TR EMERITUS

MP Zaqy Mohamad In Parliament yesterday (26 May), some MPs, including PAP MPs, asked for CPF returns to be improved. They said it is timely to review the CPF scheme in order to enhance retirement adequacy. Zaqy Mohamad, PAP MP for Chua Chu Kang GRC, kicked off the debate on the President's address. He said: We should find ways to reduce citizen's unhappiness with the changing 'goal-posts' of the Minimum Sum amount. Only half of Singaporeans today are able to meet their Minimum Sum. Thus, I can certainly understand the anxiety and fear given the barriers. So much of the frustration I encounter with the Minimums Sum or the Retirement Account after a certain age is due to the inflexibility when one falls into difficulty in the use of funds to pay for mortgage or change in property, especially if they have lost their job, or are required to take a lower pay or have drawn down their CPF fully, in their senior years. I hope that a comprehensive review can provide a more positive outcome for the CPF to provide better retirement adequacy. Mr Zaqy suggested ways to improve returns on CPF savings: Perhaps the CPF can consider a Government-backed investment plan that tracks inflation, above the existing Ordinary Account and Special Account interest rates. The existing CPF-approved investment funds are left to the market, which often has certain financial risks beyond the understanding of the ordinary CPF contributor. A Government-led plan may come somewhere in between, in that it is a trusted plan, with standard terms and the objective of tracking inflation to protect one's savings for the long-term. PAP MP for Holland-Bukit Timah GRC Liang Eng Hwa also talked about improving the CPF scheme. He said, "I fully support further improving the CPF savings and the CPF life annuity schemes, as well as developing more options for Singaporeans to unlock the value of their homes." NCMP Lina Chiam suggested alternatives to raising the Minimum Sum: While the government has tried to ensure affordable and quality health care, it has recently raised the CPF minimum sum to $155,000. This makes retirement tougher. Many Singaporeans are also deeply unhappy about the compulsory annuity CPF scheme. We need alternative retirement schemes to build an inclusive society. Singapore needs a complex mix of policies, such as alternative investment options to ensure a sufficient pool of funds in CPF. A non-mandatory CPF annuity scheme and private annuity schemes should also be considered. NMP Tan Su Shan, who is a senior bank executive, suggested having regular savings plans that are tied to bonds or fixed-income unit trusts that pay regular dividends. Such a "diversified pool of higher interest-bearing instruments" will ensure that inflation does not erode the value of CPF savings which are not invested, she said. "Some of these instruments are already available but due to the lack of knowledge, many Singaporeans have not availed themselves of these savings instruments," she added. The interest rates are 2.5% for savings in the Ordinary Account, and 4% for the Special, Medisave and Retirement Accounts. An extra 1% is paid on the first $60,000 of a CPF member's combined balances. But Singapore's inflation rate has averaged 4.1% over the last 3 years, Ms Tan noted. She has previously urged the government to issue inflation-linked bonds, but she lamented, "We can't seem to do this." 2 years ago during a debate in Parliament [Link], DPM Tharman actually said that “CPF interest rates have provided reasonable returns, on top of inflation”: We have to take a long-term perspective on CPF returns. In fact, over the long-term, CPF interest rates have provided reasonable returns, on top of inflation. Over the last 10 years, for instance, the return on Special, Medisave and Retirement Account (SMRA) monies, after accounting for inflation, was 2.5% per year (annualised real rate of return on CPF SMRA from 2001 – 2010, with 1% Extra Interest). Over the last 20 years, it was 2.2% per year, also after accounting for inflation. This was despite the extra 1% Interest on the first $60,000 of CPF balances only starting in 2008. The compounding effect of this extra 1% interest, on top of long term bond rates, will over the long run help shore up members’ CPF savings – especially for those in the lower income group. Current interest rates are very low, because of easy monetary policies in the US. This may persist for another two years, but few people expect such low interest rates to stretch over the longer term. We should also bear in mind that a large proportion of CPF savings of Singaporeans is invested in housing, which is a hedge against inflation. If a typical 55-year old median earner considers the rate of return on his total CPF savings – comprising not only what he earns on his CPF balances but also the returns on the CPF savings he put into his house he would have experienced a total rate of return of about 6% to 8%, or 4% – 6% in real terms, per year, on average, until he reaches 55. It is not known what the DPM will say, now that inflation has outstripped average CPF returns in the last 3 years. In a recent survey conducted by Aviva, more than half of Singaporeans (54%) said they would like to retire before the age of 60, but only a third (36%) believe they will actually be able to do so. Nearly half said they will have less than $2,000 per month based on their current financial plan for retirement. The Aviva Consumer Attitudes Survey was conducted in 13 countries around the world, and included 1,000 respondents in Singapore.  Read More →

On 21 May 2014, the Government announced its plans to overhaul the sector by shifting from the existing privatized model to a "Government contracting model". This outsourcing of transport operation is said to promote greater efficiency among operators which will lead to better bus services over time. The Government also promised that it will continue to ensure fares remain “affordable” for commuters. I would like to shed some light and debunk the myths of this model, and point out that this method of outsourcing is no different from the existing privatized model. Cheaper and better? Will outsourcing public transportation mean more efficient and cheaper services? Private companies exist to make money, public services exist to serve the public. Making a system where making money trumps good service is just a bad idea. Often corners will be cut, and this can greatly impair service quality and maintenance of vital assets. This outsourcing requires substantial administrative resources for monitoring and oversight. Substantial time and personnel are necessary to adequately monitor contracts, especially those involving essential governmental functions. Due to the possibilities of systematic abuse by large corporations, precious resources and the constant need for strong supervision from the government is required. These hidden and indirect costs, can make privatisation more expensive than in-house services for governments. If governments don't dedicate sufficient personnel and time to monitoring contracts, they run a high risk of poor contractor performance and wasting large amounts of money. In December 2011, the government commissioned a Committee of Inquiry into the state of breakdowns and disruptions of the train services. There have have been many instances, where private contractors failed to deliver, leaving communities without vital services. To make matter worse, it can be very expensive and time-consuming to alter contract terms or cancel a contract. Taxpayers can be stuck with legal expenses when companies or government file lawsuits seeking greater payment. Additionally, contract cancellation can lead to service interruptions or loss of access to public assets during the transition period. Some believe that this model allows for more precise budgeting, since the inflow or outflow of money appears fixed once a contract with a private entity is signed. But hidden costs and cost overruns can significantly distort these figures, market circumstances can reverse the estimates, and ripple effects of outsourcing can increase unexpected areas of governmental budgets. National security There are public services such as water and power supply, national defence, telecommunications that should not be outsourced to private entities for reasons of national security. Public transportation is one of these services that, in the wrong foreign hands, can be vitally damaging in a national crisis. Adding stress to our market Private companies naturally seek to maximise profits. Coupled by the absence of minimum wage and retrenchment insurance, experienced staff or locals will be cut for lesser skilled and far less paid foreign worker. The profit motive will also cause the quality of the service to go down while the price remains high. With good marketing and controlled media, the customers can be kept ignorant of the diminishing quality while being assured that the products are better than ever. Outsourcing could also lead to monopolies of the services under control of private companies. This is bad because the motive of profit (being stronger than the motive to help people) would give companies the incentive to provide a deteriorating service while continuing to raise prices. A good example is the privatization of water in Bolivia: the price of water increased and eventually became unaffordable for the citizens. The private sector should remain private, without government interference. Businesses should function with very limited government restraints. But public services, services for the common good, should remain in the hands of the state. The politics If the public service goes wrong, the people can always demand that the government fix it. With a private corporation running the service, it is easier for the government to push the blame to the company and perhaps levying a fine which is often treated as a cost that is passed on to the customer. This is already happening even with the semi-private SMRT. The government will only be too eager to pass the blame to a private company. Privatisation coupled by non-transparent governance can lead to corruption that undermines public interest. Political representatives can become beneficiaries of contracts awarded to private companies where the decision is based more on insider connections rather than the quality of the company. Privatisation of public transport also opens up the possibility that a ruling party, upon losing an election, can influence companies whose leaders are part of its crony-network to disrupt services or break their contract, causing a nation-wide disruptions of service. Conclusion Private companies have the primary goal of making money, while government has the primary goal of serving its citizens and creating a better society. If money were the primary goal of the government, citizens would come second to profits. A government's focus should be on the needs of the community, not businesses. Alvin Ong * Alvin Ong is a member of the Young Democrats and coordinates the technical communications of the Singapore Democratic Party's communications unit.  Read More →

I visited Mr Roy Ngerng's blog after reading reports of his allegation that Central Provident Fund savings were misappropriated ("PM Lee demands apology and compensation from blogger"; last Tuesday). Most of the points he raised were without merit and probably reflected a lack of understanding of how complex financial systems work. The CPF is a national savings programme and cannot be managed like an aggressive hedge fund, which takes on higher risks to secure better returns. What would happen if the CPF scheme collapses due to losses incurred by investing in riskier instruments? It would be unfair to members who prefer a risk-free environment for their CPF funds. Members with higher risk appetites have the option of investing their CPF funds in equities, unit trusts and other instruments. It is also unwise to correlate CPF returns to the returns generated by the Government of Singapore Investment Corporation (GIC). Some think that as GIC has achieved higher returns than the CPF over the last few decades, funds in the latter could be managed in the same way. Others feel that if GIC uses CPF funds either directly or indirectly to invest, then CPF members should be entitled to the returns. If the CPF Board places the money in a bank, and the bank lends to GIC, these are separate transactions. It is not a case of the originator of the funds deserving the returns just because it provided the liquidity. We should stop trying to link GIC and the CPF as they are different entities with different objectives and levels of accountability. Understandably, raising the CPF Minimum Sum is not a popular move among Singaporeans, including myself. However, we have to recognise that in running a national savings programme, the Government has to ensure that it achieves its intended objective - to meet the members' basic living needs when they retire. If the full CPF balance is returned to members at age 55, some may squander away the funds and fall into the poverty trap. Government welfare systems would be needed to take care of them and taxes will have to be raised to fund the schemes. Would the working population accept this? Is it sustainable? Also, it is not feasible to have greater transparency for our sovereign wealth funds. Doing so could reveal areas of vulnerability that could open the country to the risk of speculative attacks on its currency and financial systems. These funds already have robust internal or even external auditing systems to ensure functional integrity is being upheld. I hope public bloggers can differentiate between "perceptions" and "truths", which have to be based on evidence. Jason Soon Hun Khim * Letter appeared in ST Forum (27 May). Editor's note: An online search shows that Mr Soon has written to ST Forum at least twice before: Sustainable policies keep S'pore relevant, 8 May 2014 - http://www.straitstimes.com/premium/forum-letters/story/sustainable-policies-keep-spore-relevant-20140508 New CPF rates are fair and reasonable, 25 Sep 2007 - http://eresources.nlb.gov.sg/newspapers/Digitised/Article/straitstimes20070925-1.2.47.1.aspx  Read More →