TOTD: Back to Fundamental of CPF

Thought of the Day -
Back to Fundamental of CPF

I was talking to a friend over CPF issues recently and it seems that I have some of the more "radical" thought over CPF.

CPF was supposed to be meant for retirement financing but in the end, it becomes some sort of "piggy bank" for PAP as well as Singaporeans for many purposes.

First, PAP allowed you to use CPF to buy properties. Most Singaporeans are happy with such arrangement as they feel that they will be able to own a property in their lifetime. I also used up all my CPF available to buy property but that is because I do not trust PAP with my money. This is another issue for another day.

Then PAP says that you can use your parents' CPF or your own CPF to pay for higher education. On top of that, you can use your CPF to pay for your parents, children, brothers, sisters etc medical fees!

Singaporeans thought that these are all "good arrangement" but the truth is, it will create two/three problems:

1) Over consumption of housing, education and medical care
2) Depleted CPF for your retirement
3) Kicking the can down the road

On top of that, it will create other problem of another dimension:

1) Over reliance on CPF money for anything, everything
2) Weakening of Financial management skills and planning
3) Total lack of saving habits

Most financial planners will tell you that you will need to save a certain percentage of your salaries every month for future retirement. It is normally set at 20% to 25% of your income, depending on your income level.

But due to PAP's conflicting policy needs, it has totally messed up the CPF system and in the end, it resorts to setting some unrealistic arbitrary "minimum sum" which many lower income earners could not meet mainly due to the over consumption of housing. i.e. they were allowed to buy properties which they couldn't afford and shouldn't buy in the first place, if they were to stick to the 25% savings rule for retirement!

The only right way to due with this situation is set the saving rate for CPF at 25% (contribution of employee and employer add together) while banning people from using it for just any other thing, especially for housing and medical fees for other family members!

Employer's CPF contribution should stay at 17% while employees' contribution should be cut from 20% to 8%. This would mean that employees or Singaporeans will have additional 12% of their income in cash. If they need to buy property and use it to pay their mortgage, they can use this additional 12% cash to do so. However, they should not use any CPF money for mortgage payment.

For young people, they should start to learn how to do financial planning and I reiterate this point that basic financial planning concepts and knowledge should be taught in the common school curriculum! They should make it a habit to save for down payment for their first property purchase and plan for their mortgage payment as well. In general, for middle-lower income earners, they should not be using more than 35% or 40% of their income to pay for mortgage. This will prevent them from over-consuming housing and it will keep property prices in check.

If they intend to start their own little business, they could save up these extra 12% of their income for future business plan!

Our property prices have been artificially pushed up due to the excess liquidity which PAP allows Singaporeans to use CPF in doing so. This applies to prices of Medical care as well. It is precisely that Singaporeans do not "feel the direct pinch" from using their CPF money to pay for Medical care or housing, they tend to not mind spending excessively on these products and services. Of course, HDB and hospitals alike, are also happy to charge higher prices because "it is affordable" to Singaporeans due to the excess liquidity provided by CPF!

PAP has abused the system in skewing the "affordable" argument. It is not affordable when Singaporeans are paying more than 35% or 40% of their salary for a 30 year mortgage. That is totally rubbish argument of affordability because if you purchase your property at the age of 30, by 60 years old, you will have very little left in your CPF account for retirement!

The proper way of inducing better financial management by Singaporeans is to make them manage their finances according to the fixed CPF retirement saving rate (which could be adjusted according to income level) so that they would make better rational choice in their spending in housing, education as well as medical care.

This may sound "radical" to many unthinking Singaporeans and they may just jump up and down denouncing such plan but this is the only right thing to do in the face of ageing population.

Goh Meng Seng