The Real CPF Scam
I recently read Part I and Part II by Leong Sze Hian and Roy Ngerng on the Central Provident Fund of Singapore and commend them for their level of detail and analysis. I would urge everyone to read and re-read their work to understand what is going on financially in Singapore. Rather than revisiting or reanalyzing their work, I would like to emphasize a couple of points which I believe are of central importance to understand the financial management of Singapore.
First, the CPF acts as an implicit tax on Singaporeans forcing you into lower earning CPF investments. Currently, CPF returns 2.5-4% beneath returns on other assets and beneath the rate of inflation incurring large losses on savers. What makes this forced saving is that it is regressive in nature. In other words, it penalizes the poor more than the wealthy. This is simply immoral. Ask yourself whether the wealthy in Singapore who make little if any forced CPF contributions would accept earning 2.5% on their investments?
Second, given that CPF contributions are invested with either GIC or Temasek, the government is essentially confiscating all returns above the CPF rate of return. This is best noted in Chart 6 of Part II. The implication here is that the Singaporean government is keeping an enormous amount of money using the retirement savings of its citizens.
Let me try and make this concrete and use a hypothetical scenario. I am an investment manager and you have money for retirement savings you want to invest. Like any informed consumer you ask me how much I will charge you to be the investment manager. I reply, if you invest your money with me, I will keep most of the money you make and if I lose money, well you lose. Would you invest your hard earned money with anyone who gave you that sales pitch?
If this one-sided deal sounds too absurd to believe then look no further than Temasek Holdings and GIC. While there are valid unanswered questions about the returns of Temasek which have been written about in great detail, all Temasek money belongs to the citizens of Singapore not the government, executives, or other special parties.
Public surpluses and CPF capital saved by the citizens of Singapore is used to fund Temasek and GIC. Yet, the government of Singapore only pays savers 2.5-4% despite claims of earning 7 and 17% respectively between GIC and Temasek. That claimed 7% earned by GIC in USD belongs to CPF savers and the people of Singapore. The claimed 17% earned by Temasek in SGD belongs to the people of Singapore who provided the public surpluses and capital investment to build companies.
CPF contributions are borrowed to finance investment. The CPF saver receives a guaranteed 2.5-4% while the borrowing party, GIC or Temasek receive all returns in excess of 2.5-4%. The government via GIC and Temasek is confiscating returns that belong to CPF savers and taxpayers.
This is not an insignificant amount of money that the government of Singapore via CPF contributions is confiscating for its own use. As I estimated here, an average Singaporean earning an average wage with CPF contributions and CPF interest would have approximately $537,000 at the end of their working career. However, if we took those contributions and they earned GIC interest, they would now have $799,000. If they earned the Temasek rate of return the average Singaporean would have $4 million SGD in the bank after a career of hard work.
That means that if the average Singaporean was not confined to earning below market returns in CPF savings, they would be $300,000-3,500,000 richer! Put another way, the Singaporean government is keeping all money in excess of the 2.5-4% CPF return from your savings. Put yet another way, this is an implicit wealth tax on the average Singaporean worker amounting to $7,500 annually or more than 10% of per capita GDP.
The most important point is this: CPF is your money and investment returns are the investment returns of hard working Singaporean savers. The investment returns from CPF capital and public surpluses do not belong to the government, the PAP, Temasek, or GIC but to the Singaporean people.
CPF, GIC, and Temasek returns are not the governments money. They belong to the savers and tax payers of Singapore who have made it a great country. Remember: this is your money.
Note 1: Part of this post is from a previous post.
Note 2:Here is a spreadsheetthat details the calculations made here.
Note 3: My apologies for not writing more pertaining to Singapore recently, I have been quite busy and pulled in numerous different directions
Note 4: I have a long awaited update to my original paper on Singapore and Temasek that I am working on and hope to release before the end of the year.