What if you were not allowed to use your pension money, which is Central Provident Funds (CPF) in Singapore, to pay for housing, like most other countries?
Then perhaps you would not be able to pay for your HDB flats at today’s prices, which is one of the most expensive public housing in the world.
And HDB flats wouldn’t have gone to record high prices in recent years.
The Parliament passed a bill in August 1968 to allow the use of CPF to purchase public housing built by the Housing Development Board (HDB) after the Government assessed the purchase intentions of the people through a feasibility survey conducted by the Economic Research Centre in conjunction with HDB where 49 per cent of those surveyed expressed intention of buying the flats.
Minister of National Development Desmond Lee revealed last month that of the flat buyers who purchased BTO flats in mature estates and collected their keys between January 2022 to September 2022, more than 80 per cent of them had a mortgage servicing ratio (MSR) of 25 per cent or lower for their HDB loans.
He noted that this means that these flat buyers can service their HDB loans using their monthly CPF contributions with little or no cash outlay.
The HDB-CPF system, which was arguably built on the last few decades of the “asset enhancement” narrative, may no longer be viable, given that HDB flats over 40 years are typically declining in value to ZERO at the end of the typical 99-year lease.
Also, most Singaporeans, may have thrown prudence to the wind in using their CPF for HDB flats without thinking about the implications on their retirement funding, since all their CPF and cash utilised may become worthless, eventually.
The viability of having your HDB flat as a retirement nest instead of cash in your CPF account, is put to question in the recent case of Selective En bloc Redevelopment Scheme (SERS), where HDB owners at Ang Mo Kio Ave 3 are faced with the situation where they had to either fork out tens of thousands of dollars to find a new flat or to just simply break even if they were to downgrade to a smaller flat and settle for a lesser lease term.
“Holding size, location and other attributes constant, an older flat will have a lower market value than a younger one with a longer ownership duration,” said Mr Desmond Lee in response to an adjournment motion about the SERS at Ang Mo Kio 3.
If that is the case, how can HDB flat buyers obtain the promised excess proceeds from the sale of HDB flats for their retirement funds and be able to buy a replacement flat to stay in at the same time?
But even if they are aware of this conundrum, they would have no choice but to bite the bullet as the majority of the population would probably not have the cash upfront to pay for the flat’s downpayment or afford to sustain the monthly mortgage without using their CPF.
CPF’s low rate of return
The leaning towards investing in one’s property may very well be due to the perceived higher returns of investment in property as compared to keeping one’s money in the CPF.
On average, perhaps every Singaporean may, arguably, be short by about S1 million for their retirement funds, because we probably pay the lowest rate of return amongst national pension schemes in the world, historically, in the last 23 years or so.
Quite a number of people have asked me how the figure of S$1m can be computed and derived.
So, here’s an example.
If you start work at, say, 21 years old with a salary of S$1,500 – increasing at 4 per cent per annum until age 65 – at 3.6 per cent interest, you may have accumulated about S$1,482,384 in your CPF, at age 65.
As there is no disclosure as to what is the average overall interest rate on all the different CPF accounts (Ordinary 2.5%, Special, Medisave and Retirement 4.0%, plus an extra 1% on the first S$60,000, extra 1 per cent on the first S$30,000 from age 55) – we have assumed the average overall CPF interest rate of 3.6% in the above computation projection.
If the nominal rate of return is, say, 6 per cent (the historical average real rate of return after adjusting for inflation of national pension schemes in the world is, we believe, about 4 per cent) – you would probably have accumulated S$2,520,637.
Difference of $1m in 44 years?
So, you may, in a sense, be short by S$1,038,253 (S$2,520,637 minus S$1,482,384)
And we have not even factored in the difference in the returns of about 2.4 per cent (6 minus 3.6 per cent) from age 65 onwards until death under the CPF Life scheme which pays 4 per cent on the Retirement Account balance plus an extra 1% interest on the first S$60,000, extra 1 per cent on the first S$30,000 (with any excess CPF that can be withdrawn but is left in the CPF earning 2.5 per cent).
Assumptions?
Note: We have assumed a 4 per cent increase annually in salary because the historical annualised wage growth less historical inflation in Singapore is estimated to be 2 per cent.
Also, we are assuming that the CPF contribution rate ceiling may also increase in nominal terms in the future because of inflation, in line with future salary increases.
Note: Although we have assumed in the above computations that the historical annualised return derived by the government from investing our CPF is 6 per cent — it may be interesting to note that the GIC may have had a more than 8 per cent average nominal annual returns since 1981?
Singapore Prime Minister Lee Hsien Loong said at the 40th Anniversary of GIC, “Since inception, it has generated steady returns on our reserves, with annual returns averaging more than 5 per cent above global inflation and this has significantly grown the international purchasing power of our reserves”
As our CPF is managed by GIC and I understand that historical global inflation is about 3 per cent, does it mean that the nominal return may be over 8 per cent (5 + 3)?
Are there any other countries in the world that seemingly keeps so much of the returns derived from investing the national pension fund to themselves?
