The Real CPF Problem

The Singaporean government recently increased the minimum amount required for Central Provident Accounts which as caused concern among many people. Given that I have written numerous times about CPF, I will only recap the highlights before moving on to my primary topic about CPF today.

First, the Central Provident Fund is vital to understand Singapore government finances. The CPF pays 2.5-4% on funds from savers but then loans that money to the government who issue long term debt securities and unsurprisingly pays a nearly identical weighted amount on what it borrows. The Singapore government then invests the money in different ways, and by all appearances, keeps whatever in excess of the 2.5-4% it earns. The CPF is a central organization to understand Singapore public finances.

Second, despite Singapore government claims to the contrary, the CPF is imposing enormous implicit taxes or costs on Singaporean savers. If the average Singaporean had earned the average Singaporean wage since 1980 and saved the amount required by law but earned the GIC long term average rather than CPF interest, the average Singaporean would have approximately $850,000 SGD in the bank. This is approximately $300,000 more than they would have earned with the same amount of savings in a CPF account. To put this number in perspective, Singaporeans pay higher fees than what the typical hedge fund would charge. The Singaporean government is directly harming everyday Singaporeans by mandating savings into a seriously under-performing asset for the governments benefit.

Third, Singapore operates a one sided model where the tax payer assumes the risk but the government gets the benefit. If the investments do well, the government keeps everything above the 2.5-4% CPF interest payment; if the investments do poorly, and let’s assume, the CPF collapses, the tax payer will guarantee the payment to CPF holders. In other words, risks are socialized while benefits are privatized.

More important than the technical shortcomings of the CPF is how Singaporeans think of CPF, Temasek, and GIC. Officially, the Singapore government holds more than $800 billion in financial assets. Temasek holds more than $200 billion SGD and GIC is estimated to hold around $400 billion of that total $800 billion. Despite official pleadings to the contrary, Temasek and GIC are not private companies they are owned by the government, controlled by the government, and key officials are appointed by the government. Temasek was created out of privatizing government assets. SingTel, the largest holding of Temasek, was created from the Singapore Telecoms and Post Office Ministry. DBS was originally the state owned Development Bank of Singapore. These were and still are public assets. A similar story holds true for GIC and CPF.

The assets of Temasek, GIC, and the CPF are the assets of the people of Singapore. Only in certain people’s imagination are Temasek and GIC assets private and separate from the people of Singapore. The earnings in excess of 2.5-4% that the government keeps for itself that it does not return to CPF savers are directly harming Singaporeans who are on average $300,000 poorer. GIC and Temasek assets that the government insists are private despite all evidence to the contrary demonstrate the governments disdain for the blessing of the financial bounty it has received from the Singaporean taxpayer.

Kenneth Jayaretnam has proposed privatizing and floating Temasek and GIC to then distribute shares to the public. There are many variations of this basic idea. For instance, CPF savers could earn some amount tied to GIC or Temasek or the social security system could be privatized like Chile with savers allowed to invest via private asset managers. Though the government claims to seek an ownership society, the mechanism and returns of the CPF are much closer in reality to the United States social security system where the government uses contributions as a cheap pool of borrowing with extremely low rates paid for contributions. In fact, the most recent US social security actuarial report says that low income earners receive a higher total real return than Singaporean CPF savers in nominal terms. Giving people ownership of the assets Singaporeans created and linking their savings to the returns of those firm would create an actual ownership society.

As a matter of prudence, I support raising the CPF minimum to ensure income levels for the elderly in the future. However, the easiest and fairest way to accomplish this objective is to pay CPF savers a fair return for the investments that they are funding. The government should not be allowed to confiscate earnings above and beyond the rate it pays on CPF funds. It is complete hypocrisy by the government to publicize the supposedly amazing job it does managing Temasek and GIC which supposedly earn 16% since inception from public assets and 7% in USD term over 20 years from public assets, then plead poverty when paying CPF holders a paltry 2.5%. The wealth of Singapore which has been funded by the Singaporean people belongs to the Singaporean people.

An ownership society requires that owners of capital the CPF savers are compensated based upon market rates, have the ability to move their funds to higher earning investments, receive information about their investments, and how much they are paying their investment managers. The Singaporean government refuses to provide any of this information hiding basic information that would be considered standard information in the marketplace or if owned. Tragic stories of Singaporean unable to access their considerable savings they supposedly “own” demand government accountability.

The Singaporean people are the ones to demand answers and changes to how their money is managed.

Christopher Balding

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