Central Provident Fund How to deal with the CPF mess
The Central Provident Fund was once the pride of Singapore. It has now turned into a mess.

What are the issues?

a) The savings in Medisave is, to some extent, used wastefully.
b) CPF Life is unpopular and confusing
c)  Too much money is used to buy HDB flat leaving very little money for retirement. Many low income people receive only $350 in monthly payout.
d)  Many members want to take out their savings at 55, but this is not allowed.
e)  Members complained that they have to put back the CPF savings with interest, when they sell their HDB flat or private property.
f)   Employers find it confusing to compute contributions to CPF as it vary by age and type of worker.
g)  Interest rate paid on CPF savings is too low, leading to accusations that the government is making a profit from investing the funds.
h)  CPF savings are allowed to be invested in some approved investments that turned out to be bad, leaving to large losses.

It is not easy to fix this mess. 

The changes that I suggest below may improve the system, but is not likely to be a perfect solution.

a) Stop compulsory contribution to Medisave. Members can make voluntary savings into Medisave and enjoy a higher rate of interest.

b) Allow employees to make voluntary contribution, up to 20% of salary, into CPF for use in home purchase. They do not need to make any contribution, if they wish to use the income to rent a home. 

c) All of the employer's contribution will go into the special account that can be taken out in full at 55 or later. Contributions made after age 55 can be taken out in full at 60, 65 or 70 years. The contribution rate should be fixed and not vary according to age band or citizenship type.

d) After withdrawal, the member is allowed to re-invest the savings voluntary with CPF to earn an attractive interest rate, say 3.5% p.a. for 3 years and 4% p.a. for 5 years or to convert to buy a fixed annuity for 5, 10, 15 or 20 years or a life annuity calculated at a yield of 4.5% p.a. These yields may change according to the the prevailing interest rate at the time of purchase.

e) Prior to and after retirement, CPF members are allowed to invest a portion or all of their savings in an diversified index fund to earn a good market yield over the long term, but it is not guaranteed.

The main thrust of the proposed new system is to allow members to take out their savings at 55 and to offer them safe and attractive choices to meet their personal needs. 

Some members may make bad investment choices and lose their savings. This cannot be totally avoided. However, the majority are likely to take proper advice and re-invest the savings with CPF according to their personal needs.

Most members are likely to keep the savings in term deposits offered by CPF. They will find these deposits to be attractive, as they pay a higher interest rate than the deposits offered by the banks. At a later date, some members may decide to buy a term annuity or a life annuity as it may better match their financial needs.  This will be an informed choice that they make.

Summary: Under my proposed scheme, the employer contributes to the special account (for retirement purpose) and the worker makes voluntary contribution to the medisave account and to the ordinary account (for housing) according to their financial situation.

Tan Kin Lian

 

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