The Hypocrisy of CPF and Singapore's Reserves

In a recent survey, 70% of respondents polled that they had difficulty saving up enough money in their CPF. 

In another survey, most Singaporeans were also found out to be unable to meet the minimum sum.

Ever wondered why this is so? Read on.

Housing Mortgage Loan

A large proportion of the CPF contribution is used to finance housing mortgage loans for HDB flats. Assuming a couple buys a 5 room HDB flat, costing them a  $300,000 loan, and as a result, their monthly instalment is $1202. Also assuming both are working and both earn median wage of $3404 a month, of which 35% CPF contribution would be $1190. Assuming they pay equal share, about $600 each will be set aside to foot the mortgage loan, leaving only $590 of contribution.

Now, here is where the hypocrisy comes in;  The government likes to tout that most people don’t have to pay a Single Dollar of cash for their HDB. Sounds great right? But no. The mortgage loan is paid through CPF, the account which earns 2.5% of interest, as opposed to cash. As a result, you are forgoing about 50% of your savings guaranteed with 2.5% interest rates , when you can pay cash out of your regular wages and forgo a 0.1% interest rate on your regular bank deposits. As a result of paying through CPF, you lose 2.4% of interest per annum.

And over 30 years, your savings could potentially be 100% higher, without paying for the mortgage loan through CPF.

Also, If you read my article on “The Hypocrisy of HDB Prices”, even if we do not factor out the land costs, simply by reducing housing lease from 99 years to 33 years, one can bring the price of a HDB down such that couples can afford to buy it in one single downpayment , hence avoiding the need to pay loans, with interests, out of CPF. Also according to my article,  land prices, which are mainly profits for the government, account to up to 2/3s of the cost of HDB flats.

Because you pay interest on your Housing Loan, you end up paying $175,000 more for a  $300,000 5 room HDB. Had this loan interest been factored out, the minimum sum could easily have been met.

As a result, you pay the government back with what the government owes you; The government borrows your earnings in CPF, but you return 50% of it in your housing loan. Because land prices form 2/3 of the HDB costs, the government also stands to reclaw back 2/3s of the 50% as profits from its land prices. As a result, the government reduces its debt to you by 37%.

Paltry Interest Rates

A lot of people take issue with the paltry interest rates that CPF provides, 2.5% and 4.0% for a weighted average of 3.05%, plus additional 1% on the first $60,000, which adds 0.405% assuming Singaporeans meet the minimum sum of $148,000. This is 1% less than inflation rates, and Singaporeans have to watch their savings shrink as time passes by.

The CPF are invested in Special Singapore Government Securities (SSGS), which are bonds issued by the government in return for CPF money. The bonds are sold to GIC and Temasek for them to invest in Foreign Markets, so that they can return the money with interest.

It has been reported , the GIC and Temasek have been making 6.9% and 17% 20 year annualised rate of return.

Clever ones may ask, so why can’t The Government give us a 6.9 to 17% interest on the CPF then?

The short answer is, it can’t afford to, because of more hypocrisy.

Let me explain:

GIC and Temasek Losing Money due to Inflation

The GIC’s  20 year annualised rate of return is 6.9%, yes, but that 20 years has been over a period where Singapore, and its associated GIC investment funds, experienced periods of rapid growth. It is akin to taking the population of a bacterial colony over its Exponential growth phase, and then calculating the annualised growth from there; you would arrive at a very high figure.

The same goes for Temasek. Its 17% yield since inception people may dispute, but that is perfectly logical, because it grew from an initial capital fund of $500 million. Part of the reason for its growth spurt was in 2002, where it began expansive divestment in Asian Markets from 2002-2008.

However, given it grew 400x to today’s figure of $198 billion in 30 years doesn’t mean it will grow another 400x in another 30 years to $80 trillion.

Calculating the returns over a 20 year annualised period hence gives an artificially inflated growth figure.

Unfortunately though for both companies, as the fund increases in size, growth rates have slowed, typical for a bacterial colony in stationary phase. And as a result, the 5 year annualised rate of return for GIC was 3.4%

http://leongszehian.com/?p=3536 , in US$ (note, not SingDollars) , while the 5 year Total Shareholder returns of Temasek Holdings was 3%. (in SGD).

According to Leong Sze Hian, because of the depreciation of the USD, the gains of GIC has been eroded to -0.4%. 

So as a result, the total gains of Temasek and GIC are around $4.8 billion. As a proportion of the $500 billion reserves between them, this is 1%.

However, as a result of inflation, which was 4.5% in the last  5 years, the value of the reserves under GIC and Temasek has depreciated by $22.5 billion. A net REAL loss of $17.7 billion.

Hence,  GIC and Temasek have been losing money due to inflation these past 5 years, so do you think the investment returns are in a position to guarantee CPF interest? No. It has to find another source of income:

The Government’s Need to Top up the Reserves using Surplus Generated from its Budget

In FY 2012, the government reported a budget surplus of $3.8 billion. However, accounting for land sales and surplus investment returns from the reserves, not included in  NIRC, this amounts to $36 billion, as per IMF DOS standards:

http://www.ifaq.gov.sg/mof/apps/fcd_faqmain.aspx#FAQ_1548

Over the long term, according to IMF , the government has been raking in $270 billion of budget surplus since 1990 to 2010.

http://www.baldingsworld.com/2012/09/18/the-imf-re-re-statement-of-singaporean-public-finances/

The NIRC (Net Investment Returns Contribution), which is based on the 20 year annualised rate of return, of $7.7 billion, was also contributed. A $10.4 billion has been withdrawn in 2011. This constitutes a draw of $18.1 billion to the reserves.

Complemented by the $17.7 billion REAL losses by GIC and Temasek, to maintain the absolute size, plus inflation, it has to top up about $35.8 billion,  per year. Just about in ballpark of the $36 billion budget surplus it has been running.*

Also, According to Leong Sze Hian, the total debt due to CPF in 2011 was $207.5 billion. At a 3.5% interest rate, an additional $7.1 billion is due.

* I know that the CPF interest and withdraw figures are 2011 figures, the GIC and Temasek losses, 5 year annualised average figures, and the $36 billion surplus, a 2012 figure. The figures were not meant to tally in any way. They are just to provide figures so as to explain how the government can maintain its reserves, assuming current figures.

Constant Economic Growth Supports CPF Interest Rates

Now you  understand why the government has to chase economic growth at all costs, despite the dissent about population growth and influx of foreigners. This is so to increase its tax revenue so that the budget surplus can foot the difference between the CPF interest/withdrawals and the real losses of GIC and Temasek.

Interestingly, the targets of 3.5% economic growth from now till 2030 more or less matches the 3.4% weighted average of the CPF interest rates. Coincidence?

This is almost akin to a ponzi scheme, where more revenue has to be sucked out of the next batch of investors (the people), through tax revenue and land sales, to pay the interest on investments (CPF) of the previous generation.

However, such a ponzi scheme is perfectly legitimate, we should not blame the government, BUT only on the grounds that economic growth can be maintained to pay for the interest. Otherwise, the CPF scheme will fall apart, and Singapore will be in anarchy.

In other words, Singaporean might not be able to enjoy their retirement savings if companies fail to meet their 2.5% productivity growth targets over the long term.  Expect the population growth to double to  2% p.a  or more them, and 8 million or more population in 2030.

The CPF Minimum Sum and The Reserves

As you have probably noticed from the way the government conducts itself over the media, the reserves are of a vital importance to their agenda, and under no circumstances, do they want its size nor equity value to shrink. According to them, a reduction in the size of the reserves undermines the investor confidence in the financial security of Singapore’s economy, and makes us less strategically able to meet crises in the future.

That means, that not only do they not want you to enjoy a higher rate of CPF interest (cos that would cause them to lose money over the long term), but they also do not want you to withdraw your CPF excessively so that the size of the reserves are reduced in the immediate term. For example, if all 700,000 or so seniors turning/above 55 withdrew all their savings, and assuming they all had the minimum sum , the reserves would lose $108 billion, or 12%. How’s that for a bombshell in investor confidence?

By mandating that you can only withdraw your savings in excess of the minimum sum as monthly instalments, they are in fact controlling the amount of liabilities they have to pay out each year, so that they can meet the deficit using the budget surplus. This is akin to paying hire purchase, so that your salary can meet the instalments when you buy a car, so that the size of your current savings (assets) won’t have to be reduced , as compared to paying for it in a single lump sum.

Unfortunately for the government, CPF members tend to withdraw some of their savings when they turn 55. In 2007, this was $2.4 billion. By 2011, this has been reduced down to $1.9 billion, despite the number of members increasing from 204,000 to 227,000.  According to the same article by Leong Sze Hian, the total amount withdrawn has dwindled from $18.9 billion in 2001, to $10.4 billion in 2011. I highly suspect that this is too, due to the fact that people turning 55 withdrew $8 billion less in 2011 than in 2001. And as a result of the withdrawals falling by $8 billion, it can be fully accounted for by the budget surplus.

Time For a Pension Scheme?

Provident Funds like the CPF are a rarity in developed countries. The majority adopts a “Pension Fund”,  where retirement pensions are paid for by taxpayers.  Even though this has result in bad debt situations in the US and Europe, if a pension scheme is appropriately managed, it can be sustainable, as per Switzerland and the Scandinavian Countries.

Our old age support ratio now is 6:1.

Instead of setting aside 35% of our income, and promising 3.5% rate of return, we could simply set aside 5.8% of income, as tax, and pay it so that the current elderly generation can enjoy a pension equivalent to 35% of income.

Even as our population ages and our old age support ratio is reduced to 2:1 in 2030, we only have to set aside 17.5% of income as  tax, so that the current elderly generation can enjoy a pension equivalent to 35% of income.

The result is that you contribute 35% of your income as tax, which would have otherwise gone to the government anyway as CPF contribution, to settle the retirement of the current generation, and then, have the next generation contribute 35% of their income towards your retirement. The net result is still the same. You give money away as tax, but you enjoy pension benefits later on, equivalent to ‘saving’.

The pros over CPF are, that your payout increases at the rate of wage inflation, which is 1.1% higher than the 3.5% under CPF, and that there is essentially no risk. When a recession happens, wages may shrink, but payouts can be reduced as well. Under CPF, if GIC and Temasek lose money, then our CPF savings are wiped out.  During the 2009 financial crisis, GIC and Temasek lost about a quarter of their reserves, whereas wage growth still remained positive throughout this period.

Abel Tan

TRS editorial staff