Free public forum on CPF changes

I spoke in Parliament when the CPF changes were being debated. That might be one reason why I was asked to help publicise this event.

CPF Changes : Implications for Financial Planning ….. Getting, Keeping and Growing Your Money

The Society of Financial Services Professionals will be holding a Free Public Forum.

Saturday, 1 December 2007
2 pm to 5 pm
NTUC Income Centre, Auditorium 7th Storey, Bras Basah Road (nearest MRT : City Hall)

No registration required, just turn up

Programme

2.05 pm Opening Address by Guest-of-Honour
Braema Mathi
Former NMP, Chair of Maruah Singapore

2.15 pm CPF Changes : Options and Implications
Leong Sze Hian
President, SFSP

2.45 pm What are the Risks and Rewards of Investing your CPF?
Benny Ong
Vice-President, SFSP

3.15 pm Interval

3.35 pm Debate on the CPF Changes: For and Against
The Society for Associated Inter-Tertiary Debaters

4.05 pm How to Invest your CPF?
Mark O’Dell
President, Financial Planning Association of Singapore, Life Insurance Association

4.35 pm Panel Q & A
Above 3 Speakers and Ong Teow Soon, Membership Chair, SFSP

5.00 pm End

Thoughts on response to CPF speech

Since my speech on the proposed CPF changes last week, and after thinking hard about the Government's responses (and in particular, Minister Tharman's statement which I thought was particularly pertinent to the points I was raising), I have some additional thoughts about the points I made. I had 3 main thrusts:

• The rate of return for CPF members can, and should be, higher.
• The compulsory annuity represented an unprecedented inroad on CPF members' rights over their CPF funds.
• The adequacy of the proposed changes in addressing Singaporeans' long-term needs.

The first point has attracted the most attention and the most response from the Government. Indeed, 2 PAP MPs (Mr Ong Kian Min and Mr Sin Boon Ann) who spoke the day after me largely concentrated on that point. Mr Low Thia Khiang also engaged Minister Ng on the issue of the CPF funds. So this post will primarily focus on the first point, and I will only touch briefly on the other two points.

Rate of return for CPF members

I am going to keep things simple, by breaking them (including my further thoughts) down into bite-sized bullet points. To recap, my argument was that:

• The CPF Board takes CPF members' balances and purchases bonds issued by the Government (specifically, the Ministry of Finance (MOF)), at coupon rates equal to the interest that the CPF Board has to pay to its members for those balances.
• MOF apparently takes the funds raised and invests them with the Government of Singapore Investment Corporation (GIC).
• GIC manages the funds invested by MOF. It presumably makes a profit on those funds (and gets paid management fees). In the first 25 years of GIC's existence (1981-2006), GIC's annual returns on funds under management were 8.2% in Singapore dollar terms. It has estimated that its returns for the next 25 years should be 6-8%.
• GIC pays the profits to MOF. MOF pays the CPF Board when the bonds mature, and keeps the excess.
• Presumably, if GIC had made a loss, MOF would still pay the CPF Board as per the coupon rates of the bonds, and would then make a loss.

Taking Minister Tharman's and Minister Ng's statements together, I think the Government's position can be summarised thus:

• CPF members' returns are 100% guaranteed. They are completely risk-free, and the capital will never be affected.
• Any sort of rate of return tied to equity investments as per GIC or Temasek Holdings (although I would exclude Temasek from consideration -- it is a private equity fund, and its historical annualised returns of 18% mask the tremendous amount of risk which is, to my mind, wholly inappropriate for CPF members) would necessarily include exposure to market risks, including risk of capital loss. That is not acceptable.
• The rates offered by the Government are very competitive (possibly better than market) for such risk-free investments.
• Commercial fund managers have declined to operate any funds for the CPF Board to compete with the Government.
• Any profits made by MOF from investing the funds go back into the Government's budget. The Government will use the budget for Singaporeans, and will return any budget surpluses to Singaporeans, particularly the lower-income ones, e.g. Progress Package, etc.

And here are my responses:

• The re-distributive objective stated by Minister Tharman (i.e. to put the gains from investing with GIC into the budget and then funding programmes to help and/or return money to the people) is praiseworthy. It is a Very, Very Good Thing. In fact I cannot overstate how much I admire, agree with and support that. But I have to caveat my support for the re-distributive objective.
• Firstly, any re-distribution back to lower-income Singaporeans will be in a form, and at a time, determined by the Government. It is not surprising that budget surpluses are returned to the people just before election time.
• Secondly, there is no guarantee that any budget surpluses resulting from the gains from GIC will be re-distributed back to the people. They can be spent on other expenditure items (e.g. defence), or even used to fund tax cuts. Take the US, for instance. Clinton left the government with a budget surplus, which has since turned into a massive budget deficit under Bush, thanks primarily to tax-cuts that benefited the rich, and massive military spending to fund Bush's wars. So there is no guarantee that the money will be returned to people. They can be spent in many, many other ways. Until and unless there is an institutionalised system around how the gains from investing CPF funds can be used, I am disinclined to place that much weight on the re-distributive factor.
• Thirdly, there are some unstated assumptions there, such as that better-off CPF members have not withdrawn their CPF funds for investment purposes (which is something I believe the richer are far more likely to do than the poor). (Note to o: see this link for details on what can investments can be made with CPF funds.) Another related, unstated assumption is that the aggregate amount of CPF balances belonging to better-off CPF members is sufficiently larger than the aggregate amount of CPF balances belonging to lower-income CPF members. To the extent that either assumption is incorrect, the re-distributive effect is reduced, since it then increases the proportion of the GIC gains that are generated from CPF balances belonging to the lower-income anyway. These assumptions have neither been validated nor debunked, but since it is the Government that is asserting a re-distributive effect, the Government should confirm this.
• As I pointed out in my speech, this entire mechanism is effectively a large, regressive tax on CPF wealth. With the CPF cap now fixed at a relatively low $4500 per month, the rich will have a much smaller proportion of their wealth entering the CPF system in the first place. On the other hand, lower-income CPF members are much more likely to have a bigger proportion of their wealth in CPF.
• It should also be remembered that when the Government crafts its "re-distributive" budgets, it typically weaves in its socio-economic goals into the policies. For instance, the Government wants to encourage families and discourage singlehood, so some/many tax breaks are not available to singles especially single mothers. That essentially results in a re-distribution of wealth from certain "undesirable" groups (such as singles, single mothers, etc.) to other groups, regardless of wealth. And indeed, it is quite arguable that singles are precisely the ones who need most desperately to ensure financial self-sufficiency in old age.
• The Government has pointed out that GIC investments are not risk-free. And it is correct. But if MOF is bearing the risk in investing with GIC, then it must follow that Singaporeans, as tax-payers, are indirectly bearing the risk. So the risk is always borne by us, it is just a question of whether it is directly as CPF members, or indirectly as tax-payers. However, if it is the former, then at least we have the opportunity to benefit directly from the upside. If it is the latter, our ability to benefit is left entirely at the discretion of the Government.
• Taking the re-distributive objective further, it is actually the lower-income who effectively bear most of the risk of investing with GIC. Since gains and surpluses will be spent on them, therefore losses will mean programmes meant for them will be cut (since there are no longer any gains and surpluses to fund these programmes). In other words, the lower-income will be the most badly affected by poor investment returns. Better-off Singaporeans will not be affected either way, since they are likely to receive far less regardless of whether GIC returns positive returns.

Because of all of the above points, and bearing in mind the fundamental distastefulness of using my money to invest and then not permitting me to partake of the fruits of the investment (arguments about fungibility and different transactions aside), I continue to disagree with the Government.

I also want to mention a rebuttal from Mr Zaqy Mohamed who spoke after me. He talked about the relationship between risk and returns (which is true), and then said:

"So I am not too sure if Mr Siew were in the Minister's shoes, whether he is willing to sign off on such a risky policy just to accept higher returns. And I am not so sure if he is willing to be accountable to explain to CPF members if their 30-40 years of CPF savings were to be compromised years from now."

By that logic, who should be accountable to explain to CPF members why past and current rates of return may insufficient for their retirement, and why is it that the Government can, by the stroke of a pen as some have mentioned, simply increase the returns as it has just done? So I don't think that comment was fair, and in any case I do not agree with Zaqy's comment at all.

Indeed, prior to my speech, I had thought of an idea that will allow CPF members to enjoy at least part of the upside from having GIC invest their funds, while guaranteeing a minimum rate of return without making the CPF scheme an "interest rate subsidy scheme" (as Minister Tharman called it) or imposing open-ended financial burdens on the Government. But I had omitted from my speech to avoid confusion and misunderstanding.

So, this is my idea:

• This applies only to SMRA funds, which Minister Ng has said normally stay within CPF for 30 years. I chose this because this idea requires a long investment timeframe to work. Also, these funds are not (or rather, less) susceptible to usage or early withdrawals than Ordinary Account funds.
• The CPF Board again purchases bonds from MOF. But this time, the bonds are structured so that MOF will invest the funds raised with GIC, and MOF will pay to the CPF Board the higher of (i) a minimum rate of return (e.g. what the Government is currently offering, or maybe 0.5% or 1% less), and (ii) the actual nett returns obtained by GIC (i.e. after GIC takes its management fee which is presumably low and reasonable).
• I will refer to the CPF-guaranteed minimum rates as "CPF-Rate". I will refer to the actual returns earned by GIC as "GIC-Rate".
• There is an additional condition in the MOF-issued bonds. If at any time, GIC-Rate is less than CPF-Rate (which means that MOF has to top up the difference so that the CPF Board receives the actual CPF-Rate), then MOF has first priority on the differential between GIC-Rate and CPF-Rate when GIC-Rate becomes more than CPF-Rate, until such time as MOF has recouped all amounts paid by it in topping up the difference between GIC-Rate and CPF-Rate (which can include a reasonable interest rate on those amounts, e.g. CPF-Rate). Once MOF has fully recouped all amounts paid by it to top up the difference, it ceases to have any claim to the differential between GIC-Rate and CPF-Rate, which will then continue to be paid to CPF members as an enhanced return on their SMRA balances.
• This scheme has the following effects: (i) CPF members have the opportunity to enjoy the potentially superior returns from the GIC-Rate (6-8% per year on average), while still having a guaranteed minimum rate of return and without the risk of capital loss, and (ii) the Government will, over the long term, not be out-of-pocket on its guarantee to the CPF Board.
• There may be short-term risks due to short-term fluctuations, which the Government will bear. Indeed, the Government is much better-placed to bear those risks. But over the long term, those short-term risks will be evened out. The assumption underlying the MOF's decision to invest the funds raised from issuing bonds to the CPF Board must be that over the long term, its returns will exceed the CPF Board's guaranteed returns. That must be so, otherwise MOF would be expecting a loss and CPF would then indeed be an interest rate subsidy scheme.

I would be happy to see if anyone has any comments (either posted here or e-mailed to me privately) on this scheme.

Compulsory annuity and CPF members' ownership rights

I will be brief here. Nobody really responded to this point that I made. But a Straits Times article on Saturday questioned if I had forgotten about Medisave when I made this point.

No, I had not. But Medisave is fundamentally different. Yes, it channels funds into a specific account where those funds can be used only for a stipulated purpose. But if I never fall sick, then I will never have to use those funds. I don't have to spend them. They are there, I can only use them for a certain purpose, but I don't have to use them for that purpose. That is the crux: I am not compelled to use those funds to purchase anything. Which is quite unlike the compulsory annuity, for self-explanatory reasons.

I was a little annoyed at the Straits Times article. I had spent quite a bit of time with one of the journalists who put that spread together, and would have expected the courtesy of an opportunity to respond if they were going to make that sort of unfounded assertion which basically misunderstood my point. Well, so be it.

Adequacy of proposed changes

In all the policy and research papers I've read in the course of preparing my speech (and I've had to read quite a few published by different organisations and authors), they always went back to a term that, a little surprisingly, does not seem to have made its appearance in last week's debate: replacement rate.

That term simply refers to how much of a person's regular income will be "replaced" by his retirement income. Retirement experts typically recommend two-thirds to three-quarters, to maintain an appropriate lifestyle. Statistics for CPF are not available, but a 2001 study estimated Singapore's replacement rate to be 28% based on the then-prevailing rules. The rules have changed, but it is an open question whether the replacement rate, even with the new changes, would have increased by much.

Indeed, that was something I had alluded to. How much can the compulsory annuity payouts get us? If it is so little ($149 to $178 in today's dollars by 2042, figures courtesy of Leong Sze Hian by way of The Online Citizen), then surely we will need other arrows in our quiver of policy responses for a satisfactory outcome?

One of the things that the Government mentioned was how so many people in Singapore owned their homes, which can be monetised. Well, firstly it is difficult for many people to monetise their homes (either by renting or selling) -- where do they stay after that? Not everybody has children or second homes.

Secondly, if everyone chooses to sell at the same time to monetise the single biggest asset they have, then can you imagine the effect it would have on the property market?

Finally, what about those who live in rental flats and do not own their own homes? What do they monetise then?

I noted that the Government went to great pains to illustrate how much more money people would have under the changes. Yet, there were no references to replacement rates or similar concepts.

The hour is late (3am!) and I'm tired. But I remain unconvinced that the proposed changes are adequate, or fair to the people.

Speech on the Ministerial Statement on CPF Reforms: 18 September 2007

This is the prepared text of my speech delivered in Parliament earlier today. I have some further thoughts on the points made in my speech, which I'll post another day -- need to work on my speech for the en bloc changes. The CNA video clip of my speech is here. [Update: Me on YouTube, in 2 parts at here and here]

Speech on the Minister Statement on CPF Reforms and Other Measures for a Secure Retirement

1. Mr Speaker, Sir, thank you for allowing me to participate in this debate.

2. At the National Day Rally, the Prime Minister had announced some far-reaching changes to the CPF scheme. The Minister provided some important details to this House yesterday.

3. Any Government measure that enhances and increases Singaporeans’ savings can only be a good thing. Based on the figures and projections released by the Government yesterday, Singaporeans would be better off and better prepared for the hard realities of a longer life. The Minister’s assurance that under the new system, all CPF members would receive higher interest payments, is comforting.

4. But to me, the real question is whether we can do more. Can we do more, in a manner that is balanced and sensible, and does not involve unwarranted or unjustifiable risks, costs or trade-offs? I think we can.

Poor rate of returns on CPF balances

5. Sir, the poor rate of returns on CPF balances is one of the main reasons why the existing CPF scheme, without reform, will be inadequate to meet Singaporeans’ retirement needs. As a long-term retirement savings plan, the CPF’s rate of return is crucial. Unfortunately, the rate of return enjoyed by CPF members has been poor.

6. In a 2006 paper[1], two NUS economists argued that “CPF members have not benefited from the power of compound interest”. They estimated that from 1987 to 2004, the real rate of return credited to CPF members was only 1.2% per annum. This was contrasted with an equivalent rate of 3.39% for EPF members in Malaysia. This shows just how poor CPF returns have been, when compared with other countries’ provident fund systems.

7. Now, the Minister has announced an improved rate of 3.5% for up to $20,000 in the Ordinary Account. Let’s put that into perspective.

8. Since last December, insurance company Aviva has advertised a product called BIG e. This insurance product targets CPF members, providing a guaranteed return of 3.5% per annum for CPF funds parked with it, subject to a minimum investment of $5000. Aviva fixes this rate every month in advance, but it has stayed at 3.5% since the product was introduced in December 2006. Funds invested with Aviva can be withdrawn at any time without penalty.

9. How is Aviva able to offer such a product and still make profits? Why can’t the CPF Board match Aviva’s rate for all CPF balances in the Ordinary Account? My layman’s perspective cannot comprehend this, and I hope that the Minister would explain.

10. More fundamentally, I remain unconvinced that the CPF Board cannot obtain better returns on members’ balances. The Minister took pains to explain why the full investment route, as he called it, was unsuitable, and I thank him for the explanation.

11. This presumably means that the previously proposed low-cost pension fund will now be shelved. The key obstacle seems to be the need to ensure that CPF returns are risk-free.

12. Sir, in the first place, I think some Singaporeans would ague that the CPF is not risk-free, but is instead subject to different risks, specifically, the risk of government intervention. It can take the form of deferred withdrawals, higher Minimum Sum requirements, and now even a compulsory annuity, but the net effect is the same: interference with members’ entitlement to their funds.

13. I will put that aside for now. I would like to discuss the Minister’s reasoning, about the impracticability of delivering higher returns while shielding members from volatility. The Minister said that this would have meant subsidising losses using other members’ or taxpayers’ money.

14. But CPF savings are meant for the very long term. Let’s just take the SMRA funds for example. The Minister himself acknowledged that the ideal peg for the SMRA rate would actually have been a 30-year Singapore Government Security, which the Minister estimated would return 4% per annum if it did exist.

15. Over a 30-year time frame, market volatility would even itself out. The Minister referred to recent financial market turmoil as a timely reminder of the risks of the full investment route. But Sir, even with the recent turmoil, even with the ST Index briefly dipping below 3000 points a few weeks back, the STI still closed at 3,476 points yesterday, up 14.4% year-to-date.

16. Yes, short-term fluctuations may be difficult to stomach. But over the very long run, they will smoothen out. Surely, over a 30-year time frame, the average returns would exceed 4% per annum. Surely, even if the short-term risk is borne by the Government, it will be able to even out that risk over the long term.

17. The Government of Singapore Investment Corporation provides a great example. Last July, at the GIC’s 25th anniversary dinner, the Minister Mentor disclosed that the GIC had earned returns of 8.2% in Singapore dollar terms over its 25 years of existence. I understand that the GIC has indicated that over the next 25 years, a more realistic expectation would be 6 to 8% per year.

18. The GIC manages our reserves. I would expect the Government to be no less careful with our hard-earned reserves, than the CPF Board is with members’ balances. I am confident that the Government will agree, that the chances of the GIC earning less than the CPF rates are very, very low at the very most. Shouldn’t we structure CPF policy around the likelihood of long-term gains, and not the improbability of sub-par gains, especially bearing in mind the substantial opportunity costs to CPF members of the latter option? If the Government is able and willing to adopt a long-term view with our reserves, then why cannot the CPF Board take a similar approach with at least the SMRA balances, or even a portion of Ordinary Account balances?

19. Indeed, it seems that the GIC may already be managing CPF balances. It is just that CPF members are not benefiting from it. The CPF Board invests the bulk of CPF balances in Government bonds. These bonds pay a rate equal to the rate that the CPF Board has to pay members. But what does the Government do with the funds it raises?

20. According to a 2002 paper published by the Asian Development Bank Institute[2], the Government invests those funds with the GIC. If the returns are as high as 8.2% per year in Singapore dollar terms between 1981 and 2006, or 6 to 8% for the next 25 years, then why are CPF members being deprived of the benefit of the GIC’s fund management expertise?

21. What does all this mean for members? The 2002 paper said, and I quote:

“This arrangement has not provided members with high enough real returns to capture the power of compound interest. To the extent the Government earns a higher rate of return on the CPF funds than what it pays to members; there is an implicit tax on CPF wealth. This tax is likely to be fairly large and regressive, as low-income members are likely to have most of their non-housing wealth in the form of CPF balances.”

22. That paper went on to state:

“To the extent that the [GIC’s] return on investments has been higher than the return actually credited to CPF members, a recurrent, highly regressive, large implicit tax on the CPF wealth has been borne by CPF members.”

23. Sir, how much has this contributed to the situation in which we now find ourselves, with an aging population with insufficient retirement savings? And if we do not rectify this, are we not perpetuating this undesirable state of affairs?

24. Going back to the proposed low-cost pension fund, its purpose was to give all Singaporeans, especially lower-income Singaporeans, better returns on their CPF balances. Such investment opportunities are typically unavailable to lower-income Singaporeans.

25. Even as Fullerton Fund Management, a Temasek Holdings unit, seeks to manage funds from institutional investors and high-net worth individuals, the Government declines to set up a low-cost fund for lower-income Singaporeans. That seems inequitable to me. Worse, it condemns Singaporeans to an unjustifiably low rate of return, one that contributes greatly to Singaporeans needing to continue working longer.

Nature of members’ rights over CPF funds

26. Sir, the Minister has also announced that a committee will be formed to study the proposed compulsory annuity scheme. I trust that this House will be given the chance to debate the committee’s findings at the appropriate time.

27. But for present purposes, it is worth discussing what a compulsory annuity would mean for CPF members. It represents an unprecedented inroad into members’ ownership rights over their CPF funds. Prior to this, members have been restricted in what they can do with their funds, but they are not forced to spend on anything. Schemes like MediShield, ElderShield, the Dependent Protection Scheme and the Home Protection Scheme are all optional, although some are opt-out.

28. The compulsory annuity, even if limited to some but not all members, would be a very different animal. Members will be compelled to purchase an annuity, from which they may get nothing.

29. In insurance terms, it is risk pooling. But viewed in a different way, it is equivalent to the Government expropriating CPF balances to fund an annuity for the group of Singaporeans living beyond 85. From yet another perspective, it is tantamount to a tax for the same purpose.

30. All this represents a sea-change in the nature of CPF members’ rights over their CPF balances. It means that CPF members do not really own their CPF funds, because the Government is able and willing to impose policies to compel members to use their funds in a certain way, even against their strongly-expressed wishes.

31. This week, it is a compulsory annuity. But if we take that first step, will it prove to be a slippery slope of encroachment onto CPF members’ rights? What will it be next week, next year, next decade? An increase in the annuity amount? Some other compulsory scheme?

32. We really do need to have a thorough debate on what it means to be a CPF member. Do CPF funds belong to CPF members individually, and what rights do they have in determining how it is spent?

33. I hope that the Government, the committee to be set up, and my fellow Members will think about and debate this fundamental question. The potential consequences are much more far-reaching than simply insuring against longevity risk.

Adequacy of proposed changes

34. Sir, the final part of my speech touches on the adequacy of the proposed changes, in facing the challenges posed by an aging population.

35. CPF is a fully-funded, defined-contribution scheme. It is premised on members getting what they pay in. But what about those who do not pay much, or anything, in?

36. In 2005, two World Bank economists published a paper setting out the World Bank’s thinking on how countries should structure their pension systems[3]. They recommended a five-pillar approach to retirement funding. One of their key recommendations was for the state to provide a mandatory basic pillar of minimal pension payments, to provide for the poor.

37. We do not have such a basic pillar in Singapore. But we do have the lifetime poor, those who are born poor, who will die poor, and in between make too little to contribute much, if anything, to CPF. We have the informal workers, who by definition do not contribute to CPF. We have full-time homemakers and other groups, all of whom pay little or nothing in, and so will have little or nothing to take out.

38. The proposed measures will do little for all of these groups. They fail to address the fundamental issue of Singaporeans without any meaningful level of CPF balances in the first place.

39. Some may argue that we have Public Assistance, which is available to those aged 60 years and above who have no means of support. But few people are on PA. Earlier this year, this House was told that less than 3000 households are on PA. And that figure includes all recipients of PA, not just those who are too old to work.

40. I am sure we have a lot more than 3000 elderly persons with little or no CPF or other retirement savings. Yet, they are not on PA, for whatever reason. Obviously, PA does not fulfill the function of the basic pillar recommended by the World Bank.

41. What do we do about them? We encourage them to work, and to work longer. What if they do not, or cannot? Does that mean that they do not deserve to be supported in their old age? I hope not. But the proposed changes do nothing to help them.

42. So from this perspective, the proposed changes are inadequate. Indeed, focusing our approach to an aging population so heavily, arguably even exclusively, on the CPF scheme will inevitably result in such a gap.

43. The proposed changes are inadequate from another perspective. The proposed compulsory annuity as described would result in a payout of $250 to $300 per month to those aged 85 as of 2042. Assuming 1.5% inflation every year, that amount in 2042 would be worth only $149 to $178 in today’s dollars.

44. The compulsory annuity is supposed to provide a subsistence payout in case people live longer than they thought they would. But is $149, or even $178, enough even for a subsistence existence?

45. Remember, the fundamental premise for the compulsory annuity is that people are myopic and unable to save enough to support themselves, so they need a lifeline if they happen to live past 85. So there must also necessarily be the assumption that those relying on the annuity would have no other sources of income. What would they then do?

46. Sir, the Minister did acknowledge these gaps in his statement. It is therefore a little bit of a pity that the Minister did not also announce help measures that would be made available to those who need assistance. Unless and until that is done, the proposed changes do not, in my view, provide a comprehensive or adequate response to the issue of an aging population.

Conclusion

47. Sir, I do agree with the Minister on the need for a strong and fully-funded CPF system, based on defined contributions and not defined benefits. That has to be the foundation. That is a given. Any other system would be difficult to sustain.

48. But at the same time, I think we need to do better. And we can. We are able to extract higher returns from CPF balances, thanks to the GIC’s expertise. So why are we not passing these higher returns to CPF members?

49. Until we do so, why are we considering implementing a compulsory annuity, which will fundamentally change the nature and dynamics of CPF members’ relationship with their CPF balances? Why are we so ready to encroach on their ownership rights over their CPF funds?

50. We explicitly acknowledge that problems will remain, despite the proposed changes. So why were there no policies announced on how to address the residual problems? This is a significant omission.

51. We all agree that the aging population is an important and pressing issue facing Singapore. I only differ from the Minister on what can be done.

52. The Government is already doing a lot: the re-employment legislation to kick in by 2012; the higher Workfare payments for those aged 55 and above; the proposal for the HDB to “buy-back” the tail-end of certain HDB leases. These are all excellent initiatives. I hope, for the sake of the future of all Singaporeans, that the Government will do more. Because it can, and it must.

[1] Social Security Policy in an Era of Globalization and Competition: Challenges for Southeast Asia, Mukul G. Asher and Amarendu Nandy, 2006

[2] The Role of the Global Economy in Financing Old Age: The Case of Singapore, Mukul G. Asher, 2002

[3] Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform, Robert Holzman and Richard Hinz, 2005

Parliamentary sitting on 17 September 2007

There will be a Parliamentary sitting on 17 September 2007. I expect this to be a major session, as there will be extremely important debates on both the en bloc amendments and the CPF changes announced in the National Day Rally.

I intend to participate in both debates. It's going to be tough though, because my company is having a global offsite in Singapore that week, and I'll have to give some sort of presentation on 17 September itself. I'll just have to manage it somehow.

In the meantime, I'll continue to post the PQs I had filed in May, some of which are still backlogged.

Use CPF only as a cushion for retirement

This article touched on something that I had mentioned before in Parliament, in my Budget speech back in February. The Government has always used CPF as a convenient tool for cutting wage costs when the economy is doing badly. I had, in my Budget speech, touched on some of the drawbacks of doing this. Now that there is so much focus on CPF's crucial role in ensuring a financially-independent retirement, it becomes so much more important that CPF contribution rates are not changed on an ad hoc basis.

Use CPF only as a cushion for retirement

Also, resist temptation of cutting contributions during economic downturns

Wednesday • August 29, 2007

Siew Kum Hong

THE Prime Minister announced sweeping changes to the Central Provident Fund (CPF) scheme at last Sunday's National Day Rally. The past week has seen more details being disclosed, and Minister for Manpower Ng Eng Hen will make a ministerial statement in Parliament next month.

The changes are far-reaching, even more so than the graduated increases in the Minimum Sum (to reach $120,000 by 2013) announced in August 2003. They are aimed at helping Singapore's ageing population be financially independent in its old age, together with other measures such as the proposed re-employment legislation.

The latest announcements have once again focused attention on the primary objective of the CPF scheme, as a compulsory long-term retirement savings scheme. This is welcome, as CPF has over the years taken on other functions, ranging from housing payments to funding education to the management of healthcare costs.

Indeed, in the past year, CPF seems to have taken on an increasingly significant role as a policy instrument with a key role in accomplishing the Government's different objectives, in particular to manage the consequences of the widening income gap and to address the issue of an ageing population.

The Workfare Income Supplement scheme introduced this year is heavily linked to the CPF scheme, especially for casual workers. The CPF also plays an important role in the Additional Housing Grant, which aims to strengthen the role of housing as a crucial pillar in the Government's policy response to the widening income gap and the ageing population. When a grant recipient sells his flat, the grant amount must be paid into the homeowners' CPF accounts.

The key consideration seems to be that CPF is a useful vehicle to ensure that grants and assistance provided to people are not misused, since CPF funds may only be used for certain specified purposes. This is especially important for retirement planning, where a long-term view is necessary in ensuring that funds generate the necessary returns for funding retirement.

Indeed, the Government's own calculations demonstrate the power of compound interest over the long run. As the Prime Minister noted in his speech, it could mean up to $20,000 more in interest. Similarly, deferring the draw-down age for the Minimum Sum by one year means that the Minimum Sum can last for two extra years down the road.

That being the case, I would urge the Government to refrain in future from using CPF as a tool to manage the economy, specifically by cutting the CPF contribution rate (in particular, the employer's contribution rate) when times are bad so as to preserve our cost-effectiveness. This is because of the disruptive effect on people's long-term plans resulting from such changes, especially when the reductions are amplified over time.

Over the past 20 years, the Government has repeatedly cut the CPF contribution rate whenever the economy was doing badly. The rate hit a high of 50 per cent (25 per cent for employers and 25 per cent for employees) in the 1980s, but was cut sharply to 35 per cent (10 per cent to 25 per cent) in 1986 in the wake of the 1985 recession.

By 1994, the rate had been restored to 40 per cent (20 per cent-20 per cent) for those aged 55 and below. But the Asian financial crisis in 1997-1998 saw the Government cutting the contribution rate to 30 per cent (10 per cent-20 per cent). This was restored to 36 per cent (16 per cent-20 per cent) in 2001.

Although the Government had promised to restore the rate to 40 per cent, then-Prime Minister Goh Chok Tong announced in 2003 that 40 per cent was unsustainable and that moving forward, the CPF contribution rate would float between 30 per cent and 36 per cent.

He also announced a 3-percentage-point cut in the rate, to preserve Singapore's cost-competitiveness. This was only partially restored earlier this year, through a 1.5-percentage-point increase that took effect in July.

These swings in the CPF contribution rate would surely have adversely affected most people's retirement planning to varying degrees. That is to say nothing about the impact on their servicing of housing loans, or even education. For the middle and upper classes, all this would have been seriously compounded by the reduction in the CPF salary ceiling from $6,000 to $4,500.

While I accept that it is important to ensure that Singapore remains competitive and that it is always better for Singaporeans to have jobs than be unemployed, the ageing population — and its financial self-sustainability — is a pressing issue that will increasingly preoccupy us in years to come. Changes in the CPF contribution rate affect everybody, and can have exaggerated repercussions over time. It is about time that we resist the temptation to tinker with the rate, however hard the economic going gets.

The writer is a Nominated Member of Parliament and corporate counsel, commenting in his personal capacity.

Revisiting the Questions for Written Answers: 12 February 2007

In an earlier post, I set out my Questions for Written Answers filed for 12 February 2007. This post explains why I filed them, and my thoughts about the results.

The first WPQ was about the median and mean monthly household per capita income figures from 2001 to 2005 (the Minister kindly provided the figures for 2001 to 2006), for all resident households in Singapore and also for each quintile (20% divisions) of resident households broken down by income.

There were 3 tables in the answer. Unfortunately, I simply can't get the tables to display properly on this blog. So I'll simply state the relevant figures. If anyone wants to have the tables themselves, drop me an e-mail and I will send the complete answers to you.

I've always been curious about these figures, because up to 12 February 2007, the Department of Statistics had only ever published mean figures for household incomes, without a per capita breakdown. In the lead-up to the Budget, there was some talk about help for the "sandwiched class", and one of the criteria mentioned by commentators (including myself) for assessing eligibility was household per capita income. I for one saw this as a useful metric, because it indirectly measured the number of dependents (and hence the costs that a given income must bear) as well, which a flat household income figure does not.

But there was just a lot of guesswork involved here, because of the lack of official figures. So I filed the question, to get them out once and for all.

The numbers published raised a couple of interesting facts. Firstly, the gap between the mean household per capita income for the 61st-80th and 81st-100th quintiles was substantial -- the figure for the 61st-80th quintile was 42.92% in 2001, steadily dipping to 40.28% by 2006. Secondly, while the mean and median figures for the bottom 4 quintiles were relatively close, the median for the top quintile in 2006 was $3,940, compared to a mean of $5,090. In percentage terms, the median was 79.81% of the mean in 2001, dropping to 77.41% by 2006.

Taken together, these two facts suggest that there is a relatively broad and flat middle class in Singapore going all the way up to around the 80th percentile (or maybe even higher). But after that, the income seems to spike significantly after the 90th percentile. In fact, within the top quintile, there seems to be a widening income gap as well.

And that is backed by the DOS occasional paper released on the same day. In table 5 at page 6 of the occasional paper, the DOS breaks down per capita household income by decile (10% divisions). In 2006, the 81st-90th decile had a mean per capita household income of $3,120, compared to $6,880 for the 91st-100th decile.

Let me repeat this in a different way: the mean for the 81st-90th decile was 45.35% (less than half!) of the mean for the 91st-100th decile. The corresponding percentage for 1997 was 49.24%. So not only is there a widening income gap between the rich and the poor, the rich are also getting increasingly richer than the well-off and the upper-middle class.

That's one headline that the newspapers certainly didn't see fit to publish.

And since I'm on the DOS paper, another headline that you didn't see in the media was that not only are the rich getting richer faster than everybody else, they also seem to be experiencing slower price increases than the rest of the population.

If you look at Tables A1 and A2 at pages 10 and 11 of the DOS paper, you will see that the real income figures for the top quintile for 2006 were higher than the nominal figures, suggesting that their purchasing power had actually increased since 2000 (since the real figures were based on 2000 dollars). This should be contrasted with everyone else in 2006, whose nominal figures were higher than the real figures. This difference arose because the DOS does compile different CPIs for the lowest 20%, middle 60% and top 20% of households, and these different CPI figures were used to calculate the real income figures in these tables.

The DOS' Monthly Digest of Statistics for January 2007 is consistent with this conclusion, at least with respect to 2005 and 2006. Using 2004 as the baseline year, by June 2006, prices for the top 20% had risen only 0.2% since 2004, versus 2.5% for the bottom 20% and 1.3% for the middle 60%. That would explain why the complaints about the rising costs of living have appeared to come predominantly from the lower-income.

The second WPQ was about the mean and median monthly amounts of CPF funds used for mortgage payments. I filed this question because I was concerned about people using the increased CPF contributions they were going to get for mortgage payments, on the theory that people may maximise the use of CPF contributions for mortgage payments so as to increase the amount of cash available. If the Government then reduces the CPF contribution rate in a downturn a few years down the road, they would then be caught out.

The answer was that, as at the end of December 2006, 690,067 CPF members were making mortgage payments using CPF contributions, with the mean and median monthly payments being $662 and $500 respectively.

In retrospect, I probably constructed the question erroneously, because it did not tie in the amounts contributed by persons to CPF. But extrapolating from the DOS occasional paper on household income trends, a household at the 40th percentile would have two income earners making a total of around $3,800 per month (based on a mean per capita household income of $1,000 and a household size of 3.8). (I selected the 40th percentile on the rough assumption that the top quintile would be living in private property, hence the 40th percentile represents the approximate median of the HDB-buying population.)

Their CPF contributions to the Ordinary Account (which is what can be used for housing) would be around $836 if the income earner(s) are below 35, and $760 if they are below 35-45 (and lower for older workers). But the mean and median figures of $662 and $500 are for individual CPF members, whereas the figures of $836 and $760 are for two income earners combined.

This does suggest that people are in fact maxing out the use of their CPF contributions to pay for mortgages. That is worrisome, because the Government has shown a historical willingness to use CPF contribution rates as a counter-cyclical economical tool. So in a downturn, precisely at the time when people (and really, the economy) needs their cash the most, many could well be forced to use their cash to service their mortgages because of a shortfall in CPF.

Questions for Written Answers: 12 February 2007

There are a few parts to a Parliamentary sitting. The first part, and to me the most interesting, is Question Time. This is where Ministers answer questions filed by MPs. It takes place in the first 1.5 hours of a normal Parliamentary sitting (I understand that may be different for Budget sittings), i.e. from 1.30pm to 3.00pm.

MPs can file 2 types of Parliamentary Questions (PQs), either an OPQ (Question for Oral Answer) or WPQ (Question for Written Answer). Each MP is limited to 5 PQs, of which up to 3 may be OPQs. An OPQ is for the Minister to reply to in Parliament itself, and MPs can follow-up with supplemental questions. A WPQ is a question that the Minister will provide a written answer to, and hence by definition does not permit supplemental questions to be asked. So WPQs are normally used to elicit information.

I had filed 3 OPQs and 2 WPQs for yesterday's sitting (on 12 February 2007). There was not enough time to get to my OPQs, but I expect 2 of them to be answered on Thursday (14 February 2007). The 3rd is quite a bit further back in the queue and almost certainly will not be dealt with on Thursday. I did get answers to my 2 WPQs.

I will post OPQs and their answers as and when the official Parliamentary report for a sitting is out. I will also try and post newspaper coverage on those OPQs.

Anyway, my 2 WPQs are below. I am still collecting my thoughts on the responses and will post those thoughts (together with my reasons for posing these WPQs) another time, maybe tomorrow.

First WPQ

Mr Siew Kum Hong: To ask the Minister for Trade and Industry, for each year from 2001 to 2005, what were the median and mean monthly household per capita income for (i) all resident households in Singapore; and (ii) each quintile of resident households broken down by income.

Mr Lim Hng Kiang:

1. The mean and median monthly income from work per household member among resident households up to 2006 is shown in Table 1 below. Income from other sources is only available once in five years from the Household Expenditure Survey. Income data for employed households is used, instead of for all households, in order to isolate the effects caused by changes in the proportion of retiree households.

Table 1: Mean and Median Monthly Income from Work Per Household Member Among Employed Households

[table omitted -- essentially, the mean and median for 2006 were $1,950 and $1,310 respectively]

The mean and median income from work per household member among employed households by quintile is shown in Tables 2 and 3. The lowest quintile group showed a slight drop in the mean income between 2001 and 2003 but recovered from 2004.

Table 2: Mean Monthly Income from Work Per Household Member Among Employed Households by Quintile

[table omitted -- essentially, in 2006, the figures for 2006 (by ascending quintle) were $420, $850, $1,320, $2,050 and $5,090 respectively]

Table 3: Median Monthly Income from Work Per Household Member Among Employed Households by Quintile

[table omitted -- essentially, in 2006, the figures for 2006 (by ascending quintle) were $430, $850, $1,310, $2,010 and $3,940 respectively]

[These are figures that, to the best of my knowledge, have never been published. Perhaps not coincidentally, on the same day, the Department of Statistics issued an occasional paper on income statistics titled "Key Household Income Trends, 2006" that made headline news today.]

Second WPQ

Mr Siew Kum Hong: To ask the Minister for Manpower what are the mean and median monthly amounts of CPF funds used for mortgage payments.

Dr Ng Eng Hen:

1. The mean and median monthly amounts of CPF funds used for mortgage payments[1] were $662 and $500 respectively, as at end December 2006.

[table omitted -- the table basically reproduced the above information, and added that there was a total of 690,067 members, presumably being members who were using CPF funds to make mortgage payments]

[1] Public Housing Scheme (PHS), Residential Properties Scheme (RPS) and Non-Residential Properties Scheme (NRPS)