Why CPF is Failing


By Eric Tan

When the PAP inherited the CPF system from the British, they did not change the basic flaw in the system, which was to allow members to withdraw all the funds when they reached the then retirement age of 55. Later in the 1980s when they tried to move the withdrawal age to 60 in tandem with the retirement age, there was strong resistance from the ground. Consequently, they lost the second parliamentary seat to opposition in 1984.

I suspect that in order to achieve the same purpose, the mandarins then created the minimum sum and special account structure. They designed the minimum amount to increase over time such that when the baby boomers retire, it would balloon to a substantial amount. Today I believe those mandarins would have been very pleased with themselves as for more than 50 percent of CPF members who reached 55 almost all their funds in the ordinary account are transferred to the special account to meet the minimum amount requirement. However, they did not anticipate the public outcry arising from it.

The CPF as a retirement scheme has two problems, firstly the withdrawal age of 55 is outdated as people live longer and need to work longer before they can withdraw their CPF. Furthermore, withdrawal at 55 is uncoordinated with the current retirement age of 62 today. Secondly, the lump sum withdrawal is not in line with the principles of pension, which is an annuity.  The CPF members should convert the lump sum into an annuity. It looks like the government understands all these concepts. They put in place the minimum sum and CPF Life annuity.

Why this crisis of confidence?

Firstly, they did not effectively persuade people that these reforms are good for them. People felt they had been manipulated and had no choice in the matter. Ironically, in the age of the Internet it is difficult to dispel conspiracy theories.

Secondly, the CPF life annuity, which is now compulsory for those who turn 65, is not attractive. For the full minimum sum of $155,000, the retiree receives an annuity of about $1,200 for life. However, the people perceived that they have to be over 80 years old before they get back all their money. Most people do not believe they can live so long and they do not believe in the evidence reflected in the statistics. I am not an expert on annuity or actuarial science but shouldn’t the public know the amount of profits the outsourced insurance company makes from this scheme?

Lastly, the most important reason of all, most Singaporeans do not have sufficient funds in their CPF to retire. CPF is used to pay for housing, medisave, medishield insurance premiums and for paying parent’s medical expenses and children’s education.

Furthermore, the government uses CPF as a tool in recession to reduce wages.  These measures depleted the peoples’ CPF.  Why did the PAP government allow this to happen? Were they kicking the can down the road?

In the 1990s, I saw how the use of CPF for housing and medical expense led to inflated prices for these sectors. I supported the opposition movement and then joined the WP because I felt that we must debate these issues in Parliament for public scrutiny.  On one occasion in the 1990s, if I can recollect, a Minister mentioned that we have progressed so well such that clerks are now opting for A class hospital wards and soon there may not be a need for C class wards. They were depleting their medisave accounts for first class medical treatments.

For a while, the HDB stopped building two room flats under the illusion that we have prospered and there is no longer any demand for such flats. Unfortunately, for me it took another generation for the public to see the follies of these policies. For the longest time from 1990s until 2011, the people only voted two opposition MPs, signalling to the PAP all is well. It is only now the people experienced the negative impact of these policies. Today costly health care services, CPF and unaffordable HDB flats are hot button issues.

By not allowing the people to withdraw all their CPF when they reached 55 years old, it appears that they have broken their promises and subsequently lost the people’s trust.

The PAP also has to contend with the Asian cultural factor. Pensions are a Western concept, Asians expect their children to look after them. In the best case, we give our children a good education and happy childhood and we hope, out of love, they will look after us. In the most cynical case, we promise them an inheritance to induce them to look after us when we are old.

As my retired friend told me, you have to keep the honey so that the bees will keep coming back. I think the British introduced CPF to complement this system. Annuities do not leave an inheritance. However when they are far from sufficient to live on, you have a social time bomb.

Therefore, the government has to get off from their comfort zone and start persuading the people that they need to convert their CPF into an annuity to be drawn down after they retire at 62. One way is to make the CPF Life annuity very compelling and offering better rate of returns for CPF funds.

CPF  rate of return

In the past, CPF rate of returns have always been low but Singaporeans accepted them as we see it as supporting our nation building. I remembered in the early 1980s, Ong Teng Cheong had to defend the low 4 per cent per annum CPF rate when the bank deposits were close to 10 per cent. However, there were no protests as people can see that their lives were getting better and they believed the CPF funded the construction of the PIE, Changi Airport and JTC all of which contributed to our well-being. Ministers and top civil servants were not paid million dollar salaries then.

Today despite what the officials say, many believe that CPF is funding GIC and Temasek. Both sovereign funds are run like private equity funds with multi- million dollar salaries and bonuses paid to the fund managers working for them. The public response is understandable, why should they provide cheap CPF funds for these people to earn high salaries .They will demand more transparency and accountability for these funds.  Now comes the difficult question: how much risk should a pensioner take to get better returns?

CPF members have an option to invest part of their CPF balance in their ordinary account in CPF approved equities and unit trusts. However, the performance for those who opted to do so has been bad. As a result, the take up rate is low. The problem is that the average CPF member is not a well-informed investor. Also in the case of unit trusts, if the performance is poor, the unit trust fund managers are not accountable to the individual CPF investor.

The solution is that we should restructure the CPF funds into a pension fund with fund managers who are accountable directly to the CPF members or the public. These fund managers would enjoy economies of scale to reduce their costs. The large fund size would give them the advantage to gain access to the best deal flow and private equity funds. The Ministry of Finance through the CPF board can set guidelines on the range of risk appetite for different categories of investors. For example, those who have amounts in excess of $100,000 in their CPF can invest in equities otherwise they should be restricted to investment grade bond funds. These guidelines should be debated in Parliament.  CPF can then offer various mutual funds, including those from GIC and Temasek, to accommodate the CPF investor risk profile.

Proposed Action Plan for Government

The government must restore the original pension objectives of the CPF by gradually reducing the amounts from CPF, which can be used for housing and healthcare costs. The financial impact of a housing loan on your CPF balances when you retire is punitive as the total interest paid for a 25-year loan is equal or greater than the amount borrowed. For example if you borrow $200, 000, then when you repay it after 25 years, the total amount deducted from the CPF would be more than $400,000.  Reducing the amount that can be used for housing will have a negative impact on the property prices but the PAP government has to manage it since the problem originated in their watch.

The government must convince the people that deferring the CPF withdrawal and converting lump sums into annuities are good for them. They can do so by making the annuities more attractive and improving the returns as proposed above.


Eric Tan is a retired banker and former treasurer of the Workers Party