This is going to be lengthy but this needs a rebuttal because there are things that the author intentionally excluded which makes it malicious. I’m referring to the article “Truth Exposed: The Dirty CPF-HDB Scheme To Trick Singaporeans“. I am not a fan of the CPF because I eschew the fact that it is only a good tool for people who are actually earning enough but does not compensate for the low income earners. I question the economic efficiency of having a large reserve in the form of CPF and the risk of it been siphoned off without the necessary safeguards. But I’m not going to spread lies about it and then weave it into some conspiracy theory. I don’t believe that the provident fund is the best model for Singapore at this point but given the political economic structures in place, it might be the only appropriate model in the foreseeable future. So let me take apart Mr Roy Ngerng malicious article and I will give him credit for the things that are right.
1. The income replacement ratio of Singapore is NOT the 20% Roy claimed to be. It is approximately between 58 to 70%. The exact calculation requires CPF to release data or to have a number of people to reveal how much they were earning and how much they are receiving from their CPF. For the unacquainted, the income replacement ratio is taking the average payout you receive per month divided by the average income you receive per month over all your work years. For a little estimate, if you manage to have at least your minimum sum in your CPF account current retirees will receive $1233 a month. That’s definitely more than 20% IRR since medium wage can’t be $6166. This is based on a bit of reverse counting where I found out that the payout per month is approximately equals to retirement account balance/120 and given that the current minimum sum is 148,000. I will deal with the number of people retiring with at least the minimum sum question later.
2. It is true that we are probably contributing a significant amount of our wages into our retirement funds. 37% is right. I have seen people arguing that 17% from the employer contribution is technically not our wages. Well, if you consider that in every OECD country, employers contribute to the employee’s pension and if they don’t, they are required to payout the difference. There is no such ruling in Singapore and it’s based on the companies hiring policy. This is a problem, but nothing to do with CPF. It is a problem for the labour market and it’s out of scope of this article.
3. There is absolutely nothing wrong in paying an additional 2.6% to HDB for the mortgage. You always have to pay interest on hire purchase. Now if you take a mortgage of course you will pay more.
4. Now, it’s absolutely wrong to say that the government is making you pay additional interest for nothing. You paying accrued interest into your CPF because fundamentally, CPF is meant for your retirement savings. If you are to take money out from it, you should top it back up. It is also wrong to say that the CPF is making you pay them interest because ultimately, that accrued interest of 2.5% that you pay goes into your OWN CPF account. In another words, you are putting cash from your pocket, back into your CPF account.
5. Roy cleverly tried to mislead the reader into thinking that the accrued interest never ends. This is NOT TRUE. The accrued interest ends when you eventually pays off the difference. You can pay off the interest in many ways, the first being putting cash into your CPF, the second and probably the most common way is when you sell your flat and use the proceeds from the flat to top up the difference. By the way, while Roy happily accrues the interest across time, he conveniently assumed that the flat does not appreciate in value. Perhaps you should ask how much is the resale value of the flat versus how much was paid for the flat. The golden rule here is as long as your flat appreciate more than your the prevailing interest rate, you are making a capital gain. Here’s why the CPF interest rate can’t be too high and the government is so afraid of falling property prices. Because if your flat appreciate less than the prevailing interest rate, then there is a good probability that you have to top up cash into your CPF account when you sell your flat. Now, that will be travesty isn’t it.
6. Now here’s the minimum sum question. Mr Roy assumed that the minimum sum will increase between 4-6% which means that at 2035, the minimum sum will be about 350,000 or 570,000 which he means that you are probably unlikely to get any money out at 55. But the minimum sum is not something that the government doesn’t gives you. The minimum sum is something that will be kept to fund your retirement account. If we use the same ratio, the monthly payout for a retiree 2035 will be around $2900 to $4750 assuming that you have reached your minimum sum. Using his calculations, the median wage earner is actually going to have 370,000 in the CPF in 2035 which means you can withdraw out 19k and then enjoy a payout of $2900 a month. That’s not too bad.
7. By the way, if at that point of time, when you are 55 and you decide to sell your flat and move into a smaller flat for example, you actually get to keep all the proceeds of your flat if you are the medium wage earner with your minimum sum in the CPF. There is no need to pay the “accrued interest” whatever the amount is. For people who took a study loan on their parents CPF, you can check with them that if their parents are above 55 years old and have the minimum sum in their CPF, they can choose to waive off the interest and the principal you have taken for your study loan. Oh, and if you are actually do not have the minimum sum in your CPF OA account when you reach 55, your flat will be automatically pledge to make up the difference. IE, if you sell your flat and move to a smaller apartment, you will only need to top up the difference to the minimum sum and screw all that accrued interest.
8. The last note, of course there should be much more money in the CPF coffers than the 5.9% they disburse. I will be very worried if there is less, because that money is the liability that is held and will be paid out in the future. Though how effective is that 253 billion invested is another question, but I’m glad there is the money (in paper) there.
I like solutions rather than bitch about something. So here’s the winning strategy. Remember a few principle:
1. Cash is king. As my friend puts it, $10,000 spent on something I need through the CPF is $10,000 saved on my disposable income.
2. As long as your property appreciates more than 2.5% per annum, you are fine. When it appreciates less than 2.5% per annum, you will have to pay cash into your CPF if you sell before 55.
3. If you are projected not to have the minimum sum when you are 55, you should really look at downgrading your flat. But don’t worry, 50% of the people need to worry about this because they are below the medium income. More importantly, it will be prudent for you to buy a flat that is within your means.
4. It is generally wiser to take a shorter loan period for your housing purchase especially since you are paying more interest on your HDB mortgage. If you are using all your CPF contribution to fund your house for 30 years, chances are, you probably won’t have much in it when you retire.
5. If all else fails and you don’t really like this whole CPF nonsense, migrate. Even better, migrate overseas and come back and work as a foreign talent. I have a colleague, a Brit who is a PR here. He get’s his CPF, and when he retires, he is leaving Singapore for good and going back to UK to leach on the NHS while having a nice lump sum pay off from his CPF.
Oh, and I don’t need you to donate money to me. That’s not necessary. But if you want me to do some financial planning for you, then maybe you need to compensate me for my time. I am not going to ask you to compensate me for spending your time to read something I wrote with the intention of informing my readers.