Sunday, June 8, 2014

Return our CPF?

There was a protest called "Return our CPF" at Hong Lim park on Saturday. The turn out was about 6000 people which filled up the whole field. The whole protest was centred on the frustrations that Singaporeans cannot withdraw much of their CPF savings for retirement and many Singaporeans can't afford to retire. In fact, it was reported that about 55% of Singaporeans do not meet the minimum sum and thus they can only withdraw $5000 out at age 55. The rest will be paid out monthly to each individual once they reach ages 62-65.

The retirement problem in Singapore

There are indeed people who can't retire in Singapore. Prices have been rising rapidly especially from the 90s till recently and Singaporeans would realise that their savings have somewhat diminished. $10,000 today is not worth as much as $10,000 30 years ago. $1 may be able to buy you a bowl of noodles in the past but $1 today can only barely buy you a cup of coffee. This is how inflation affects ordinary people like us. If Singaporeans themselves have no personal savings and rely on the CPF for retirement, i would say they would be in deep trouble.

Why is the CPF savings not enough for retirement?

The CPF contribution rates for employees like us are 20% currently and for your employers, it's 16%. That is a total of 36% currently. But did you know that CPF contribution rates was only 10% for employers and 20% for employees in 1999? It gradually rose to 16% in 2001 and 2002 but dropped back to 13% from 2003 to 2006. However, in the mid 1980s, CPF contribution rates was a total of 50%. On average, suppose the CPF savings a person has will be around 30% of his monthly income. Why is it still not enough for retirement when its already a savings of 30%?

Some argue its because of the low interest rates which the CPF pays. Currently, the CPF ordinary account (OA) pays 2.5% and the special (SA) and medisave account pays 4%. There is also an extra 1% for the first $20,000 of OA and the first $40,000 of SA. Is this low in our current low interest rates environment?

Another main reason is that most of us use CPF to pay for our housing loans. When we do that, we would definitely have lesser in our CPF for retirement.

The history of CPF interest rates

CPF interest rates were 6.5% for both OA and SA from 1977 to 1986. Why was it higher in the 1980s and only 2.5% and 4% currently? The reason is simple, Singapore follows the global interest rates. We have to anyway because if we do not, our country will suffer as a whole. Back then, interest rates on savings deposits were high. POSB once had interest rates on its savings account as high as 9.5%. But, don't forget that if you borrowed money to buy a house back then, the interest rates were high too. The two interest rates goes hand in hand.

Similarly, now we have low interest rates which our banks pay only 0.15% on your savings account. When you buy a house, interest rates are low too at 1.5% if you borrow from a bank. CPF legislated its interest rates to pay a minimum of 2.5% if not we would be getting even lower than this. However, if you realise, the loan interest rates for borrowing from HDB to buy a house is 2.6%. This is higher than the bank's lending rate. So now people are protesting that CPF interest rates are low and the government should raise interest rates but how many realise that the loan interest rates will rise as well? If it rises to 4%, can people still afford to buy a house? There are impacts to every action which is taken.

How to get higher interest rates?

No matter how much people protest, the CPF interest rates will not change at the current situation. If it were to change drastically higher, i would be worried as this would certainly crash our economy and create even more problems such as unemployment. To ensure that we can retire, we need to plan ahead. At least we should find ways to grow our money above the inflation rate so it does not depreciate overtime.

The average inflation rate has been 3-4% over the past 10 years. The OA pays only 2.5-3.5% so it is unable to keep up with inflation. That is why the money inside this account does not grow fast enough to keep up with rising prices. On the other hand, the SA account pays 4-5% interest which is keeping up with the inflation rate. The safest way we can do is to transfer the money from our OA to our SA to earn the guaranteed higher interest rate and let it compound over the years. However, do note that once you transfer to your SA, you cannot transfer back. If you need the money in your OA to pay for housing loans, do consider carefully before doing the transfer.  

Another way is to invest your CPF OA money under the CPFIS scheme. However, do take note there is always risks associated with investing so do equip yourself with the knowledge before embarking on any investments.

The importance of personal savings

I cannot emphasise enough the importance of personal savings. The CPF will not be enough for most people to retire on as most of us use it for housing purposes. Most people use 30% of their monthly salary to pay for housing which leaves only 6% of their salary saved into CPF. This small amount will never be enough for you to meet the minimum sum and much less retired. With housing prices at a high, every young person's CPF will be left with very little. I would think that young people like me will have an even tougher time to retire in the future if we do not start to have our own savings. We need to plan ahead so that we do not face the same problems as what older people are facing today.

So, is it still viable for return our CPF? You be the judge.

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Related Posts:
1. All about CPF minimum sum and CPF life


  1. So many sheeps just following the crowd and protesting for the sake of protesting without thinking through their grey matter. It's almost as if they don't have grey matter in the first place.
    If only everyone is as reasonable and logical as you.
    Just curious about the 2.6% housing loan from CPF. It is still being paid back to the OA account right?
    So essentially I'm paying myself for my retirement at a higher rate to compensate for the compounded interest that was lost when I took out the money for housing.
    At least that's how I see it.
    Good article.

    1. Hi,

      Once you sell your house, you'll have to return the CPF money you used for that house plus the interest back into your CPF account. Anyway, i guess people are protesting because they don't understand the whole picture. It's a complex issue altogether. To convince the people, there would need to be a whole lot of explanation to be done.

  2. Hi SGYI,

    Here is some info where actually interest returns on CPF may be possible to be increased to help low/middle income Singaporeans

    1. Hi Chan Yuan,

      Thanks for sharing. The first $60,000 has an additional interest of 1% which i guess is to help the lower income people. To increase by an additional 1% to 6% i don't know if its feasible. The CPF board will have to calculate it out. From what i know, the CPF money is invested into a special SGS bond which is deposited with MAS and transferred to GIC to manage the proceeds.

    2. Well from GIC's website, the investment company has produced 6.5% p.a. over 20 years. It is entirely possible since all CPF proceeds are passed to GIC to manage

    3. Hi Chan Yuan,

      The nominal return was 6.5%. The real rate of return was only 4%. I think they are basing their calculations on the real return.

  3. When I started working only with GCE 'A' level after NS; I also wondered whether I could marry and support a family with such low pay.

    Could I fully paid up the housing loan before 55?

    How many people would blame themselves?

    Bill Gates - If you born poor it is not your mistake, But you die poor, it's your mistake.

    1. Forgot to mention that I grew up in Toa Payoh one room rental flat till I got married and bought 4-room flat in Hougang.

    2. Hi Uncle CW,

      It all boils down to proper financial planning. Some earn little but can retire while some earn a lot but still cannot retire.

    3. Hi Uncle CW,

      You were my parent's generation. They were very very poor. Sometimes not enough to eat.

  4. I am all for CPF to be locked up. Is a basic safety net that should not be taken out till retirement.

    1. Hi Cory,

      Yes, i agree totally. If no CPF, there would be even more problems.

    2. So glad to see there are still people who see value in CPF instead of bashing it for the sake of bashing.
      Returns could be higher, true but everything has a cost.
      Majority seem to not realise the consequences of higher returns or simply giving them access to their entire savings in one go.

  5. Hi
    The importance of cpf is being undermined by all these unhappiness.
    These populist speeches by the protesters r making the poor and lower income people think that they can take back their cpf. What they do not understand is that the poor and lower middle income group are the ones who will suffer the most if cpf Isis scrapped.

    1. Hi Julian,

      To me, cpf is a good system for the benefit of the country and so as to not burden the next generation. It is a safety net like what the government says. The whole negative sentiment is going nowhere and a lot are not based on facts but rather on emotions. I hope the government can do more to reach out to these people and let them understand. Meanwhile, we shall do our best in helping to spread the real message around.

  6. Yes, it is important to spread the news of cpf benefits.

  7. Hi Jimmy,

    Sorry I accidentally deleted your comment. His comment was that you can't transfer any more to SA account if you've reached the MS but your regular contribution will still be contributed to the SA account even if you've max out the MS. What he said is correct.

  8. Hi,

    Not sure if everyone's knowledge has been updated, but for the CPF loan, the 2.6% interest doesn't go back to your account, its paid to CPF. The interest that you have to pay back to yourself is called the accrued interest, and is payable when you sell your flat. Considering that the first $20k in your OA earns a 3.5% interest, the accrued interest will vary between 2.5% - 3.5%, making your effective interest rate to be 5.1% to 6.1% interest. Also, since interest earned is compounded, the longer the time between using your CPF funds to purchase your flat and selling your flat, the more accrued interest you will have to pay back to your OA account, ie you will be getting less cash on hand.

    1. Hi unluckid,

      The 2.6% interest should be factored into the monthly loans that we have to pay already. You are right in saying the 2.6% is paid to CPF. The interest we have to put back into our own CPF account is indeed the accrued interest that should have been earned over the years.