Critics
CPF is not compulsory for low wage and self-employed Singapore citizens. The CPF Board does not provide figures of working Singaporeans who do not actively contribute to their CPF savings or medisave accounts. This implies a significant number of low income Singaporeans do not enjoy the benefits of medishield coverage and retirement savings.
While the CPF does indeed contribute to Singapore having one of the highest savings rates in the world, even in Asia (where savings rates tend to be higher than that of the Western world), the rigid investment nature of CPF, the inadequacies of various short term schemes Minimum Sum, Annuities, puny provident fund interest and soaring medical costs will produce significant problems for a rapidly aging Singaporean society. In addition, citizens are not entirely happy with the low returns of their CPF savings.
High-income and affluent middle class usually depend less on savings component of the provident savings account. They tend to have access to possibly higher yielding and diversified portfolio. An opportunity cost is realised if their provident fund savings are not invested in higher yielding professionally managed instruments or business opportunities. Currently there are many restrictions on type of investment products using CPF funds e.g. local stock or debt market. High retail fees often reduce returns from CPF approved investments. In addition, with CPF savings forming the largest segment of Singapore government's debt, they are recycled as low yield Hold-To-Maturity financial assets. This implies a large segment of citizens' wealth will be subjected to low returns and are not efficiently invested for optimal returns.
Morever for lower and mid-income Singaporeans, CPF accounts contributions significantly reduce their disposable incomes after adjustments for inflation. This restrict their personal consumption choices throughout their employment period. This could lead to an inability to afford more comprehensive health or accident insurance, for which the Medisave component of CPF may be inadequate in coverage.
Dr Ng Eng Hen, then Minister overseeing the CPF, revealed the monthly median housing loan repayment is around $600. For a median wage earner, repaying huge housing loans over a prolonged period will lower the monthly CPF contributions portions. The depleted retirement provident savings will not be able to meet eldery citizens' retirement consumption or earn compound interest income.
In addition, with lower disposable income and higher costs of living, the average Singapore family size has been trending downwards since Independence. Smaller family size resulted in all time low birthrate at 1.2 levels. This will inevitable strain the provident system in the future as the population aged and less contributions are made to the provident fund pool.
The greatest threats presently facing the CPF schemes are the dwindling birth rate and persistent low yield returns from Hold-To-Maturity financial instruments. The dwindling CPF contributions due to aging population will test the future government's ability to meet CPF savings redemptions if population continues to age without raising existing taxes. The various schemes e.g. CPF Life annuities schemes and Minimum Scheme Sum provided the means to stagger CPF withdrawals or pool longevity risks. However they will not fundamentally solve the problem of re-investing the massive CPF savings to ensure that the low yields are able to provide substantial retirement savings for citizens.
The other risk associated with any forced provident savings is citizens have no way to prevent the government from stealth confiscation of wealth. The key pillar that substain any pension or provident fund system is faith on the future government's promise or ability to pay workers their pensions/provident savings upon retirement. Historical and recent examples e.g. Argentina showed that governments when faced with financial insolvency tend to tap pension funds to starve off financial crisis. In addition, the low interest rate paid to pensioners upon their retirement may be disguised as a 'saving tax'.
Read more about this topic: Central Provident Fund
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