, inevitably part if not all of our CPF must have been managed by GIC and Temasek going through the government's hands. Once we establish this simple fact of relations, there will be lots of questions and doubts about the well being of our CPF money as well as the "appropriate returns" which our CPF money should deserve.
PAP has claimed CPF is "RISK FREE". Is that really so? Let's look at the example of the bankruptcy of the Greek government. Greek government's bonds should be risk free right? Same as the government bonds CPF has bought. But in the end what happens? Investors in these Greek government bonds are forced to accept a hefty discount from the capital value they have invested in it! So, this illustrates the fact that "Government guarantee" on bonds or such, are as good as naught if the whole government went bankrupt.
Risk is basically about UNCERTAINTIES that could be detrimental to your investment. The greater uncertainties the higher risk it is. If the risk is higher, we would expect to have higher returns for taking the higher risk. If you lack the flexibility or options to mitigate the risk in a timely manner, it would increase your risk factor. These are all basic Financial 101 fundamental teachings of Risk management.
There are a categories of risk our CPF face but I shall touch on the THREE fundamental risks here:
1) Inflation and Forex risks
2) Policy and Political risks
3) GIC and Temasek investment and liquidity risks
These risks are discussed on the backdrop of the fact that CPF is a LONG TERM investment. Any LONG TERM investment will always incur HUGE risks than short term investment. This is just basically why Fixed Deposits in banks will give you higher interests because the risk you face when you are unable to liquidate your funds if something went wrong, is higher. This is especially true when you are FORCED to put money into CPF which part or most of it, you do not have the ability to control or manage the funds at all.
Inflation and Forex Risks
PAP government is not transparent in its management of CPF funds, least so for GIC and Temasek. The mechanism that decides that 2.5% and 4% for CPF money has not been justified by any methodology at all. In the 1980s, we could have as high as 6% interests for CPF but suddenly, we are stuck with 2.5%. The mechanism that decides the increase of minimum sum for CPF is also opaque as well. We could have as high as a 10% increase in 2009 while for other years, an average of 5% - 6%. If both of these indicators are pegged to inflation rates, I do not see why they are not adjusted in tantrum.
So what is the point here? Is 2.5% or 4% a justified interests return for our CPF money? The answer is no because we face pretty higher risk than any other investments. For example, we could use these CPF money to buy bank shares and stocks and safe to say, we should get about 4%-5% dividend return every year. This does not take into the consideration of capital gains in the long run. Furthermore, if there were to have problems with the banks, we could well liquidate them in timely fashion to manage that risk. Thus, in actual fact, investing our money in bank shares is basically SAFER than CPF and yet giving us a higher return! Thus, why should we satisfied with PAP government's promise of 2.5% to 4%?
Whatever government guarantee promised to CPF, we must take it with a pinch of salt. Beside the PRIME example of Greek and Italian government's debacle in recent years, such guarantee is only as good as the government of the day.
If our CPF interest isn't really pegged with inflation rates, then we are basically facing inflation risk. At times, the CPF interest given is even LOWER than the inflation we face yearly! Money is as good as the amount of goods it could purchase. You can promise me $1 million in 30 years time when I put in $10 now, but if I can't even buy a packet of chicken rice with that $1 million after 30 years later, then what's the use of such guarantee?
If our Singapore dollars is to depreciate over time, we will face foreign exchange risks in the long run as well. As a small open economy, we import almost everything for our livelihood and it would mean that our cost of living will be very much higher by then.
PAP government can only "guarantee" the amount of money in terms of digits to our CPF BUT they can't guarantee the preservation of our dollar value in terms of purchasing power basically because they have limited means to control inflation and foreign exchange in the long run. We are very much subjected to external factors influencing these two important parameters.
Policy and Political Risks
We are already facing drastic policy risks now. PAP has amended the CPF Act so many times that we have lost count. From the most primitive and simple "withdrawal at 55 years old" to the amendment to increase and decrease of contribution rates, Medisave, Special Account, Minimum Sum manipulations, Compulsory Life Annuity etc.
The fundamental question here is, is this FAIR to CPF contributors? For Medisave, most likely we will not see the money in this account until we die! The yearly increment of Minimum Sum decided by CPF and PAP government their own total discretionary power without any form of transparent methodology will basically prevent MAJORITY of Singaporeans from withdrawing their money other that "token" of S$5000 when they reach 55 years old. Worse of all, the Compulsory Life Annuity is basically a FORCED TAXATION like the Social Security Mutual Fund system. This is a strange twist in this whole CPF system. We have decided on a Self Reliance CPF system but in the end, when we get old, we are FORCED to turn it into a lousy pension fund system which really pays pittance monthly amount for our retirement!
PAP has set a very BAD example here by messing up the CPF system. It has empowered itself and CPF to decide on the amount of Minimum Sum increment every year without the need to go through any scrutiny at all. They don't need to go through any debates in parliament, nor referendum, nor consultation with the people or in any way, transparent about how they derive such figures and decisions! Imagine if in future, we have really mediocre politicians as our leaders, they could have abused the CPF system with such powers!
On the other hand, if the government of the day mess up the economy and mismanage both the fiscal and monetary policies, we may face with the situation that most of our CPF money "borrowed" by the government via the bonds would be used to finance huge budget deficits, trade deficits or foreign exchange losses. Naturally, we may face even higher inflation.
These risks are by no means small because Singaporeans DO NOT HAVE THE OPTION NOT to lend the government their CPF money to finance such policy failures!
GIC and Temasek Holdings Investment and Liquidity Risks
The management of CPF by the two SWF, GIC and Temasek holding, makes it even more risky here. These two SWF invested most of the money overseas. If they invest in assets valued in other foreign currencies, we will face even more foreign exchange risks. For example, if they have invested US$100 at exchange rate of S$1.70 (i.e. S$170 invested) in a company in the past, after 10 years, the paper value of this company has "increased" to US$110 but the exchange rate has dropped to S$1.20 per US$1, then in effect, we have only S$132 left. This is an actual loss instead of a gain!
The government's assertion of "guarantee" also means nothing when both SWF failed, where would the government get the money to pay our CPF interests? By printing more money? That will create hyper inflation instead! That would mean that even if the government guarantee that paying of 2.5% to 4% CPF interest, these money given to us would be greatly discounted by the inflation caused by money printing! So what good is such "government guarantee" worth? It doesn't really mean "risk free" at all. Thus, it is totally MISLEADING and irresponsible for PAP to use such a BIG word "RISK FREE" return and to argue that since it is "RISK FREE", it justifies lower interest return for CPF!
On the other hand, using these SWF as vehicle to manage our funds will face liquidity risk. On paper, an asset may be worth $100 million but it may not be easy to liquidate such asset at the paper value because there may not be many qualified buyers around. It will take time or even DISCOUNTS to make a successful liquidation of such assets in order to meet the expected payout to CPF. An aging population would mean that more and more liquidity would be needed to meet the liability of monetary payout to CPF holders. It may not be easy for both SWF to make timely liquidation of their assets to meet these obligations without suffering losses.
I personally suspect that one of the main reasons why PAP decided to stop Singaporeans from withdrawing ALL their CPF at one go when they reach 55 years old is because of the potential difficulty in maintaining such liquidity. They would prefer a prolonged period of drawing down so that they need not make massive liquidation of assets to meet their CPF payout obligations. The unilateral manipulation of Minimum Sum may be due to this consideration as well. The most obvious case is revealed in the year 2009. The increase of minimum sum has suddenly shot up to more than 10%. This corresponded to the massive losses both GIC and Temasek Holdings incurred during the period of 2008 to 2009. The write off of assets would mean that the investment income would severely affect the ability to provide the necessary cashflow and liquidity to cope with the yearly pay out to CPF.
Conclusions
There are many issues with CPF but I find that we should first have proper deliberations on the RISKS we face right now with the present setting. It is apparent that the interests given to our CPF accounts do not fully commensurate the amount of (high) risks we are taking by placing our money in CPF. As mentioned, it would even be better for us to use our ALL our CPF money to buy bank shares and enjoy the 4% to 5% yearly dividends and at the same time, benefits from the capital appreciation of the share value. We can't do that with our money in Medisave account.
We face STRUCTURAL risks with the rigid arrangement of CPF being forced to buy only Government Bonds which is not entirely "Risk Free" at all. The lack of flexibility would mean that we are forced to face the risks of having a bad government as well as the risks of the bad performance of our two SWF.
There is no such thing as "Risk Free" in this inflationary world. Even if PAP guarantees to peg the interest rates CLOSELY correlated to inflation rates with a totally transparent mechanism that can be scrutinized by the people, Singaporean CPF holders still face the basic risks of how well GIC and Temasek perform. They have no means to mitigate such risk factors according to their risk adversity level at all.
If we could make our own decisions in how we could invest our CPF money, directly in our SWF or other mutual funds, we would be able to reap the full returns for the types of risks we face. i.e. we will not be taking a meager 2.5% to 4% interest return while the two SWF are making an average of over 10% per year! Basically, we have been shortchanged. To look at it from another perspective, we are suffering a heavy TAX imposed by the PAP government on the potential returns we should get if we invest directly in the SWF instead of going through the "Coffee Making" process of PAP government! The tax could be as high as 60% on the potential 10% returns which we could get from GIC or Temasek or both combined!
Last but not least, different people have different risk portfolio or adversity. The present CPF system has forced us into a situation of one size fits all. Risk management should be customized to each individual's appetite of risk taking. At the same time, individuals should be allowed to change their portfolio construct anytime they want. They should also be provided adequate choices of mutual funds to invest in, with differential percentages of their CPF money to be invested into different portfolios with different risk construct.
The CPF is an instrument to make sure we save for our retirement BUT not a means to provide the government CHEAP funds to invest and make money for their own use. It is definitely not meant to make us fit into a high risk situation with inadequate returns, least to make us lose our purchasing power over time due to inflation and foreign exchange risks.
Whether we like it or not, our CPF is clearly NOT RISK FREE and it is definitely linked to the fate of the two SWF, GIC and Temasek Holdings, as well as the type of government we have at any one time. Once we understand these fundamentals about the RISKS we face in CPF, then we can question PAP government effectively on the flaws in the present CPF system.
Goh Meng Seng
CPF is a BIG issue and it requires a lot of effort in studying how it works. I remember that during my NUS Econs Honours year, I have to spend quite a few weeks to study the whole CPF system and its changes over the years to fully understand it.
A lot have been said about "how safe" our CPF monies are but PAP government has countered such argument that "government provides guaranteed returns to CPF" to address the point. When people question the safety of our CPF in view of the massive losses made by GIC and Temasek Holdings, PAP has gone overdrive to try its best to dissociate the notion that what GIC and Temasek invested have "nothing to do with CPF".
This come as a shock to many people, especially people like me who have gone into detailed study of the mechanism of CPF during my Econs classes in NUS. We have been taught and believed that CPF money has always been invested in our sovereign funds like GIC and Temasek through the government. Yes, technically speaking, CPF uses the money contributed by Singaporeans to buy some fixed interest rate bonds from Government which are "non- tradable". But in Singapore's context, the government cannot just print money to pay CPF the interests. Our government has more budget surpluses that it doesn't need to borrow CPF money for its budget spending. So, it must be the case that CPF is invested in some investment instruments and the sovereign wealth funds like GIC and Temasek are the natural choices.
Thus it is totally misleading for PAP government to claim that our CPF is not being managed by Temasek or GIC based on some "technical definitions". It is just like the following illustrations I have written on my FB:
The mystery of CPF money...
Aiyah, it is like that one. You have coffee powder (CPF), give it to PAP government, then it just mixes with water (SLA revenue from land sales), sugar (Budget Surplus) and milk (Trade Surplus), stir it and then, serve it to Temasek and GIC. But when you ask, where is my coffee powder, PAP government acts blur but say We sure guarantee to give you back your coffee powder lah, Temasek and GIC also act blur and say we only drink Coffee given by PAP government but didn't take your coffee powder!
If PAP still insists that GIC and Temasek Holdings did not invest any of our CPF money, then please tell us WHERE THE HELL HAS OUR CPF GONE TO? What have they done with our CPF money?
No matter how we look at this issue, inevitably part if not all of our CPF must have been managed by GIC and Temasek going through the government's hands. Once we establish this simple fact of relations, there will be lots of questions and doubts about the well being of our CPF money as well as the "appropriate returns" which our CPF money should deserve.
PAP has claimed CPF is "RISK FREE". Is that really so? Let's look at the example of the bankruptcy of the Greek government. Greek government's bonds should be risk free right? Same as the government bonds CPF has bought. But in the end what happens? Investors in these Greek government bonds are forced to accept a hefty discount from the capital value they have invested in it! So, this illustrates the fact that "Government guarantee" on bonds or such, are as good as naught if the whole government went bankrupt.
Risk is basically about UNCERTAINTIES that could be detrimental to your investment. The greater uncertainties the higher risk it is. If the risk is higher, we would expect to have higher returns for taking the higher risk. If you lack the flexibility or options to mitigate the risk in a timely manner, it would increase your risk factor. These are all basic Financial 101 fundamental teachings of Risk management.
There are a categories of risk our CPF face but I shall touch on the THREE fundamental risks here:
1) Inflation and Forex risks
2) Policy and Political risks
3) GIC and Temasek investment and liquidity risks
These risks are discussed on the backdrop of the fact that CPF is a LONG TERM investment. Any LONG TERM investment will always incur HUGE risks than short term investment. This is just basically why Fixed Deposits in banks will give you higher interests because the risk you face when you are unable to liquidate your funds if something went wrong, is higher. This is especially true when you are FORCED to put money into CPF which part or most of it, you do not have the ability to control or manage the funds at all.
Inflation and Forex Risks
PAP government is not transparent in its management of CPF funds, least so for GIC and Temasek. The mechanism that decides that 2.5% and 4% for CPF money has not been justified by any methodology at all. In the 1980s, we could have as high as 6% interests for CPF but suddenly, we are stuck with 2.5%. The mechanism that decides the increase of minimum sum for CPF is also opaque as well. We could have as high as a 10% increase in 2009 while for other years, an average of 5% - 6%. If both of these indicators are pegged to inflation rates, I do not see why they are not adjusted in tantrum.
So what is the point here? Is 2.5% or 4% a justified interests return for our CPF money? The answer is no because we face pretty higher risk than any other investments. For example, we could use these CPF money to buy bank shares and stocks and safe to say, we should get about 4%-5% dividend return every year. This does not take into the consideration of capital gains in the long run. Furthermore, if there were to have problems with the banks, we could well liquidate them in timely fashion to manage that risk. Thus, in actual fact, investing our money in bank shares is basically SAFER than CPF and yet giving us a higher return! Thus, why should we satisfied with PAP government's promise of 2.5% to 4%?
Whatever government guarantee promised to CPF, we must take it with a pinch of salt. Beside the PRIME example of Greek and Italian government's debacle in recent years, such guarantee is only as good as the government of the day.
If our CPF interest isn't really pegged with inflation rates, then we are basically facing inflation risk. At times, the CPF interest given is even LOWER than the inflation we face yearly! Money is as good as the amount of goods it could purchase. You can promise me $1 million in 30 years time when I put in $10 now, but if I can't even buy a packet of chicken rice with that $1 million after 30 years later, then what's the use of such guarantee?
If our Singapore dollars is to depreciate over time, we will face foreign exchange risks in the long run as well. As a small open economy, we import almost everything for our livelihood and it would mean that our cost of living will be very much higher by then.
PAP government can only "guarantee" the amount of money in terms of digits to our CPF BUT they can't guarantee the preservation of our dollar value in terms of purchasing power basically because they have limited means to control inflation and foreign exchange in the long run. We are very much subjected to external factors influencing these two important parameters.
Policy and Political Risks
We are already facing drastic policy risks now. PAP has amended the CPF Act so many times that we have lost count. From the most primitive and simple "withdrawal at 55 years old" to the amendment to increase and decrease of contribution rates, Medisave, Special Account, Minimum Sum manipulations, Compulsory Life Annuity etc.
The fundamental question here is, is this FAIR to CPF contributors? For Medisave, most likely we will not see the money in this account until we die! The yearly increment of Minimum Sum decided by CPF and PAP government their own total discretionary power without any form of transparent methodology will basically prevent MAJORITY of Singaporeans from withdrawing their money other that "token" of S$5000 when they reach 55 years old. Worse of all, the Compulsory Life Annuity is basically a FORCED TAXATION like the Social Security Mutual Fund system. This is a strange twist in this whole CPF system. We have decided on a Self Reliance CPF system but in the end, when we get old, we are FORCED to turn it into a lousy pension fund system which really pays pittance monthly amount for our retirement!
PAP has set a very BAD example here by messing up the CPF system. It has empowered itself and CPF to decide on the amount of Minimum Sum increment every year without the need to go through any scrutiny at all. They don't need to go through any debates in parliament, nor referendum, nor consultation with the people or in any way, transparent about how they derive such figures and decisions! Imagine if in future, we have really mediocre politicians as our leaders, they could have abused the CPF system with such powers!
On the other hand, if the government of the day mess up the economy and mismanage both the fiscal and monetary policies, we may face with the situation that most of our CPF money "borrowed" by the government via the bonds would be used to finance huge budget deficits, trade deficits or foreign exchange losses. Naturally, we may face even higher inflation.
These risks are by no means small because Singaporeans DO NOT HAVE THE OPTION NOT to lend the government their CPF money to finance such policy failures!
GIC and Temasek Holdings Investment and Liquidity Risks
The management of CPF by the two SWF, GIC and Temasek holding, makes it even more risky here. These two SWF invested most of the money overseas. If they invest in assets valued in other foreign currencies, we will face even more foreign exchange risks. For example, if they have invested US$100 at exchange rate of S$1.70 (i.e. S$170 invested) in a company in the past, after 10 years, the paper value of this company has "increased" to US$110 but the exchange rate has dropped to S$1.20 per US$1, then in effect, we have only S$132 left. This is an actual loss instead of a gain!
The government's assertion of "guarantee" also means nothing when both SWF failed, where would the government get the money to pay our CPF interests? By printing more money? That will create hyper inflation instead! That would mean that even if the government guarantee that paying of 2.5% to 4% CPF interest, these money given to us would be greatly discounted by the inflation caused by money printing! So what good is such "government guarantee" worth? It doesn't really mean "risk free" at all. Thus, it is totally MISLEADING and irresponsible for PAP to use such a BIG word "RISK FREE" return and to argue that since it is "RISK FREE", it justifies lower interest return for CPF!
On the other hand, using these SWF as vehicle to manage our funds will face liquidity risk. On paper, an asset may be worth $100 million but it may not be easy to liquidate such asset at the paper value because there may not be many qualified buyers around. It will take time or even DISCOUNTS to make a successful liquidation of such assets in order to meet the expected payout to CPF. An aging population would mean that more and more liquidity would be needed to meet the liability of monetary payout to CPF holders. It may not be easy for both SWF to make timely liquidation of their assets to meet these obligations without suffering losses.
I personally suspect that one of the main reasons why PAP decided to stop Singaporeans from withdrawing ALL their CPF at one go when they reach 55 years old is because of the potential difficulty in maintaining such liquidity. They would prefer a prolonged period of drawing down so that they need not make massive liquidation of assets to meet their CPF payout obligations. The unilateral manipulation of Minimum Sum may be due to this consideration as well. The most obvious case is revealed in the year 2009. The increase of minimum sum has suddenly shot up to more than 10%. This corresponded to the massive losses both GIC and Temasek Holdings incurred during the period of 2008 to 2009. The write off of assets would mean that the investment income would severely affect the ability to provide the necessary cashflow and liquidity to cope with the yearly pay out to CPF.
Conclusions
There are many issues with CPF but I find that we should first have proper deliberations on the RISKS we face right now with the present setting. It is apparent that the interests given to our CPF accounts do not fully commensurate the amount of (high) risks we are taking by placing our money in CPF. As mentioned, it would even be better for us to use our ALL our CPF money to buy bank shares and enjoy the 4% to 5% yearly dividends and at the same time, benefits from the capital appreciation of the share value. We can't do that with our money in Medisave account.
We face STRUCTURAL risks with the rigid arrangement of CPF being forced to buy only Government Bonds which is not entirely "Risk Free" at all. The lack of flexibility would mean that we are forced to face the risks of having a bad government as well as the risks of the bad performance of our two SWF.
There is no such thing as "Risk Free" in this inflationary world. Even if PAP guarantees to peg the interest rates CLOSELY correlated to inflation rates with a totally transparent mechanism that can be scrutinized by the people, Singaporean CPF holders still face the basic risks of how well GIC and Temasek perform. They have no means to mitigate such risk factors according to their risk adversity level at all.
If we could make our own decisions in how we could invest our CPF money, directly in our SWF or other mutual funds, we would be able to reap the full returns for the types of risks we face. i.e. we will not be taking a meager 2.5% to 4% interest return while the two SWF are making an average of over 10% per year! Basically, we have been shortchanged. To look at it from another perspective, we are suffering a heavy TAX imposed by the PAP government on the potential returns we should get if we invest directly in the SWF instead of going through the "Coffee Making" process of PAP government! The tax could be as high as 60% on the potential 10% returns which we could get from GIC or Temasek or both combined!
Last but not least, different people have different risk portfolio or adversity. The present CPF system has forced us into a situation of one size fits all. Risk management should be customized to each individual's appetite of risk taking. At the same time, individuals should be allowed to change their portfolio construct anytime they want. They should also be provided adequate choices of mutual funds to invest in, with differential percentages of their CPF money to be invested into different portfolios with different risk construct.
The CPF is an instrument to make sure we save for our retirement BUT not a means to provide the government CHEAP funds to invest and make money for their own use. It is definitely not meant to make us fit into a high risk situation with inadequate returns, least to make us lose our purchasing power over time due to inflation and foreign exchange risks.
Whether we like it or not, our CPF is clearly NOT RISK FREE and it is definitely linked to the fate of the two SWF, GIC and Temasek Holdings, as well as the type of government we have at any one time. Once we understand these fundamentals about the RISKS we face in CPF, then we can question PAP government effectively on the flaws in the present CPF system.
Goh Meng Seng
I think we will find the behavioural economics support for your case quite easily. Humans don't behave economically rationally.
