MPs offer ideas to improve CPF

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#31
A very interesting article by Mr. Devadas Krishnadas published in Today 28th May edition. Quite a long article, but in my opinion worth spending for those who has a serious interest in this topic.

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

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.

TOO MUCH OF A GOOD THING?

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.

THE POLITICS OF SELF-RELIANCE

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.

REVISIONING CPF

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.

TIME FOR A NEW SOCIAL COMPACT

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.
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#32
We need people like Michael Bloomberg, who was New York Mayor for 12 years.
Independent candidates who wholeheartedly do good for the people.
So determined he is about doing good that he spent part of his own fortune
lobbying for change. (I.e. gun control, smoking, junk food etc)

And that's why the U.S. is a great place(despite its financial woes and all the things that I do not agree with),
because there are people like him.

Back to CPF, I sense a change coming, and no matter how I look at it, I do not think it is likely to alter our lives significantly.
It will be a non-event. Rather plan on my own for my future than let the government take care of it for me.

Yes, I can see why there is a need for it for the general population but I am still totally unhappy about having to contribute CPF.
From a business perspective, it is turning a highly liquid asset(cash) into somewhat a restricted intangible asset. It's there but you cant touch it.
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#33
Kudos to Mr Krishnadas' article which I find balanced and pinpoints the issues correctly, which we also discussed in this forum.

First principle is that CPF is for retirement and secondly how much real return is reasonable without compromising the first principle? For example letting people invest 100% in stocks is out because it defeats the first principle unless it is guaranteed return.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#34
(29-05-2014, 02:03 AM)specuvestor Wrote: First principle is that CPF is for retirement and secondly how much real return is reasonable without compromising the first principle? For example letting people invest 100% in stocks is out because it defeats the first principle unless it is guaranteed return.

One should not be too quick to dismiss suggestions like that. E.g. CPF's official rules state that one can only withdraw the savings upon hitting 55 provided one meets the conditions for withdrawal. However, exceptions do apply on medical grounds.

Therefore, my suggestion to CPF is that as long as one can meet the minimum sum, say in the Special and Medisave Accounts, one should be allowed to invested the remainder of the savings in property or stocks.Cool
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#35
CPF and beyond.

The current heated discussion on CPF boils down to a question of a lack of public trust.

Most Singaporeans have high expectations of realising some cash after their retirement. Changes made to the CPF and the constant reminder that they may not have enough disposable income when they grow old, created a sense of insecurity. This is backed by the fact that only half of active CPF account holders have enough to meet the minimum sum requirement. To add to the anxiety, the minimum sum was increased recently resulting in less disposable money for their retirement.

Human nature is such. Many live on hope and promises. How did we come to this scenario? CPF was intended to give us comfort in old age but this do not seem to be so now.

Questions were asked why CPF investment was not giving us better returns. As answers were not so forth coming, they inferred that probably there was not enough CPF fund to give back and thus the need to retain more in the minimum sum. This may not be the case but nevertheless confidence in the system has been dented.

Younger Singaporeans, better educated, and with a more enquiring mind zoomed in on how the CPF money was invested. They raised some pertinent questions like interest rates and want to know where, how and quantum of return from investments but they got same standard answers ( e.g. CPF are invested in Singapore government bonds). This did not satisfy their young minds. They want to know whether GIC and Temasek holdings are also managing the funds. But apparently these questions were not well clarified. This created a suspicion of the government not being transparent and that the government was not revealing the true status of our money in the CPF.
As the answers were not forth coming, more pressure was exerted through the new media and some got carried away too far with allegation of wrong doings by the authorities. So the big stick was used.

The CPF issue is but one of many such encounters that the government will have to face. It is very challenging and difficult .
There will be more such standoffs. But for now, how is the government going to manage this?
Will the tough action taken, strengthen the resolve of the young or a more engaging approach be a better way for such encounters in future?
How hard the big stick is used will be carefully watched both by Singaporeans and Singapore watchers abroad.


An insightful post by Tan Cheng Bock on his Facebook.
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#36
(28-05-2014, 09:11 PM)sgd Wrote:
(28-05-2014, 07:49 PM)HitandRun Wrote:
(28-05-2014, 07:15 PM)sgd Wrote: if they are so confident of their ratings why need us to lend to them ask them try borrow from the giant squids who fleeced greece just 2 years ago they should able to get favorable rates since as you say bondholders view their credit risk as very low lah.

Ah ha! My favourite topic. But today a bit busy, meanwhile, can you study this balance sheet first? (cannot find the latest, only can see 2012. I suspect that it ain't very different):

Government's Balance Sheet

oooo big scary numbers.

asset 765 bil
+cash 149 bil
+inv 615 bil

-liab 558 bil


asset to liab ratio is only 1.4 cash is 19% I see a lot of liabilities very little cash obviously I also dunno what is needed to finance a country but I also don't see a lot of buffer to me low risk is low debt at least 2-1 asset to debt and a lot of cash. so what made you conclude that it is low risk?

The positive development is that I've managed to get you to read the govt's balance sheet.

My key takeaways as follows:

1. Operating expenditure for FY2014 is approx 55 billion, i.e. Govt has almost 3 years worth of cash buffer.
2. All the contingent liabilities (including pension, edusave, R&D, etc.) are backed by real assets, unlike many other govts around the world.
3. Even after taking into consideration all those liabilities, Govt still has > $200 billion unspoken for, classified under General Balance.
4. CPF money owing to CPF holders are reflected as liabilities under the category called government securities fund. As part of the CPF Act, all CPF money will be used to purchase Special Singapore Government Securities ("SSGS").
5. The crucial question is not why is the Govt borrowing the money from CPF holders. The more important question is does the Govt need to borrow the money?
6. As one can observe from the balance sheet, the government can sell its assets (including Govt stocks and Other investments) to fund all the obligations to CPF holders, plus all the other funds and still have >$200 billion left over.
7. If the Govt is so rich, why is the Govt borrowing money from CPF holder then?
8. As one should be aware of, CPF board does not have an investment committee that makes investment decisions, i.e. returns on investments must come from some where. Therefore, the purchase of SSGS allows a mechanism whereby the Govt will pay CPF holders for "using" their money.
9. At the start of nation building or inception of CPF in 1955, the Govt probably really needed to borrow money then. Due to the subsequent economic successes, the current Govt has accumulated a lot of surpluses.
10. The strength of the Govt's balance sheet plus its cashflow are the main reasons why ratings agencies such as S&P have rated Singapore Govt as AAA.
11. I believe that MAS's foreign reserves of approx $345 billion are not included as part of the balance sheet, i.e. accounted for separately.

I rest my case.
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#37
The Singapore govt does not need to borrow money from CPF. It can borrow money by issuing bonds in the open market at lower rates (for shorter duration bonds) than it pays for the special bonds. The special bonds are basically an accounting mechanism to reflect the govt's transfer to CPF. Without this, CPF would have no way to earn 2.5 to 4% riskfree on balances that are essentially on demand (can be withdrawn for investments, housing etc).

Here's an earlier thread with a specific proposal. http://www.valuebuddies.com/thread-1011.html
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#38
Quote:11. I believe that MAS's foreign reserves of approx $345 billion are not included as part of the balance sheet, i.e. accounted for separately.

How about GIC? I suppose most of the Government Securities fund will be diverted to GIC for management but I doubt that forms all the investment fund of GIC.
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#39
CPF is providing gov consistent source of funds with controllable costs of funding, these are very important to a borrower, it provides certainty on source and cost of funds.
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#40
(29-05-2014, 07:54 AM)HitandRun Wrote:
(29-05-2014, 02:03 AM)specuvestor Wrote: First principle is that CPF is for retirement and secondly how much real return is reasonable without compromising the first principle? For example letting people invest 100% in stocks is out because it defeats the first principle unless it is guaranteed return.

One should not be too quick to dismiss suggestions like that. E.g. CPF's official rules state that one can only withdraw the savings upon hitting 55 provided one meets the conditions for withdrawal. However, exceptions do apply on medical grounds.

Therefore, my suggestion to CPF is that as long as one can meet the minimum sum, say in the Special and Medisave Accounts, one should be allowed to invested the remainder of the savings in property or stocks.Cool
i second that. i think it's quite fair. But they just have to increase SA and MA. every year to keep up for inflation, lel.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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