CPF: A paltry payback

Wayne Arnold
International Herald Tribune
18 May 2005

Up to 75% have insufficient funds to retire on

AS President George W Bush tries to persuade the US Congress that some Social Security payments should go into a personal investment account, the island state of Singapore is grappling with an extreme version of what he has proposed.

Singapore’s national pension program places every penny a worker contributes – 33 percent of total pay – into a personal account.

Workers can choose whether to accept a guaranteed deposit rate from the government or chase higher returns in the property or stock markets.

Called the Central Provident Fund, Singapore’s programme has succeeded in increasing home ownership and virtually eliminating the cost to the government of funding retirement by taxing the young.

But is the fund adequate for retirement? Not according to Leo Lim Tong, who after working 16 years as a hotel cook finds himself at 60 embarking on a career as a security guard at a local shopping center.

The returns on the fund, known locally as CPF, he said, are “only a little bit, not enough.”

Nor did it work for Shu Ting Hoe, a career banker who retired at 57 thanks to an early retirement package from his employer. “Depending on CPF alone, it’s not enough to retire,” Shu said.

When the governing party took control of a newly independent Singapore in 1965, it rejected the idea of a welfare system that would drain public coffers and adapted the fund system left by the British, expanding it to channel savings toward social goals.

“Singapore doesn’t purport to have a perfect system,” Ng Eng Hen, the manpower minister, said. But he disputed the notion that the CPF provided inadequate returns.

Workers contribute 20 percent of their salary and their employers the equivalent of 13 percent, all of which goes into three accounts, including one for medical insurance and health care.

Once workers reach the retirement age of 62, they can either take their savings as a lump sum or begin drawing it down in installments.

If they have saved more than a minimum set by the government, they can begin withdrawing at 55.

The government pays a guaranteed interest rate on fund deposits that works out to about 3.4 percent.

Depositors can also invest their savings in mutual funds, insurance products or, to a limited extent, in individual stocks. Whatever they contribute, as well as any interest or profit earned on their money, is tax-free.

Mukul Asher, an economics professor at the new Lee Kuan Yew School of Public Policy here, estimates that as many as 75% of fund members end up without enough to retire on and that the fund delivers on average less than 30% of the average depositor’s last salary.

That compares with 70 % in France and 45% in the United States.

Economists say the government uses the fund as a fiscal tool, periodically changing the contribution rates the way a central bank changes interest rates.

In the 1980s, the government pushed contribution rates as high as 50 percent to fight inflation.

After the Asian financial crisis in the late ’90s, it halved the contribution from employers, to 10 percent, effectively giving the entire country a pay cut.

Allowing members to withdraw their savings for such government-ordained investments opens another hole in retirement planning, economists say. Asher calculates that 70% of all funds deposited end up being withdrawn, often to buy property.

In the 1960s, to enable its population to move out of slums, the government began allowing citizens to withdraw CPF savings to buy public housing.

Singaporeans today withdraw more to pay for property than they do for retirement, a situation that leaves many asset-rich and cash-poor. Many are loath to sell, economists say, because property values have fallen by roughly a third in the past decade.

Ng said that most elderly property owners were sitting on profits that could fund their retirements. Cultural pressure to own and pass along a home dissuade many from selling, but “they can live with their children,” he said.

Although caring for the elderly is part of traditional Asian values, critics of the system say relying on the young to care for the elderly amounts to just the kind of generational tax that Singapore’s system was supposed to avoid.

Perhaps the most worrisome feature is the record on Singaporeans investing their own funds.

According to Asher, CPF members on average lose 15 percent on their investments. When they pick individual stocks, they lose even more – about one-third.

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