To Understand CPF, First Understand Its Purpose

All these years, I know for a fact that many of us do not really understand our CPF well. To many, it is just one of the many ways our government uses to “hoard” our assets. Over the past 2 weeks, online postings and discussions have brought this mistrust to a higher level.

To understand CPF, we first must know that the primary purpose of CPF is to help us meet our basic retirement. It is on this premise that the scheme was built upon and it is from this perspective that we must look from.  All other uses of CPF monies are meant to support this one purpose. As such, rules are set such that if you use your CPF monies for housing, children’s education, insurances, paying medical expenses and investments, they must either help you in your retirement or not affect your retirement. One example to illustrate this would be if you use your Ordinary Account (OA) monies to fund your children’s local universities, polytechnics or either one of the Colleges of Art’s education, one year after they leave the course, your children have the obligation to pay back the money plus interest not earned by their parents in their OA. Another example would be, if you want to top up say, your parents’ CPF account using your own CPF monies, you can’t do it unless you have met your own minimum sum as CPF is meant for your own retirement, not your kids’ education, nor someone else’s retirement.

In the same vein, if you sell your property that was funded by CPF for the purchase, you need to put back the amount you have used plus the accrued interest not earned (if you had kept it in OA), back into your OA. It is not that you are paying interest for your own money, but rather, this is to be sure that your retirement money is there when you need it.

For this purpose, the CPF Board was started on 1 July 1955. Life was hard then and the government at that time feared that our forefathers might not have the knowledge and ability to save for their retirement. CPF became a form of forced savings for them. When Singapore was forced to leave Malaysia and became independent in 1965, we were struggling to survive and many needs arose. The government implemented schemes to meet those needs, such as Public Housing (1968), Medisave (1984), the Minimum Sum (1987), Medishield (1990), CPF Investment (1997) and CPF LIFE (2008), while keeping the primary purpose of CPF in mind.

Minimum Sum Scheme (MSS) (1987)

Each year, at the end of the Lunar New Year season, my kids will always excitedly count how much money they have collected in their angpows and plan for the things they want to buy. This is when my wife will step in, take a portion of the money and “force save” it on the kids’ behalf, in their bank accounts. The kids are left with some money to spend, usually on unnecessary things. Are the kids happy? Never. But we know that they will grow up seeing a pretty decent sum in their account, and knowing that their parents always have their welfare in mind.

The MSS works on this same principle. At age 55, before one can take all their CPF monies (and we have heard stories of how people use it up very quickly on unnecessary things), CPF board will take a portion of it (known as the MS) and deposit it into their Retirement Account (RA). At age 62 (previous draw down age[DDA]), the retirees get a monthly annuity till about age 82. However, with Singaporeans now living longer, even beyond 85 years old, the old MSS became dated. CPF LIFE was thus launched to bridge this gap.

CPF LIFE (2008)

The objective of CPF LIFE is simple: to give the retiree a lifelong income stream till his demise. So, the CPF Board made 2 changes to the old MSS:

Take a portion of monies in RA and pool it with other members to form an “insurance annuity” fund

Extend the DDA to age 65.

As a result, based on the new MS of $155,000 come July 2014, a couple contributing this amount to their own RA will have about $2,400 per month till their demise. If they pass away early, the unused portion of their monies will be given back to their beneficiaries.

The Hottest Debate Currently

Allow me to share with you a parable. 2 men, Peter and John, came together to strike an agreement with each other. Peter will lend to John $100,000 with the understanding that John will pay Peter a guaranteed 4% p.a. with no risk of losing the capital. The deal was done and John took the $100,000 he borrowed from Peter and invested it.

At the end of the year, John made 7% from his own investments and as agreed, paid Peter 4%. Peter became angry with John and insisted that John pays him more since he had made more with his money. Although that was not the original agreement, John was prepared to change the agreement but told Peter that in the same way, if he loses money in his investments, in the future, Peter must be prepared to get lesser than 4% or even suffer a capital loss. Peter was fuming mad. He scolded John for being untrustworthy as getting a guaranteed 4% p.a. with no capital loss was what they agreed upon.

By now, you will understand that I am referring to the interest rates we are getting from our CPF accounts. Our CPF is invested into special issues of the Singapore Government Securities (SGS) (otherwise known as Singapore Government Bonds) as they are rated AAA and deemed very safe. These bonds are issued specifically to the Board to meet its interest and other obligations. They do not have quoted market values and the Board cannot trade them in the market. The CPF Board currently guarantees that we will get a minimum return of 2.5% p.a. for OA and 4% p.a. for Special Account (SA), Medisave Account (MA) and RA. OA interest is lower because OA is in essence, no different from a special purpose demand deposit – savings are withdrawable on demand primarily for housing. By investing it in Special SGS, we are effectively lending our monies to the Singapore government for a guaranteed 2.5% p.a. to 4% p.a. with very low risk. If the monies are subsequently invested by our government and reap higher returns, I do not think it is fair for us to demand a higher return for our CPF monies because we cannot ask for a higher return without taking on higher risk. But what if one wants to take higher risk and get higher than CPF returns? There is then the CPF Investment Scheme (CPFIS), which allows him to invest his CPF on his own. Why doesn’t CPF Board invest it on our behalf? Because the primary purpose of CPF is to help us meet our basic retirement, and as such, the investment objective should then be one of capital preservation rather than growth.

Over the past 2 weeks, plenty of numbers and statistics were brought up to discredit the CPF and its custodian. But let us not be lost in numbers and statistics and forget the purpose. It is not that the numbers are not important. They are, but they exist to serve a purpose and must be discussed in that context. We can continue to debate how the current CPF should be improved. But we should never cast doubt on its intention. Because once public trust is lost, the psychological defence of my country is broken.