Proposals for CPF Changes

I shall propose a series of improvements to the current CPF system.

An introduction to the CPF system: The CPF can be broken down into 4 Accounts: Ordinary Account (OA), Special Account (SA), Medisave Account (MA) and Retirement Account (RA). Each Account serves a different set of purposes. OA may be used for residential properties and full-time local tertiary education. SA may be used for primarily retirement funding only. MA may be used for primarily hospital bills and to purchase insurance policies that cover hospital bills and severe disability. RA is created when one is reaching retirement age, and proceeds in this Account may be withdrawn either directly from the balance or indirectly in the form of annuity pay-outs after the balance had been used to buy an annnuity.

The improvements I propose are:
1) Cap the withdrawal of OA for paying the deposit of residential properties to 80% of OA balance. For example, if a couple each has an OA balance of $18,750, only 80%, or $15,000, may be used to pay the deposit for their flat. The couple, then, would only have $30,000 available from OA to buy their flat. With $30,000 from OA, they can buy a flat that is at most $200,000 in selling/valuation price, because 15% of the price may be paid using OA. They would need to pay another 5% of the price, or $10,000, in cash.

By lowering the cap, we can achieve these positive effects:
A) The above couple would have ($18,750-$15,000) x 2 = $7,500 left in their OA after buying the flat, instead of having a zero balance. This can act as a buffer against shocks such as retrenchment or loss of employment.
B) They would also be more likely to buy an apartment that is more affordable relative to their income level
C) HDB/ the bank giving them the mortgage loan would also be more credit-worthy because the risk of the couple defaulting should be lowered if they took up a smaller loan and have the 20% buffer in their OA.

2) CPF Education Scheme should be extended to include part-time tertiary education including NITEC, polytechnic Diploma and Bachelor's degree programmes offered by UniSIM, local polytechnics and the ITE. Those who have started their family or have a financial commitment that prevents them from having the luxury to study full-time should not be excluded from this Scheme. This is particularly helpful to graduands of polytechnics who wish to take a degree but cannot afford to study full-time.

Beside enabling those who are in the workforce to upgrade themselves, such a change would also allow housewives to upgrade themselves academically by part-time study. This should help them to improve their ability to nurture our next-generation (e.g. by studying a part-time Diploma or Bachelor's in Early Childhood Education in a polytechnic or UniSIM) or to re-enter the workforce after their children have grown up. In order to support the housewives, UniSIM and one or more of our polytechnics should offer part-time, online-supported Diploma and Bachelor's degree programmes (e.g. Early Childhood Education, Accounting and Human Resource Management) catering to their needs.

3) Broaden the CPF-SA investment scheme to allow:
A) more SA should be allowed to be invested. Presently, the first $40,000 cannot be invested and is locked up in the CPF earning an interest of about 4%. In the long term, this rate of return is much lower than many other investment options'. We should not lock more than $20,000 in SA, limiting its growth potential.

Since SA may not be withdrawn until retirement, the time horizon for investment is much longer, meaning it's more suitable (than OA) to invest it in options with higher risk and higher projected returns (of >7%).

B) allow SA to be invested in stocks and pure equity funds for the above rationale that it has a very long time horizon, hence should be invested in higher-risk options. Presently, SA cannot be invested in pure equity funds and stocks; only balanced funds are allowed. The compounding effect of investing SA funds in investments with higher annualised returns is significant in a long period of 20, 30, or more years. Since the Financial Advisers Act had already been enacted to regulate the financial services industry, the government should have more reason to believe that CPF investments would be better managed, and hence derive much better returns in the long term, by the better-regulated professionals and institutions in the industry.

4) Allow low-skilled, >35 workers with 2 or more dependents to make SA Withdrawal for Living Expenses During Approved Training. Low-skilled workers are often stuck in a vicious cycle that prevents them from acquiring the skills they need to end poverty: they live from pay cheque to pay cheque. Drawing a low salary, they have limited discretionary income which may be saved, resulting in them being unable to stop working for the 6 months to 2 years required to complete a training programme.

The government does offer various training courses for them, but can they afford to stop working? Whereas the primary objective of SA is to ensure that CPF members may enjoy a more secure retirement, and whereas for such Singaporeans upgrading their skills is the best way to secure a better livelihood, it makes sense to allow them to withdraw their SA to replace their salary income during their training periods.

To really give these Singaporeans peace of mind during their training, they should be allowed to withdraw a sufficient amount of income to sustain their own and their dependents' living during training. Additionally, if a trainee's OA has insufficient fund to pay for his mortgage loan during his training, his SA should also be allowed to be temporarily used for servicing his loan.

A team of CPF officials should be trained to assess the needs of such Singaporeans and work out a financial plan that would enable them to undergo their training with peace of mind, while preventing abuse of this provision. The applicants should be asked to substantiate the amount they need to withdraw from their SA in order to make ends meet during their training.

5) Allow the use of Medisave in more overseas approved hospitals, nursing homes, clinics and dialysis facilities. This allows Singaporeans with limited cash and CPF savings to choose more affordable options, and others with special needs to seek alternative treatment options overseas.

For example, kidney dialysis may be performed at a much lower cost in neighboring JB, Malaysia. For those who need long-term dialysis, and who don't mind taking frequent bus trips across the Causeway, it might be a more affordable option. HIV drugs, which aren't subsidised here, may be bought at a much lower price in Thailand or even Malaysia. Certain specialist hospitals in China offer TCM-cum-Western-medicine-combined treatments for stroke patients that have attained superior clinical results. Mandarin-speaking Singaporeans who wish to receive such treatments should be allowed to use their Medisave in such Chinese hospitals.

One key point, of course, is that the government should set up a Panel of Experts to accredit such overseas hospitals and facilities to ensure that only the credible ones are accredited to provide Medisave-paid services. By expanding the number of Medisave-approved service-providers beyond our national borders, we can increase competition to the local players, and thereby counter medical inflation and increase our service quality.

6) Include Primary Care in Medisave-Approved Insurance Schemes. By primary care, I mean outpatient treatments by family doctors (i.e. GP) and specialists which don't require hospitalisation or surgical operation. With few exceptions, these are not covered under Medisave and the national medical insurance scheme, Medishield. The government should allow private insurers to offer opt-in medical insurance plans that cover primary care. Those with sufficient Medisave savings should be allowed to use their Medisave to purchase such plans. (They are already allowed to use Medisave to buy private medical insurance plans that cover hospital and surgical expenses but not primary care expenses).

Many chronic diseases, such as diabetes, heart disease, high cholesterol and stroke, which do not require hospitalisation and surgery, can be a heavy burden because patients require treatments and prescribed drugs long-term.

We should encourage Singaporeans to go for regular health screenings and seek treatment as early as possible by allowing them to do so using their Medisave. This would delay or even eliminate the need for much more expensive hospitalisation and surgery, which are usually necessitated by late intervention. Intervention if adopted early enough would improve the quality of life. As the saying goes, a stitch in time saves nine. By excluding most primary care from the Medisave schemes, we are not doing enough to encourage early detection and intervention of serious diseases.

7) RA should be created once Minimum Sum has been accumulated, not only at age 55. Since the purpose of CPF is to ensure that Singaporeans have sufficient fund for retirement needs, but not to lock up our savings for an excessive period, it should strive to not lock up excessive amount of our savings once we have sufficient fund for retirement needs.

By sufficient, I mean the CPF-set "Minimum Sum" or its inflation-adjusted amount. Many Singaporeans have much more CPF savings --sometimes a few times more---than the Minimum Sum, yet face financial problems when they get retrenched, especially in their 40s or 50s. Others opt to 'utilise' their excessive amount of CPF by buying bigger, more expensive flats, since that is the only way they can 'touch' their CPF savings, literally. For both cases, I question the purpose behind locking up excessive amount of our savings in CPF. Why should the retrenched man facing financial problems be forced to keep much more than what he needs for retirement in his CPF? Why should excessive amounts of hot money be availed for the local property market, indirectly causing excessive housing inflation?

Hence, if the purpose of our CPF is merely to meet the objective of ensuring we have sufficient retirement fund, and if the Minimum Sum is what the government assesses as being the sufficient amount, then, rightfully, once a person has combined SA and OA balances that exceed the Minimum Sum, he should be allowed to opt for early retirement. He should be able to open a RA, transfer the Minimum Sum into it from his SA and OA, then be allowed to withdraw any excess amount in his OA and SA. The CPF should only lock up his Minimum Sum compulsorily, nothing more. He should be allowed to withdraw any amount in excess.

Of course, he should also be allowed to keep any excess in his OA and SA if he so chooses, for the additional benefits offered by the CPF Board, such as legal protection from creditors and higher interest rates than banks'. But I don't think he should be forced to have more savings than is required locked up in his CPF.

This provision is particularly important for many Singaporeans in their 40s who get retrenched. If they are allowed to withdraw excessive savings in their CPF accounts earlier, they could well have started a small business with the money. Instead of staying in employment throughout their working life, they could have become an entrepreneur after working for others for 20-30 years. Without this provision, what many of them are doing now is use their excess OA to speculate on the property market by buying a bigger or more expensive property in the hope of making some profits which could be partially kept and spent.

What $387m could do for the needy

In a report, Mr Leong Sze Hian reveals that "Only 3,000 people are on the Public Assistance scheme, which pays a paltry 360 dollars (267 U.S. dollars) a month" and that it was "last disclosed in Parliament that, in a year, 50 percent of applicants were rejected." It was also reported on CNA that the government will have spent S$386 million on the Youth Olympic. I shall not comment on whether I think the government should spend this amount of money to host the YOG. But I shall show what the same amount could have done if it were spent in another area, such as helping needy Singaporeans.

To put this amount in perspective, I shall use an example of what it can do for 3,000 persons on a sustainable basis if it were deposited in a CPF account paying 4% interests per year. Since the CPF is what most Singaporeans are familiar with, such an example should be easier to understand. At this writing, the CPF pays an interest of 4% per year for Medisave, Special and Retirement accounts, so I shall take this rate as the basis of my illustration. CPF members are allowed to make withdrawals from these accounts for a wide range of approved investment, healthcare and retirement income purposes.

In the following spreadsheet, we can see how much each of these 3,000 persons could receive in withdrawals every month if:
1) We start with an amount of $387m in the morning of 01 Jan, 2010
2) At afternoon, we withdraw 3.6% of the balance ($13,932,000) and pay it to the 3,000 persons once a month over the 12 months in 2010.
3) With this $13,932,000, we can afford to pay each person $387/month in the year, 2010
4) After making the $13,932,000 withdrawal, the fund is reduced to $373,068,000 at the end of the day, 01 Jan, 2010
5) At the end of the year, on 31 Dec, 2010, this balance accumulates interests of 4%, so it grows to $387,990,720
6) In the following year, on 01 Jan 2011, we make another withdrawal. This time, we withdraw 3% more than what we did in 2010. We withdraw $13,967,666. In subsequent years, we also increase our withdrawal by 3% over the previous year.
7) This allows us to pay each person $387.99/month in 2011. The 3% increment is to cushion the inflationary effects. In subsequent years, the monthly amount that each person may receive also increases in this way, by 3% over the previous year.
8) This fund can sustain itself if we assume an interest rate of 4% and a 3% annual increase in withdrawal and monthly pay-out. 100 years later in 2110, the fund size grows to $499,744,802, from the $387,000,000 it was started with in 2010.

Year	Balance on Jan 01	Withdrawal Amount on Jan 01, starting with 3.6% of $387m (increases by 3% pa)	Withdrawal distributed to 3000, each gets this mthly)	Balance after Withdrawal	Balance plus 4% interests on Dec 31
2010	$387,000,000	$13,932,000	$387.00	$373,068,000	$387,990,720
2011	$387,990,720	$13,967,666	$387.99	$374,023,054	$388,983,976
2012	$388,983,976	$14,003,423	$388.98	$374,980,553	$389,979,775
2013	$389,979,775	$14,039,272	$389.98	$375,940,503	$390,978,123
2014	$390,978,123	$14,075,212	$390.98	$376,902,911	$391,979,027
2015	$391,979,027	$14,111,245	$391.98	$377,867,782	$392,982,494
2016	$392,982,494	$14,147,370	$392.98	$378,835,124	$393,988,529
2017	$393,988,529	$14,183,587	$393.99	$379,804,942	$394,997,140
2018	$394,997,140	$14,219,897	$395.00	$380,777,243	$396,008,332
2019	$396,008,332	$14,256,300	$396.01	$381,752,032	$397,022,114
2020	$397,022,114	$14,292,796	$397.02	$382,729,317	$398,038,490
2021	$398,038,490	$14,329,386	$398.04	$383,709,105	$399,057,469
2022	$399,057,469	$14,366,069	$399.06	$384,691,400	$400,079,056
2023	$400,079,056	$14,402,846	$400.08	$385,676,210	$401,103,258
2024	$401,103,258	$14,439,717	$401.10	$386,663,541	$402,130,083
2025	$402,130,083	$14,476,683	$402.13	$387,653,400	$403,159,536
2026	$403,159,536	$14,513,743	$403.16	$388,645,792	$404,191,624
2027	$404,191,624	$14,550,898	$404.19	$389,640,726	$405,226,355
2028	$405,226,355	$14,588,149	$405.23	$390,638,206	$406,263,734
2029	$406,263,734	$14,625,494	$406.26	$391,638,240	$407,303,769
2030	$407,303,769	$14,662,936	$407.30	$392,640,833	$408,346,467
2031	$408,346,467	$14,700,473	$408.35	$393,645,994	$409,391,834
2032	$409,391,834	$14,738,106	$409.39	$394,653,728	$410,439,877
2033	$410,439,877	$14,775,836	$410.44	$395,664,041	$411,490,603
2034	$411,490,603	$14,813,662	$411.49	$396,676,941	$412,544,019
2035	$412,544,019	$14,851,585	$412.54	$397,692,434	$413,600,132
2036	$413,600,132	$14,889,605	$413.60	$398,710,527	$414,658,948
2037	$414,658,948	$14,927,722	$414.66	$399,731,226	$415,720,475
2038	$415,720,475	$14,965,937	$415.72	$400,754,538	$416,784,719
2039	$416,784,719	$15,004,250	$416.78	$401,780,469	$417,851,688
2040	$417,851,688	$15,042,661	$417.85	$402,809,027	$418,921,388
2041	$418,921,388	$15,081,170	$418.92	$403,840,218	$419,993,827
2042	$419,993,827	$15,119,778	$419.99	$404,874,049	$421,069,011
2043	$421,069,011	$15,158,484	$421.07	$405,910,527	$422,146,948
2044	$422,146,948	$15,197,290	$422.15	$406,949,658	$423,227,644
2045	$423,227,644	$15,236,195	$423.23	$407,991,449	$424,311,107
2046	$424,311,107	$15,275,200	$424.31	$409,035,907	$425,397,343
2047	$425,397,343	$15,314,304	$425.40	$410,083,039	$426,486,361
2048	$426,486,361	$15,353,509	$426.49	$411,132,852	$427,578,166
2049	$427,578,166	$15,392,814	$427.58	$412,185,352	$428,672,766
2050	$428,672,766	$15,432,220	$428.67	$413,240,546	$429,770,168
2051	$429,770,168	$15,471,726	$429.77	$414,298,442	$430,870,380
2052	$430,870,380	$15,511,334	$430.87	$415,359,046	$431,973,408
2053	$431,973,408	$15,551,043	$431.97	$416,422,365	$433,079,260
2054	$433,079,260	$15,590,853	$433.08	$417,488,407	$434,187,943
2055	$434,187,943	$15,630,766	$434.19	$418,557,177	$435,299,464
2056	$435,299,464	$15,670,781	$435.30	$419,628,683	$436,413,831
2057	$436,413,831	$15,710,898	$436.41	$420,702,933	$437,531,050
2058	$437,531,050	$15,751,118	$437.53	$421,779,932	$438,651,129
2059	$438,651,129	$15,791,441	$438.65	$422,859,689	$439,774,076
2060	$439,774,076	$15,831,867	$439.77	$423,942,210	$440,899,898
2061	$440,899,898	$15,872,396	$440.90	$425,027,502	$442,028,602
2062	$442,028,602	$15,913,030	$442.03	$426,115,572	$443,160,195
2063	$443,160,195	$15,953,767	$443.16	$427,206,428	$444,294,685
2064	$444,294,685	$15,994,609	$444.29	$428,300,076	$445,432,079
2065	$445,432,079	$16,035,555	$445.43	$429,396,525	$446,572,386
2066	$446,572,386	$16,076,606	$446.57	$430,495,780	$447,715,611
2067	$447,715,611	$16,117,762	$447.72	$431,597,849	$448,861,763
2068	$448,861,763	$16,159,023	$448.86	$432,702,739	$450,010,849
2069	$450,010,849	$16,200,391	$450.01	$433,810,458	$451,162,877
2070	$451,162,877	$16,241,864	$451.16	$434,921,013	$452,317,854
2071	$452,317,854	$16,283,443	$452.32	$436,034,411	$453,475,787
2072	$453,475,787	$16,325,128	$453.48	$437,150,659	$454,636,685
2073	$454,636,685	$16,366,921	$454.64	$438,269,765	$455,800,555
2074	$455,800,555	$16,408,820	$455.80	$439,391,735	$456,967,405
2075	$456,967,405	$16,450,827	$456.97	$440,516,578	$458,137,241
2076	$458,137,241	$16,492,941	$458.14	$441,644,301	$459,310,073
2077	$459,310,073	$16,535,163	$459.31	$442,774,910	$460,485,906
2078	$460,485,906	$16,577,493	$460.49	$443,908,414	$461,664,750
2079	$461,664,750	$16,619,931	$461.66	$445,044,819	$462,846,612
2080	$462,846,612	$16,662,478	$462.85	$446,184,134	$464,031,499
2081	$464,031,499	$16,705,134	$464.03	$447,326,365	$465,219,420
2082	$465,219,420	$16,747,899	$465.22	$448,471,521	$466,410,382
2083	$466,410,382	$16,790,774	$466.41	$449,619,608	$467,604,392
2084	$467,604,392	$16,833,758	$467.60	$450,770,634	$468,801,460
2085	$468,801,460	$16,876,853	$468.80	$451,924,607	$470,001,591
2086	$470,001,591	$16,920,057	$470.00	$453,081,534	$471,204,795
2087	$471,204,795	$16,963,373	$471.20	$454,241,423	$472,411,080
2088	$472,411,080	$17,006,799	$472.41	$455,404,281	$473,620,452
2089	$473,620,452	$17,050,336	$473.62	$456,570,116	$474,832,920
2090	$474,832,920	$17,093,985	$474.83	$457,738,935	$476,048,493
2091	$476,048,493	$17,137,746	$476.05	$458,910,747	$477,267,177
2092	$477,267,177	$17,181,618	$477.27	$460,085,558	$478,488,981
2093	$478,488,981	$17,225,603	$478.49	$461,263,377	$479,713,913
2094	$479,713,913	$17,269,701	$479.71	$462,444,212	$480,941,980
2095	$480,941,980	$17,313,911	$480.94	$463,628,069	$482,173,192
2096	$482,173,192	$17,358,235	$482.17	$464,814,957	$483,407,555
2097	$483,407,555	$17,402,672	$483.41	$466,004,883	$484,645,078
2098	$484,645,078	$17,447,223	$484.65	$467,197,856	$485,885,770
2099	$485,885,770	$17,491,888	$485.89	$468,393,882	$487,129,637
2100	$487,129,637	$17,536,667	$487.13	$469,592,970	$488,376,689
2101	$488,376,689	$17,581,561	$488.38	$470,795,128	$489,626,934
2102	$489,626,934	$17,626,570	$489.63	$472,000,364	$490,880,378
2103	$490,880,378	$17,671,694	$490.88	$473,208,685	$492,137,032
2104	$492,137,032	$17,716,933	$492.14	$474,420,099	$493,396,903
2105	$493,396,903	$17,762,289	$493.40	$475,634,615	$494,659,999
2106	$494,659,999	$17,807,760	$494.66	$476,852,239	$495,926,329
2107	$495,926,329	$17,853,348	$495.93	$478,072,981	$497,195,900
2108	$497,195,900	$17,899,052	$497.20	$479,296,848	$498,468,722
2109	$498,468,722	$17,944,874	$498.47	$480,523,848	$499,744,802
2110	$499,744,802	$17,990,813	$499.74	$481,753,989	$501,024,148

Using the above assumptions to illustrate, with $387m, we could provide 3,000 needy people with a monthly income of $387+3% increment every year perpetually.