Wednesday, October 24, 2007

Heads We Win, Tails You Lose - Singapore's CPF

Singapore has, since 1955, had a particularly good solution to the problem of providing a social safety net. Rather than simply have the government as provider of last refuge, the Singapore government instituted a transparent and relatively straightforward compulsory system for the collection and administration of social security monies.

The Central Provident Fund
, or CPF, to give it its normal TLA, assigns every working citizen and permanent resident an account into which a portion of wages are paid, with contributions from the employer and employee. With online access, one's CPF account looks very much like a bank account, meeting the tests of transparency and good order.

That's the good news.

The bad news comes, predictably, whenever governments have large pools of money sitting around. There is a primal itch to do something with the funds. And so the CPF has been tweaked, stretched, re-purposed, and generally abused into the service of a number of different goals deemed worthy by the administration of the day.

One only has to look at the Mission and Values statement on the CPF web site to see the distance that has arisen between the primary mission:


“To enable Singaporeans to save for a secure retirement.”


“A world-class social security organisation providing the best national savings scheme for Singaporeans to enjoy a secure retirement.”

and the current Corporate Philosophy:

"The basic purpose of the CPF is to help members meet primary needs like shelter, food, clothing and health services in their old age or when they are no longer able to work."

The mission has been extended from saving for retirement, to cover shelter, health services, and unemployment. Investing in shares of Singapore Telecom, and providing funds for education have also featured over the years.

Once it was decided in 1968 that home ownership was a national goal, the CPF was modified to allow use of savings for home mortgages. This has spawned a whole bureaucracy to handle the movement of funds between CPF and banks and the Housing Development Board.

Singaporeans don't have sufficient medical insurance? In 1984, the CPF was used to fund Medisave, and in the process, create two accounts where there used to be one, so now CPF has an Ordinary Account, and a Medisave account.

Worried that people are putting too much of their savings into housing (ah, the law of unintended consequences), create a third account - the Special Account - to remove funds available for housing.

By 1988, worries were expressed that people would run out of money for their retirement before they died, and so a Minimum Sum Scheme was introduced, forcing contributors to leave money with CPF even though they had retired and presumably earned the right to their money.

Worried that people are relying too heavily on government for their retirement and need to take more responsibility for their future? Create the CPF Investment Scheme (CPFIS) in 1997 to allow a certain portion of funds to be used to buy certain "qualified" investments. Oh, and give the three local banks a monopoly on handling the accounts created, allow them to charge whatever they want, and don't insist on any service standards.

The economy has also played a role in CPF changes. When the government became worried that contribution rates were making Singapore uncompetitive, the employer contribution rate was reduced, restored, and then reduced again.

And so CPF has grown and mutated, serving whatever hot issue of the day needs a solution. What should be a straight forward retirement savings system, has become a multi-headed hydra with tentacles into most areas of Singapore life. Which is all well and good. Governments can do whatever they want, and people deserve the governments they get.

The effect of constantly tweaking a system set up to do one thing in order to make it do other things is complexity and the destruction of predictability. With each new mission, the original CPF has become more complex, more rigid, and more unpredictable.

But now to the latest assault on the CPF. Having done the numbers, the government actuaries are staring at a shortfall in CPF funds for members even though the Minimum Sum has been raised every year. The driver in this case is an increase in life expectancy. Although the official retirement age remains at 60, people are living into their 80's, destroying the underlying actuarial assumptions for the CPF.

What to do? One obvious solution would be to raise the retirement age. There are few societies that can afford to have a large portion of their population unproductive and attempting to live off savings.

Instead of taking this somewhat unpopular step, the government is proposing to break the basic promise of the CPF.

To quote from a paper comparing the CPF with the US Social Security system,

the most salient features of the [CPF] scheme have not changed since 1955: it is compulsory, its basic principle is thrift and self help; and the contributions made by each member are earmarked for the benefit of the individual, with no redistribution among members"

The basic principle of each individual being the beneficiary of his own contributions is about to be violated by the proposed introduction of compulsory annuities which will commingle contributors funds into an external risk pool. Instead of having access to the money you worked for and saved, you will be forced to turn it over to an insurance company that will pay you a monthly sum. If you die the day after, tough, you lose everything.

Unless you have the luck of Methuselah and live longer than the actuarial tables predict, this is a pretty lousy deal. With interest rates among some of the lowest in the world and below the inflation rate, a Singaporean annuity is a financial disaster.

More importantly, these sudden changes to the rules destroy any planning that a prudent person has made for his own retirement. Funds that are earmarked for retirement are long term and patient money. We are also lectured about the power of compounding interest and the futility of market timing. Save now, and you will be fine later.

Except when "they" keep changing the rules. How is one supposed to plan, or trust, the guardian of one's retirement funds when the rules change unpredictably?

Ironically, there is still one situation in which the CPF achieves its original promise of funds for retirement. You can get all of your money, without any hold backs. Just promise to leave Singapore and never come back.

History of the CPF
Analysis of the CPF


puni said...

I agree that it does come down to a question of trust. One has to wonder how long before the withdrawal rules for 'foreigners' changes?

Anonymous said...

Such professional excellent writing this article!

Anonymous said...

excellent article..
the CPF has been too diversified and expanded that it has loss its focus on the very purpose it was created for..