Saturday, May 20, 2006

Unexpected exchange with Kway Teow Man over CPF.

My comment on CPF policy at Channel X had led to a rather lengthy exchange with Kway Teow Man, whom I think is very well versed in economics.

Here is the exchange for those who are interested.

at82 said:

Hi chris,

Gross Domestic Product (GDP) is the gross value of goods and services that a nation produces.

Central Provident Fund (CPF) is the compulsory saving scheme that the Spore govt imposed on us. Currently 33% of our income (13% from employers and 20% from employee) is channelled into it. There is 2 types of accounts in CPF , the ordinary account and the special account.

For the ordinary acc, the govt gave a derisory 2.5% interest rate for the $ we put there, regardless what the inflation rate inflation rate is. We can use the $ in the ordinary to buy HDB flats, pay for children educational fee and even invest in some investment schemes. The investment schemes has already been declared a flop by the govt.

For the special acc, the govt gave a pitiful 4% interest rate for the $ we put there. We cannot touch the $ in the special acc until we reach either 55 or 62 or when we migrate out of Singapore.

Can u imagine having a fix deposit acc that only pay you a max 4% interest rate for locking your $ up for over 30 yrs?

That is exactly the CPF is doing.

By forcing us to put so much of our $ into CPF while giving us derisory returns, they are indirectly taxing our income.

Don’t you think there is something wrong, if we cannot afford a decent flat and decent retirement after saving 33% of income lifetime income?

As if it isn’t enough, the govt is imposing a new minimum sum scheme and delaying CPF withdrawal age.

Sometimes I wonder if I will live to see my CPF $ given back to me.

Channel X said that although HK rank just 3 countries above us in term of standard of living, but we can only use 80% of our income to pay for our expenses. This means although our standard of living is high we have less $ to pay for it due to CPF.

I hope my explaination is of use.


KTM said:

I'm afraid that I disagree with your rant about the CPF. It may not be perfect, but there's some sense in the madness.

Insures the State (actually tax payers) against people growing old and broke. Essentially makes people pay for their old age.

In any case, the CPF money can be used to build property, so it's not as illiquid as it seems.

Finally, you find for me a fixed deposit that pays more than 4% per annum. Fixed D hor. Must be riskless one. :-)

Just wanna make sure that the next episode of Channel X doesn't spout something about the CPF that I cannot agree with. :-P

at82 said:


This is not a rant, this my conclusion after much thought.

The new min sum scheme and the ultra low interest rate is something i disagree with.

CPF is not without risk, bcos 1st of all CPF is not transparent.

Secondly the ease of which the CPF contribution rate can be altered and min sum can be raised is already a clear sign that we dun really have a say over our $.

Who know when the govt will raise the min sum again to say 150K or when the new withdrawal age will be set?

At the very least a fix deposit acc is not subjected to the whim of the govt.

But I am not totally against CPF.

I believe CPF can be improve.

I know CPF is a fully funded social security sys which can help to guard against old age without burdening the state too much compared to the pay as you go sys in Europe.

I am not disputing that.

However I just have to disagree with the ease of which the govt can altered the scheme.

Cheers. :-)

KTM said:

As Channel X rightly pointed out, CPF is really a hidden tax. Since when people got to decide on the tax rate? :-)

The difference with the CPF however is that you can use up your CPF to buy property, thereby avoiding paying indirect taxes by not putting your CPF money under the mercy of the lousy (at least in your opinion) interest rate. :-)

Given the increasing life expectancies and the fact that there is inflation, the minimum sum and minimum retirement ages are certain to rise accordingly. If there's anything that the KTM can tell you with any certain, it's quite certain that both are going up and probably never coming down.

That's just a reality of life given the purpose of the CPF. You got any brighter ideas on how else it can be done? Cannot have a national referendum everytime we want to increase either right?

I dun know whether you checked out the market, but 4% is quite a good rate given current market conditions. In fact, I think there's a limit to how much you can transfer to the Special Account. :-) And seriously, you will have to try quite hard to prove the case that CPF is more risky than conventional fixed Ds. :-)

Perhaps I can tell you what I think the catch is. The catch is liquidity. :-) Once your transfer to the Special Account, I dun think you can transfer it back out.... that's probably the reason why they can afford to give relatively high rates also. :-P

It is true that for some people from the lower middle class, CPF might cause some undue hardship since it reduces their disposal income. Given the complains that the Garmen has not been very good at keep a lid on the rising costs of living, it's a real problem.

The important thing however is to realize the cause of the problem. It's the rising costs of living rather than the CPF. While it's true that reducing the CPF rate so that people have higher take-home pay may alleviate the plights of those affected, these people will pay a price when they retire -- or the State can choose to bear it.

Pick your poison. :-P

at82 said...


While I agree that the contribution can be altered to cope wif sudden economic crisis, I believe that govt shd NOT have the right to change the age which we can withdraw OUR $.

I really dun think a scheme which pays u only 4% interest rate for locking up ur assets for over 30 yrs is a gd deal. :-P

We shd remember CPF is not a pay as u go sys where the govt have to tax us to keep the sys gg, in fact u have already mention that CPF is a hidden tax by itself.

Hence I see no reason why we cannot have access to our own $ at the not so young age of 55.

I am of the opinion that Govt shd give us the option of withdrawing our $ from CPF at 55 if we wanted to and not arbitarily raise the min sum and withdrawal for everyone.

Moreover I believe that S'poreans are not so stupid that once we withdraw our CPF we will spend it all while leaving nothing for old age.

We probably have fundamentally different idea on hw much control shd the state have over our assets.

We probably will never agree wif each other on this. So let agree to disagree. :-)

KTM said...


Okay, let's agree to disagree loh.

However, let me just pause to highlight that if you say that the Garmen should not have a right to increase the minimum retirement age above 55, you are saying that 55 is somehow the magical "correct" age. Question is WHY 55?

If the purpose of CPF is to force people to locked away money (and perhaps indirectly tax people), then as people start to live longer and longer and the retirement age is raised, the logical thing is to raise the minimum withdrawal age too.

If you are of the opinion that the CPF money is YOUR money and you really should have access to it then you seem to be arguing AGAINST having CPF in the first place and you should really be arguing that CPF should be abolished and people should get to manage their own money.

If so, then you will just have to propose an alternative loh. I don't think the US-style pay-for-your-father's generation Social Security system is a better deal.

You said, "S'poreans are not so stupid that once we withdraw our CPF we will spend it all while leaving nothing for old age." While you can speak for yourself, I don't think you can generalize for all Singaporeans though. Many are like sheep. Anyhow blindly follow the latest fad.

At the very least many are GREEDY. You give them access to all their money. They will hear about some ludicrious get-rich-quick scheme, park their money there and get burnt. The hor, if they become destitude, the State (tax payers) will have to come bail them out.

at82 said:


U dun seem to be too happy with me lolz.

Anyway if I am not wrong, CPF withdrawal age is not the same as retirement age.

You ask why 55. I said 55 bcos it is the age whereby many Singaporean have the heaviest financial burden.

55 is the age whereby most are facing job insecurity while having to worry about their children higher education fees.

It is also a fact that the real retirement age in Singapore is much lower than the official retirement age of 62. Many older Singaporeans have difficulty in finding work.

Hence I believe that 55 is a optimal age for CPF withdrawal.

FYI I did not argue for the abolishment of CPF.

I am not for a US-style pay-for-your-father's generation Social Security system either.

What I am arguing for is a tweaking of status quo.

Since you are well versed in economics, surely you would know that over-insuring would lead to sub-optimal welfare even for the risk averse. ;-)

It is not as if the returns from CPF is that great either.

In fact as u have said it probably is a hidden tax.

Anyway I am of the opinion that the state should not attempt to protect people from themselves beyond a certain limit, which in this case is the withdrawal age of CPF.

That is also why I supported the casino initiative.

Moreover I did include the option of leaving the $ with the CPF, so ppl who prefer to leave their $ with CPF can do so.

BTW do you really believe that S’poreans will become destitute if they are allowed to withdraw their CPF at the age of 55?

Singaporeans might not be very smart, but judging the progress we have made we can’t be that dumb either!

Moreover most ppl recieve $ from their children even after getting their CPF.

My sense is that you held the view that the govt shd protect the people even from themselves, while I am of the view that more autonomy for citizens is needed as the state can only do so much.

2 very different policy philo la.


KTM said...

No lah, where got dun like you. :-) Just pushing you to articulate your assumptions and prodding you to shore up your argument. :-P

In actual fact, the KTM is quite indifferent to minimal sum and withdrawal age. His view is very simple -- whatever the numbers, they cannot be set arbitrarily. Must study the figures and statistics first. Since he got no access to the numbers, he is not in a position to say whether 55 is a good age or not. :-P

I was intensionally being provocative in my earlier statement that Singaporeans "are like sheep (and will) anyhow blindly follow the latest fad". I'm actually quite sure that the majority of people will be okay if you let them take out their money. :-) The problem arises only with the minority of the people who will squander it away. It is likely however that the sensible fellas who will not get in trouble are likely to be able to take care of their finances and hence be able to manage even under the present regime.

You may say, what's the big deal since it's THEIR money? The problem is that if we any how give back all the money and the fellas who cannot think squander all their money, then the burden may still fall back on the State. In some sense, maybe the current CPF regime is trying to protect the sensible majority from the not-so-sensible minority. :-)

The real question is: to what extent should the State try to protect the people from themselves? This is what I think: if the people will make a pact with the Garmen agreeing that the Garman can wash its hands on the old folks once it returns them all their CPF money, returning all the CPF money isn't really a problem. However, this is not a politically feasible solution. :-)

Honestly, I wouldn't be too upset if the Garmen returns me all my CPF money when I reach 55. The State however cannot make decisions by optimizing the utility of each individual. The collective incentives of the State are often different from that of the individuals.

Take care and have a good weekend. :-P

at82 said...


U take care and have a great wkend too!

Cheers ;-)


At 8:36 AM, May 21, 2006, Blogger global citizen said...

What? Since when can you amend the terms and conditions of a contract without the consent of parties involved? The original intention of the CPF is evolving into a private bank for those who control it. How a person spend his retirement fund is personal. The objective is to make people's lives better and not to make them take the blunt of any unforeseen yet-to_happen projected 'disasters' by cutting their 'water supply'

At 3:36 PM, May 21, 2006, Blogger at82 said...

Hi global citizen,

Since when the amending of CPF terms needs the consent of the ppl anyway?

Where have u been all these yrs?

I guess I cannot blame u since u are a global citizen lolz.

CPF contribution rate had been changed by the govt so many times, the latest being the reduction of employer contribution rate from 20% to 13%.

Then there is a new min sum scheme and the govt is delaying withdrawal age.

Anyway CPF is more than a bank for ppl to save up retirement fund.

It is no secret that the $ in CPF had provided cheap loans to the Singapore govt during the early years of Singapore.

This enabled the govt to carry out development program much more cheaply.

But now I see the need to revamp CPF asap given that many ppl are unable to meet the retirement needs with CPF and I think the solution shd be increasing the returns of CPF and not raising the min sum and delaying withdrawal age loh.

At 5:44 AM, May 22, 2006, Blogger global citizen said...

You said right. There is a need for change in CPF. But how can we do that? For starters, the Government cannot amend the rules and regulations without the people's consent. Those who agree with them can sign an agreement for it. Those who do not see benefit or 'goodness' in their proposed change must be able to opt not to be part of it.

At 6:39 PM, May 22, 2006, Blogger at82 said...

Hi global citizens,

Well, I think CPF will remain the hands of the govt for the forseeable future.

If even the CPF withdrawal age can be altered at will, I really dun see hw will agree to your proposal.



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