By Timothy Ho
Published on 05 Apr, 2014
There has been much debate on whether CPF & HDB are tricking Singaporeans into purchasing HDB flats using CPF monies. Dollarsandsense.sg weighs in with our views.
In case you missed it on your social media feed, this article from Singapore Blog, The Hard Truth, has been making waves online the past week. They posted an extremely elaborated breakdown on CPF, and how Singaporeans are being penalised for using CPF contributions when they purchase HDB flats, at least from a monetary perspective.
The article struck a chord with many online netizens sparking complaints and getting them to share their views on how the Singaporean Government is “cheating” them. Just about anyone, even those who have completely no idea how much money is in their CPF accounts or what these accounts are even called, have an opinion on the topic.
Here is the article in case you miss it. With that, let’s get down to differentiating the realities from the myths in the article.
1. CPF provides a lousy interest rate return
The article compares the paltry 2.5% interest rate returns with what other 1st world nations (plus Malaysia & India) are supposedly giving. Singapore ranked last.
Yes, 2.5% is a poor return, especially for money that is forcibly “locked away” for a long time. However the truth is that the money is not entirely “locked away.” Singaporeans can use the money in their CPF Ordinary Account (OA) for monthly repayment of home or for investing.
What we are trying to say is that even in the midst of anger & outrage, we have to be fair in criticizing the Government. Assuming I have $100,000 in my CPF OA today, earning me an interest of 2.5% (1st $20,000 will earn me an additional 1%). If I feel like it, I can use up to $80,000 tomorrow to buy stocks on SGX, treating the money just like how I would treat money in my POSB savings account.
No bank anywhere in the world will pay a 2.5% interest rate for money that can be used anytime on demand. If you want that, it’s a saving account you need. And the interest you will get would be below 1%. Because the truth is your money in the bank (or CPF account) is extremely liquid. The other party cannot confidently use your money for long-term investments without the full assurance that you will not withdraw a chunk of your money tomorrow. Any banking undergraduate can explain the concept of liquidity to you, and we’re willing to wager, even if they had fallen asleep during that class.
If you transfer your OA monies to CPF Special Account (SA), you will get an interest rate of about 4%, which is actually not that bad. Again CPF monies in the Special Account can be used for stock investing (excluding the 1st $40,000) for those who claim they can earn better returns on their own. The money is not entirely locked-in. If I have $100,000 in my SA and I believe I can generate returns above what CPF is providing me in the Warren Buffet-style, I am free to do withdrawn up to $60,000 tomorrow to do so. There is nothing to stop me. Banks typically will not give 4% interest rate on deposits that can be withdrawn anytime as and when the clients want to invest it in something else.
The best way to see CPF it is that it functions as a hybrid between a bank account, whereby you can use the money for investment purposes as and when you like, and a pension scheme, whereby you earn interest rates of up to 4% – 5% for monies that you decide not to utilise, or if you have no idea how to invest properly anyway.
To further add, we think it is important to share the fact that there is also a correlation between a strong currency and a low interest rate. Again, any banking undergraduate who has not slept during all his lectures will be able to tell you that countries with a strong currency are likely to provide lower interest rates, as in the case of Singapore.
2. Singaporeans pay “double interest” when we use our CPF monies for HDB repayment
This is surely a myth. But it was written in such a fine manner that we were almost convinced of the reality of it.
When you buy a home and take a mortgage, you will surely be charged interest, whether it is a HDB loan or a bank loan. No one has a problem with that.
How you choose to repay the loan is a personal choice. The typical way, which is what everyone else in the world is doing, is to repay it using income that we derived from working. We can also choose to do that in Singapore. No issue.
However in Singapore, we have an alternative. We can borrow against our own “pension fund” and use the money contributed towards it for monthly repayment instead. And because we are so materialistic in Singapore, we much rather use our monthly salary instead to purchase an overpriced car, an end-of-year holiday every year, drinks at Zouk, a new smartphone ever year, the most expensive childcare education we can afford for our children, and whatever else we think is more important than repaying the mortgage we took when we first got married.
Long story short, we prefer using our “pension fund” to repay our home mortgage.
Unbeknownst to many however, is despite the rule already being in place for decades, this “pension fund” has a “borrowing cost”. And this “borrowing cost” is the interest that the Government would have paid you had you not used the money elsewhere.
Here is where it gets a bit confusing, and the writer at The Hard Truth does a great job in capturing the confused readers with well-elaborated arguments, which in our opinion is incorrect.
The Real Truth – And it is very straightforward actually.
If the government “borrows” money from your “pension fund”, they are obliged to pay the “borrowing cost”, which is currently set at 2.5%.
If you “borrow” money from your “pension fund”, you are obliged to also pay the “borrowing cost”, which is also 2.5%.
At the end, the money is your retirement nest egg so it is really still yours anyway.
This is the simple straightforward truth of how the concept works.
3. CPF lock-in too much money when CPF accrued interest that we can never repay back
This is both a myth and a reality.
Based on the statistics provided by The Hard Truth, A $300,000 HDB flat will accumulate a whooping $626,755 after CPF accrued interest is accounted for. This means that upon selling of a flat, a CPF member who had borrowed money from his “pension fund” will have to return a very substantial amount.
However, what the writer failed to mention is that upon reaching the age of 55, CPF members can withdrawn any amount after having set aside the Minimum Sum (MS) required.
A Simple Example:
If a 25-year old person bought a $300,000 flat today based on a 30-year loan, he would have to return about $626,755 if he sells his flat at the age of 55, based on information provided by The Hard Truth.
However if he has already set aside the MS required, CPF will not demand that the $626,755 have to be returned. That is because the person is already free to withdraw any additional amount beyond what is set-aside in the MS once CPF members hit the age of 55 – as per usual CPF guidelines.
That means the person can continue to earn 2.5% on the $626,755, or whatever amount he prefer if he puts it in his CPF account. Or simply use the money to buy another property or do whatever he wants with it. He is free to decide.
Who is Right & Who is Wrong?
The reason for our article today is to provide our thoughts on some of the controversial areas that we feel Singaporeans may have been misinformed by the article in contention. Regular followers of our website will know that DollarsAndSense.sg avoid taking sides when it comes to policy related matters in Singapore. Our aim as a website is to provide Singaporeans with our inputs on personal finance matters that we believe are essential for everyday living in Singapore.
Since HDB & CPF are two essential matters for all Singaporeans, we thought it would be good for us to share our views in light of these two areas being a hot topic in the last few days. You may agree, disagree or have even more inputs. You don’t have to agree with us, but we are more than happy if the article has provided you with insights you never knew about. You may follow us on our Facebook page and do drop us a comment if there is anything you feel strongly about.
Editors Note: A reader pointed out that CPF-SA cannot be used for direct stock investment. She is right and hence our earlier statement stands corrected. CPF-SA can be used for investing purposes but the instruments available is not as extensive as the CPF-OA. You may refer to the CPF website for detailed information.