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What’s so good about the CPF?

By Gordon Lee

Singapore’s Manpower Minister Tan Chuan-Jin has weighed in to offer the “truth about our CPF and the minimum sum”. In his view, the only alternative to the CPF is dismantling it and leaving it entirely to the individual.

This is a false choice - there are other policy options out there that a Minister is paid (highly) to consider. To help him out, I propose an alternative in this article.

The CPF is fully funded

I remember that at a civil service event held in the UK some years back, when I was a student there, it was mentioned several times that the CPF is “fully funded”. Unlike pension schemes in the UK (civil servants do not hold back criticising the policies of other countries even as visitors), an individual’s CPF contribution is held in an account specifically designated for them. This is unlike the UK where pension contributions are pooled into common fund. In his article, the Minister repeated the same argument.

We've dealt with the benefits of a “fully funded” state pension system, but what are its costs? “Fully funded” merely means that the more you can afford to contribute, the more you get.

Unfortunately, the converse is also true. This means that far from protecting the low paid - and especially if you believe that the CPF gives you market-beating interest rates - the CPF disproportionately benefits the rich. It is no wonder that Lim Swee Say was quoted as saying, “Every month, when I receive my CPF statement, I feel so rich… Not only is it earning good interest, my capital is protected.”

The CPF is a strong safety net... particularly for those who can already afford a safety line.

An alternative

What Mr Tan ignores is that alongside the state pension, the UK has a government-mandated workplace pension scheme. Under the scheme, employers have to enrol their employees in a private pension scheme (although employees can choose to opt out). Employers have to match the contribution by their employees, and contributions are tax free. Employees are also given a say on how their money is invested by the fund.

So far, it seems almost like the CPF scheme, except:

  1. You can opt out if you really want to. There is a separate state pension as a really basic safety net. This balances protecting both the disadvantaged and individual freedom.
  2. There is a choice on which fund management provider to engage. This is unlike the CPF which is essentially a state-run monopoly.

Mr Tan says that the CPF is “backed by the full faith and credit of the Singapore Government – only one of a few countries in the world with a triple A credit rating from all of the world’s major credit rating agencies”.

However, the Minister fails to note that bank deposits in Singapore are covered by the Government’s Deposit Insurance scheme - backed by the full faith and credit of the Singapore Government. Clearly the Government recognises that it is possible to back contributions/deposits with the right regulatory architecture, without having to run a state monopoly.

Conclusion

I am not a massive fan of the UK system explained above, but I personally prefer it to a state-run monopolistic pension provider. It provides a basic safety net for those who need it most (i.e. those who are poor and have not contributed much), while at the same time giving workers the freedom to participate in a private pension scheme and have a say over how their money is invested.

The Minister should be actively considering this and other alternatives, instead of hard selling a policy which may be well past its “sell by” date.