CPF savings 'may not be enough for old age'

[Jared Seah]

Our modern capitalistic system is based on "trust".

Whether you see parallels with Ponzi schemes may depend whether you see the forest or the trees.

Perhaps that's why some banks are too big to fail. If there's a run on the banks, I don't think the printing presses can keep up.

As tourist or in our professional capacity, have we "rejected" to be paid in certain currencies? We only "trust" certain currencies. Why is this so?

If you are in Vietnam, you may want to check-out the % of networth the middle-class and above have hoarded in terms of USD and gold. You don't need to be financially literate to appreciate why they don't "trust" their own Vietnamese dong - with inflation running at 15-20%.

Whether money is physically there or not is one thing. There's always the printing press.

As savers and retirees in US and UK have found out, the "trust" has already been broken. You never invested or speculated all your life. You "trusted" the govt will take care of you. The $1 you took out in savings or pension tally with the yearly statements. The $1 looks the same as the $1 you put in years ago, but the "trust" in its value has been eroded...

Yes, who we choose every 5 years has a big impact. And some have even voted with their feet. There are no quitters. There are only decision makers.

I trust our SGD (as of now).

Now that I know this word called counter-party risk, I know where to look. If I don't like what I see and can't influence the outcome, I am ready to vote with my feet.

[tanjm]

Buying US Treasuries is NOT riskless. There is FX risk in SGD terms.

And as for the statement that in the past, interest rates were higher.... take note that you can put your CPF savings into a fixed deposit (which btw is not totally riskfree). The 2.5% CPF rate is merely a floor.

All these arguments about how the SG government is giving too low a return on CPF or even implying that the government is somehow conning us, is basically just masking the fact you expect a free ride. On a open market basis, please tell me how you can get 2.5% riskfree with a 1Y duration (I say 1Y because CPF credits interest on a yearly basis).

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To D.O.G.

The real wealth of a country like Singapore (with no natural resources) is in
1. Our productive capacity. Our ability to do work or perform services that other people (in other countries) want.
2. Our foreign reserves and assets. Literally our hold on other people's obligations to us.

Given that the government can literally print money, SGD balances, SGD budgets, CPF monies in SGD etc are a book keeping mechanism. It doesn't really matter what the SG government does with the money, it only matters what we can do with the money or what alternative returns we can get from the money.

From a macro point of view, I only need to worry if the SG government will run actions in the future that will devalue the SGD currency. From the CPF balance point of view, I only need to ask myself : is there a viable riskless alternative for myself compared with the 2.5% rate?

[freedom]

Buying US Treasuries is NOT riskless. There is FX risk in SGD terms.

And as for the statement that in the past, interest rates were higher.... take note that you can put your CPF savings into a fixed deposit (which btw is not totally riskfree). The 2.5% CPF rate is merely a floor.

All these arguments about how the SG government is giving too low a return on CPF or even implying that the government is somehow conning us, is basically just masking the fact you expect a free ride. On a open market basis, please tell me how you can get 2.5% riskfree with a 1Y duration (I say 1Y because CPF credits interest on a yearly basis).

1.
with fix deposit, I can withdraw any time after it matures. be it one year, two year, 5 year or longer. that's why we called it one-year fd, 2-year fd, etc. in the case of cpf, assuming you are 30 now, it is at least 35-year fd. will you be satisfied you get 2.5% pa for a 35-year fd?

2.

on guarantee. bank fix deposit is guaranteed by MAS(up to certain amount), the central bank of Singapore, part of the Singapore Government. Who guarantees CPF? the same Singapore Government.

I don't see significant difference in credit risk between CPF and FD.

[d.o.g.]

On the section where you mentioned about members withdrawing their CPF monies for purposes such as housing, in the books of the CPF Board, a withdrawal by a CPF member from his account is a reduction in the liability (i.e. a debit) of the CPF Board. From the accounting pov, since CPF Board cannot sell the bonds it is holding, the CPF Board must record a credit somewhere and I can only think of recording as a transfer to the Govt (e.g. HDB Board) or a transfer to the banks (for members who are servicing their mortgages from their OA account). While members continue to contribute to their CPF accounts, one should also not forget that most of the members also withdraw from their CPF accounts for a variety of reasons, especially for housing. And property prices being where they are now, I don't think it is unreasonable to assume that whatever monies that goes into the OA, is quickly withdrawn to service mortgage payments.

And finally, on your assertion that CPF statements are completely fake, I think you should have been careful with your choice of words. (And no, I don't mean from a legal point of view). Would one call their own bank statements fake then, since we all know that at any one point of time, the bank doesn't hold all the depositors' balances in cash.....And going by the logic of your arguments, should we also then label banks' operations as "parallel with ponzi schemes, where one person's withdrawals are funded by another's contributions.... that the cash flow mechanics are similar."?

Please look at the financial statements produced by the CPF Board. Especially on page 5, where the $187bn of assets is broken down into its key components, among them $185bn of members' accounts. Note that the CPF members' accounts are treated as ASSETS not liabilities.

The CPF Board is not treated like a custodian who owes its assets to the beneficial owner. The CPF Board is treated like a cooperative where the members are the owners. If the CPF Board was treated like a custodian holding money on behalf of members, it would have gigantic liabilities corresponding to CPF members' accounts, just like banks have gigantic liabilities corresponding to depositor accounts. Instead, the CPF Board is shown as holding gigantic assets and almost no liabilities relative to the assets. In other words, the CPF Board's assets are in fact CPF members' monies, as is clearly disclosed on page 5.

The CPF Board's assets (which, again, are really CPF members' assets) are primarily in special SGS, not cash. That means, when divided up and apportioned to individual members pro-rata, member account balances, despite being shown as cash in CPF-OA, CPF-SA etc, are in fact not held in cash but mainly in special SGS. This is why I say the account statement sent to individual members is fake - because the underlying cash is not there.

What happens when you make a net withdrawal e.g. downpayment for the house? Your current month's contribution is not enough to offset the drawdown and you must drawdown the cash balance shown in OA. But there is no actual cash in your OA - it's in special SGS. The CPF Board cannot sell your pro-rata share of the special SGS. Therefore the cash is met by an offset from other members who are making a net contribution. Of course, given the large sums of money, all these transactions are book entry only.

It is correct that for banks, the Ponzi parallel also applies. Again, banks are not Ponzi schemes, but the cash flow mechanics are similar. The big difference for CPF versus a bank is that in a bank account statement, the statement of your cash assets is in fact a statement of the bank's liabilities to you as a depositor. There is not enough cash to pay you, but if you demand it the bank will somehow find a way or die trying.

But for CPF your statement is not a statement of the CPF's liability to you. It is supposed to be a statement of what you really own and not what the CPF owes you. Of course, since you can't withdraw your CPF money except under certain conditions, this is normally a moot point. But like I said, this doesn't change the fact that the accounts are fake in the sense that the underlying assets are not in the form of cash as implied. To be more politically correct, the accounts are misleading because they do not make clear that the underlying assets are mainly special SGS and not actually cash. You have to read the CPF Board's financial statements to realize what is going on.

Again, this isn't meant to cause a panic, and indeed for a government old age/pension scheme the CPF is probably one of the least bad ones on an international basis. But I for one am not depending on the CPF for anything in old age - for my own retirement planning purposes I assume that I will not be getting any money out of my CPF account. Any person trying to plan for retirement would be wise to do the same.

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Given that the government can literally print money, SGD balances, SGD budgets, CPF monies in SGD etc are a book keeping mechanism. It doesn't really matter what the SG government does with the money, it only matters what we can do with the money or what alternative returns we can get from the money.

From a macro point of view, I only need to worry if the SG government will run actions in the future that will devalue the SGD currency. From the CPF balance point of view, I only need to ask myself : is there a viable riskless alternative for myself compared with the 2.5% rate?

I am not complaining about the 2.5% interest paid on CPF balances. I am complaining about the poor disclosure of what is being done with CPF members' money. As I pointed out earlier, the government could simply do a direct credit of the required interest into CPF member accounts without the rigmarole of issuing bonds and paying interest thereon. There must be a reason why the CPF cash balances are being borrowed.

I remember reading somewhere that one of the early uses of the CPF money was to fund the HDB's construction program. Later on HDB of course issued its own bonds, along with JTC and LTA. Today no government agencies appear to need such a huge amount of money. Changi Airport for instance is profitable according to its own annual reports ($337m profit in FY11), and PSA's 2010 annual report says it made $1.2bn in 2010, so these 2 entities at least can finance themselves. Why hasn't the borrowed money been returned to CPF members? Where is it, and what is being done with it?

Again, this isn't to say that the Singapore government is going to collapse or that its finances are unsound. I would just like more disclosure about what is being done with CPF members' money. In the meantime I am just pointing out that the CPF statements sent to members paint a completely different picture from what is actually going on.

[freedom]

As I pointed out earlier, the government could simply do a direct credit of the required interest into CPF member accounts without the rigmarole of issuing bonds and paying interest thereon. There must be a reason why the CPF cash balances are being borrowed.

I am not sure that I read it correctly. does the quote imply that the government just creates money from thin air and credits it to the CPF members as interest? (or the government uses its tax revenue to fund CPF members' interest?) would it be better that government or its associated agencies should invest the CPF money to generate the return rather than to "print" the return.

[tanjm]

Again, this isn't to say that the Singapore government is going to collapse or that its finances are unsound. I would just like more disclosure about what is being done with CPF members' money. In the meantime I am just pointing out that the CPF statements sent to members paint a completely different picture from what is actually going on.

Yes, but
1. does it matter?

2. even if they were completely open about why they do what they do, does it enlighten the average person better? Will it reduce complaints? I doubt it.

3. The CPF statement represents a effective picture of what the CPF member has or can do with his balances. Just like a bank statement does not literally tell you what the bank is doing with your cash or that it has it.

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I remember reading somewhere that one of the early uses of the CPF money was to fund the HDB's construction program. Later on HDB of course issued its own bonds, along with JTC and LTA. Today no government agencies appear to need such a huge amount of money. Changi Airport for instance is profitable according to its own annual reports ($337m profit in FY11), and PSA's 2010 annual report says it made $1.2bn in 2010, so these 2 entities at least can finance themselves. Why hasn't the borrowed money been returned to CPF members? Where is it, and what is being done with it?

I don't know the answer, but I suspect that it is simply sitting on the govt's books somewhere. Remember that a govt is the only entity that is able to disappear money or create it out of thin air. It does not even have to deposit any money it receives.

The SG gov reportedly does not even have to borrow money via the bond market, yet it has an active SGS bond issuance market. The reason it does this is to create the bond market itself, and to manage general liquidity. When MAS issues 10 billion of bonds, it sucks 10 billion in cash out of the economy. When it similarly redeems 10 billion of bonds or pays interest, it injects 10 billion in cash into the economy.

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Buying US Treasuries is NOT riskless. There is FX risk in SGD terms.

And as for the statement that in the past, interest rates were higher.... take note that you can put your CPF savings into a fixed deposit (which btw is not totally riskfree). The 2.5% CPF rate is merely a floor.

All these arguments about how the SG government is giving too low a return on CPF or even implying that the government is somehow conning us, is basically just masking the fact you expect a free ride. On a open market basis, please tell me how you can get 2.5% riskfree with a 1Y duration (I say 1Y because CPF credits interest on a yearly basis).

1.
with fix deposit, I can withdraw any time after it matures. be it one year, two year, 5 year or longer. that's why we called it one-year fd, 2-year fd, etc. in the case of cpf, assuming you are 30 now, it is at least 35-year fd. will you be satisfied you get 2.5% pa for a 35-year fd?

The analogies are not exact since there is no analog for CPF outside. But you certainly can make restricted withdrawals from CPF any time. Just for housing, investments, fixed deposits, medical insurance/expenses etc. You just can't withdraw for holidays, buying cars etc :-)

My choice of 1Y is fairly arbitrary, but I certainly would not choose 35Y as the duration. The true duration would depend on the weighted average length of time a dollar stays in CPF without being withdrawn. And for much of a younger person's career (maybe most of it), a very large chunk is withdrawn for housing.

[d.o.g.]

would it be better that government or its associated agencies should invest the CPF money to generate the return rather than to "print" the return.

So where is this money invested?

Just like a bank statement does not literally tell you what the bank is doing with your cash or that it has it.

The bank statement says what the bank OWES you. The bank doesn't need to have the cash now, only when you demand it. You are a lender to the bank, it is normal that the bank is using your funds to run its business.

The CPF statement says what you OWN. The CPF is not a bank, it is portrayed as a custodian, like a warehouse safeguarding your assets. You are not lending to the CPF, the CPF is safekeeping your assets for you and should not be using your assets for its own purposes.

Imagine you parked your car at a long-term parking facility with the agreement that you'd pick up your car in 20 years. In the meantime, would you be happy for your car to be used without your permission, even if some rental fee was paid?

even if they were completely open about why they do what they do, does it enlighten the average person better? Will it reduce complaints?

It is true that many people do not know and those who do know may not care. But without disclosure there is potential for abuse, and when that happens all of us could suffer.

[tanjm]

even if they were completely open about why they do what they do, does it enlighten the average person better? Will it reduce complaints?

It is true that many people do not know and those who do know may not care. But without disclosure there is potential for abuse, and when that happens all of us could suffer.

This statement could apply to literally almost anything about any complex entity or government in the world. Even if you are offered a blow by blow account, it doesn't mean it won't be abused - the govt is its own auditor.

When you buy shares in a company, you are relying on trust that its accounts and business are accurately portrayed as well (an auditor is only a pretty limited creature).

[freedom]

would it be better that government or its associated agencies should invest the CPF money to generate the return rather than to "print" the return.

So where is this money invested?

I thought the CPF board bought investment such as special SGS, statutory board bonds. The money has been lent to the government. how the government would like to investment this money and how much money the government would earn with the money borrowed from CPF, is up to the government, rather than CPF itself to decide. What CPF cares about most is probably the safety of the principal and the interest. Although the investments made by government such as billions loss in Temasek/GIC might not be able to repay the interest and the principal, the government eventually would decide to "print" the return. That would be a totally different topic on how the government had lost billions, not exactly the same as CPF has lost billions, though underlying they probably would be the same.

of course, Whether CPF board makes the best decision for CPF to investment in special SGS is another topic as well.

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on a different note, I don't think the financial statement is CPF board's statement, rather than CPF's statement (as a fund). So it is totally natural to treat the fund's money as asset, not liability, just like any other funds. the pool of the money is the asset of the CPF (not CPF board).

CPF board is more like a fund manager of CPF, rather than a "co-operative".

[wsreader]

Imagine you parked your car at a long-term parking facility with the agreement that you'd pick up your car in 20 years. In the meantime, would you be happy for your car to be used without your permission, even if some rental fee was paid?

I would be interested to know if my car is repainted and used as a taxi, or if it is rented out to a loanshark runner for his operation. In the latter case, I may not get back my car if it is impounded by the police and can only trust that the long-term parking operator will buy another car to return me. It is also my interest to ensure that the long-term parking operator will still be around at the time of my car collection, and hope that there is no further extension in time