Is CPF really safe?

Here is a video of Lim Swee Say, a PAP minister reassuring the public about the safety of our Central Provident Fund (CPF) money. It is very interesting to see how an elite likes to condescend to the public by speaking in very bad Singlish and getting his facts wrong(you don't get monthly statements). I also think it is in very bad taste for our millionaire minister to mock those who lost their money in those structured products.

But that is not the point of this post. I wanted to examine the statement about how CPF money is really safe. Because frankly, I am skeptical.

According to Lucky Tan, the Ministry of Finance takes our CPF money to buy bonds from GIC at a 2.5% interest rate. So CPF is lending money to GIC at a low rate. GIC takes your money and use it to invest in more risky assets (common stock like citigroup etc..) . This explains how they make a 9.5% return. However, they do not pass most of those returns back to CPF.

In a nutshell, they are taking risks and keeping most of the benefits of those risk. While you as a CPF holder are bearing the full responsibilities for those risks. Why? If GIC collapses (credit event), all our CPF money will be gone as the CPF will be left with useless bonds. So it is not as fool-proof as they say.

Anyway the real threat of you losing your money is inflation. The fact that inflation is roughly 6-7% per anum, means that you get a guaranteed loss of 2-3% in real terms per year. If they really wanted to help Singaporeans, GIC should give the same rates as corporate bonds which are much higher in the real world(outside Singapore).

Even the disparity between the yield on an online savings account and inflation in the United States is much lower.

For further contrast, let us now see what else is available to American citizens. The US government issues treasury inflation protected securities(TIPS) which anyone can buy, the TIPS pays you regular coupons like a real bond but its principal is adjusted yearly by the consumer price index to account for inflation.

It is true that such gains are taxed by the government but there is a special retirement account available to everybody known as a Roth IRA which makes all your gains tax free. The only problem is that you can put in not more than $5000 a year and can only take out all your gains at 65, although at any time, you can take out any money you have put in penalty free.

Now we know why CPF, like National Service, is forced upon the citizens. Because if subjected to real market forces, they simply would not be an attractive form of retirement savings. Instead, the only things in Singapore that are subjected to market forces are the price of your HDB flat, the price of electricity, the cost of transportation... etc.