CPF Is Broke

The hot topic of the day is Central Provident Fund (CPF). When the CPF was first started in 1955, both employees and employers had to contribute 5%. Over the years, the rate was gradually increased until it reached 25% in 1985 for both parties. Surely one of the highest compulsory savings rates ever - 50 cents in the kitty for every $1 earned -  ensuring a secure nest egg for a comfortable retirement. It's turning out to be a rotten egg, all sulphurous and foul smelling.

Member of parliament (MP) Inderjit Singh inadvertently touched on one source of the stench, "If we use less for housing, we will have more for retirement". Investing CPF monies in property makes sense only if the asset enhancement model works. But like all investment plans - including CPF Investment Scheme–Ordinary Account (CPFIS-OA) and Special Account (CPFIS-SA) funds going into insurance, unit trusts, exchange traded funds (ETFs), bonds and treasury bills, shares and gold - the game is all about risk versus reward. No one guarantees the pot of gold will still be there after the upturn and downturn cycles. You need more than a pinch of salt to swallow the property agent's snake oil, that rentals will always cover the cost of the bank loan.

Civil servants at the CPF board who were not comfortable stashing the money in biscuit tins or under the matresses knew they had to generate at least interest income to pay out to the citizens when it was time to collect, which used to be age 55. Never underestimate the power of the compounding rate.

MP (Chua Chu Kang GRC) Zaqy Mohamad is proposing an investment-linked plan managed by the CPF board to pool the investments from different members and provide higher returns. But the Monetary Authority of Singapore (MAS) is already doling out the CPF funds to investment entities through the mechanism of Singapore Government Securities (SGS). The difference is the quality of returns. Our northern neighbour's Employees' Provident Fund (EPF) declares an annual dividend on funds on deposit which has varied over time, depending on investment results. Recent numbers are 5.90% (2010), 6.00% (2011), 6.15% (2012), 6.35% (2013).

Which brings to mind Chris Balding's observation that, in our topsy-turvy CPF world, risks are socialized while benefits are privatized. Ergo, if the investments do well, the government gets to keep everything above the 2.5-4% CPF interest payment level; if the investments do poorly - as in the Bank of America buy high sell low debacle - tax payers will have to work longer years to guarantee the payment to CPF holders. No wonder the citizenry is upset.