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The CPF is a national Ponzi scheme!

Thursday, February 12, 2015

"The CPF is the biggest Ponzi scheme in Singapore and it is run by the government!"

Heard of this before?

Now, what actually is a Ponzi scheme?

A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop. (Source: Investopedia)

An important characteristic of a Ponzi scheme is the almost continuous need for new investments (contributions) from either new or existing investors. 

So, it is unheard of to have a bona fide Ponzi scheme rejecting investments (contributions).

I made a miscalculation last year and because of that I received a letter from the CPF Board recently. 

See for yourself:

So, is the CPF a national Ponzi scheme?

I don't know. You tell me.

Central Provident Fund (CPF) members will be able to grow their retirement savings further next year as the Government will raise interest rates on account balances, the salary ceiling for contributions and contribution rates for older workers.

An additional 1 per cent interest will be applied to the first $30,000 of CPF savings for those aged 55 and above next year, on top of the existing 1 per cent extra interest on the first $60,000 of savings. 

This means that the first $30,000 in Special, Retirement or Medisave accounts can earn up to 6 per cent interest.

(Source: The Straits Times, 23 Feb 15.)

Related post:
CPF: Something light and something purple.


KC said...

I made a miscalculation as well and received a similar letter on my refund. However, my letter noted the refund would occur 'within the next 14 days' instead of your 'by Feb 2015'. My letter was dated 29 Jan 2015.

AK71 said...

Hi E H,

Then, we must give the CPF Board top grade for trying to inject some creativity in letter writing. ;p

Mao Mao said...

Just curious. Are the excessive refunds interest-free?

AK71 said...

Hi MaoMao,

No interest is paid on excess VC. So sad. :_(

AK71 said...

My comment in FB:

If we are rational, it is hard to argue against the merits of the CPF system and it is hard to argue against the merits of having an annuity that will pay us an income for life from age 65.

I have blogged about the matter extensively and also explained how much of the money in my CPF-SA is actually contributed by the government and this proportion will increase as I age. I will get an income for life from age 65 and anything in excess of the minimum sum, I can withdraw from age 55. Do we see anything wrong here?

If people are rational, they will see the good that is in the CPF system. Unfortunately, like Mr. Market, we cannot depend on everyone to be rational.

Many (but not all) who cried out for their CPF money to be returned to them were probably less than prudent financially in their younger days. Having made mistakes in the past, they should not make another mistake now. They should also do their children a favour and not propagate negativities about the CPF and prevent their children from enjoying the benefits of (risk free) compound interest which I have amply demonstrated to have worked for me.

1. A lot of money in my CPF-SA is from the government.
2. Don't be stupid to top up your CPF-SA!
3. If I had done this, I would have hit the minimum sum too!

AK71 said...

From my FB wall:

Lvin Yong:
If people are rational, they would also see that the CPF is a form of deferred tax where money is taken and kept away from them while they are forced to accept a low level of return which hardly covers historical inflation. CPF also does not need approval from their members on the class and type of investments they choose to pursue.

If people are rational, they would realise that the minimum sum was not part of the bargain when the CPF Board was first constituted. They would also realise that the steady increase of the retirement age and the mimimum sum over the years could be a potential red flag.

Although the CPF may have work wonders for some of their members since its inception, mainly due to the magic of compounding, their members should take note that the lack of significant control they have over their CPF monies implies that they have to bear a heavy opportunity cost when Mr Market presents an opportunity but members finding themselves being unable to take advantage of it due to cash being locked in the CPF account.

Assi AK:
I guess people who are against the changes made to the CPF in the past would have to be supremely confident of their ability to manage their own money and to beat inflation year after year. (Remember, hindsight doesn't count.) I wonder if anyone believes that most people would be able to do that. So, if we are rational, we would realise that the changes to the CPF in the past are for the good of the majority of the population.

I don't think we have to be rational to realise that the minimum sum was not part of the original concept. We just need a good memory. However, as healthcare improves and as people are living many more years beyond age 55, rational people would have realised that the changes made sense.

During the GFC, I utilised a percentage of the money in my CPF-OA to invest in certain stocks which helped to grow my OA. Granted that not 100% of the money could be utilised but, again, the rational would do well to remember that the CPF money is a fail safe and primarily a basic safety net. What if things had gone horribly wrong with our investments?

If we do not trust a system, we will find it hard to accept it. Ask why don't we trust the system. Examine the reasons rigorously and see if they really hold water.

AK71 said...

Lvin Yong:
Im not sure if its accurate to say that money in the CPF is "fail-safe". If there is one thing the GFC taught us, it would be that no financial institutions in the world can be assumed to be "fail-safe". Lehman brothers was suppose to be a AAA institution but still failed anyway.

Post GFC, CPF has further tightened the limits oh how one can use their CPF monies. Stock purchases are now limited to just 35% of your CPF monies. Going forward, withdrawing your CPF monies is not just getting more difficult but growing your OA as well.

I suppose its hard to justify a system that requires constant fixing and adjustment as one that is stable and consistent. An inconsistent system is not going to find much trust with their rational members eventually.

Assi AK:
The CPF is a fail safe because the money is used to buy AAA rated bonds issued by the government of Singapore. If the CPF should go kaput, it would mean only one thing. In such an instance, the S$ would be worthless. Everyone should make a beeline for UOB's gold counter to buy as many gold bullion coins as they can afford to. ;p

I think the GFC gave the Singapore government a shock too. The paternalistic streak in them probably thought it wise to restrict further the use of the CPF-OA for investments. The benefits of such a tightening measure, I agree, is highly debatable although the intention is good.

I also agree with you that the constant changes in the past (even though they made good sense) are a strong reason why there is a lack of trust in the system. Hopefully, the system has matured and will gain popular acceptance over time.

Ray said...

Hi ak, I wondering for someone who never contributed to cpf as he was self employed would it make sense to put lump sum money into the cpf now that he's going to retire (let's assume he is 60)? I looked at the cpf life scheme, it would be worth it is the person live very long and enjoy the monthly payouts but touch wood if he should die by 65, the bequest would be much lesser than the lump sum he would have deposited at 60. Any thoughts.

Sillyinvestor said...

Hi AK and Lvin,

While not exactly chronic, I do think CPF has a trust issue.

I am not saying the system cannot be dynamics and changes with the time, but guideline like to take into consideration CPF and STANDARD OF LIVING changes is really too vague a principle and especially so for the later.

I will make sure of it, but seriously, I am not sure if the keeper of the system when my time comes will have my retirement interest at heart.

AK71 said...

Hi Ray,

No one knows how many years we would continue to live upon retirement. However, everyone knows that he would need a dependable and meaningful income in retirement.

This is where an annuity comes in. The CPF Life is probably the best annuity there is out there.

I think we should worry about having that income in retirement first and not worry about leaving any money behind when we leave this world. :)

Ray said...

Taking about ponzi, the old folks are saying govt is worried that too many old people are dying and are worried that the large sum of cpf going to be withdrawn for their beneficiaries when they die. That's why now they come up with new plans to trick purple into putting more money in, so that they can continue to payout to the current batch. That's exactly ponzi! 😃

AK71 said...

Hi Mike,

Yes, the issue of trust or a lack of it is a valid one but it is also mostly emotive and irrational. Of course, when we get emotional, our ability to think rationally is often compromised. -.-"

The government must continue to do a better job at communicating with the people and they should try other channels other than the official ones. Skeptics automatically switch off or even make derisive remarks when they see something in the official channels.

Like in any relationship, trust takes time to build. I hope the government will continue to do better.

An said...

Hi Ak, for discussion and learning purpose, say u are 55 years old, has 240k in CPF, will you go for Enhanced or Full Retirement Sum?

Assuming you do not have war chest or a lot of spare cash lying around to be activated.

Will you draw out the 80k (diff btw ERS and FRS) to self-invest in reits and blue chips of decent value?
Or have you already answered this and I missed out on tapping on your grey cells?

Thank you.

AK71 said...

Hi Andy,

If I were 55 and had $161,000 in my RA, what would I do if I only had another $80,000 of cash lying around (either in my bank account or OA)? Would I go for the ERS? The answer is "no".

I would only go for the ERS if I had much more than $80,000 in spare cash. It is not even about using that $80,000 for investments. We must remember that CPF Life starts paying only from age 65. I would need to have some near money from age 55 to 65. :)

An said...

Aiyo, you trying to evade my question.

Let me pin you down ;-)
This soon to retire uncle thinks he has enough to last that 10 years plus he also continues to draw a modest salary. (Pls dun add in any more variable like take the 80k to pay off 5% housing loan)

I think for the average Joe, this will be the dilemma. To keep another 80k for another decade or to take out in order to seek higher returns as ERS returns is less attractive than FRS.

Or am I silly?

Casey said...

Hi Ak,

Would you compare a national retirement fund yield with
A. Triple A Gov. 5 years bond yield
B. Triple A Gov. 20 years bond yield
C. Triple A Gov. Infinite bond yield
D. 45 years Triple A endowment plan yield

Any CPF similar instrument, if available in commercial segment, is an incredible fund raising tools to any financial institution. A finance magician could work wonders on the outcome for good or bad.

To me, a safer retirement system to protect retirement is a system that is pegged to the inflation rate yet guarantee outperforming inflation every year, even by 0.5% or 1% on yearly basis. This is to ensure whoever who run the show be held accountable on its performance to protect public retirement interest, in this case, against the core inflation for every cumulative yearly interval, to avoid any statistical manipulation.

The retirement fund shall be independently benchmarked against the yearly inflation rate rather than any short term endowment or triple AAA bond yield, which you can withdraw at anytime at any price. A retirement fund does not carry this flexibility, hence it is inappropriate to compare it with those triple aaa short or medium term bonds. If any, to me it should be benchmarked against triple a 'infinite' bond which the rules or contract could be altered at anytime for good or for bad.

Don't get me wrong, I did not mean that the CPF retirement fund should carry such withdrawal flexibility. So far, it works well and fair to me, let's pray hard that the fund do not fall into a wrong hand. A national retirement fund performance benchmarking system shall be developed and debated to coax out a even better performance accountability. It is important to ensure that the performance must be reviewed on yearly basis instead of any longer term basis to avoid any possible charting manipulation.

Do you agree?


AK71 said...

Hi Andy,

Aiyoh, how come you liddat say? I am innocent! ;p

Anyway, if that 55 year old uncle were to be gainfully employed from age 55 to 65, it changes things.

Then, the pertinent question to ask is whether he was a savvy investor and what was his risk appetite. If he was pretty risk averse and knew nothing about investing, then, go for ERS. Just being prudent. ;)

AK71 said...

Hi Casey,

Your comments are always thoughtful and thought provoking. Thank you very much for enriching the discussion here. :)

I agree with you that it should be inflation indexed. In fact, this was something that was suggested by a speaker at the IPS Forum on the CPF last year.

Balancing returns, risks, facts and fallacies."

The speaker also went on to share myths about the CPF and inflation in Singapore. ;)

Although, I feel that you are also right about the lack of transparency and how we might encourage better performance through some bench-marking, I am also fearful that this might encourage managers to take on more risks. Of course, if they are good, they will manage risks well and deliver better returns.

Anyway, like you, I feel that the system has worked well for me so far. It is about understanding the rules of the game and playing the game well. By sharing my own experience here in my blog, I hope that many more will learn to appreciate the game and play it well too. :)

apex property investment said...

The nest egg is a myth. If there is no knowledge in money management, it does not matter how much you have in the CPF or outside of it. Recently I met a old uncle courier discussing on bikes. He had retired and is working freelance as a courier. "Retire, do what?"... This is an standard answer from retirees. Do they even know what is enough for retirement at what lifestyle without having to worry about livelihood, or do they even want to retire with doubt's lingering over their heads on if they can make ends meet when they are much older and inflation caught with them. What is more important here would be education rather than trust or don't trust CPF. Again, ERS or not? Do you even know how to calculate retirement requirement?.... I don't know. At 38 now, I've never ever depended on CPF to fund my retirement. I've long gotten ready to accept that it is money gone and if I can ever withdraw it, its a bonus.

AK71 said...

Hi Apex,

You might want to read:

If I had done this...

It is possible to take full advantage of the system and let the system help us meet retirement adequacy.

Of course, if you decide that you do not trust the system and do not wish to make the system work for you, I can understand.

shun said...

Hi, Ak, would like to ask what it means when cpf statement shows "Part of your account has been reserved". Thks always for ur advice

AK71 said...

Hi shun,

My best guess is that the money is reserved for housing or for some other schemes. Is money from your CPF being used for housing or education, for examples?

Best to call up the CPF Board to find out. :)

Mao Mao said...

Hi shun.

In response to your question, you should click on the words "View details."

I have the sentence "Part of your account has been reserved. View details." too. It is for people who have done cash top-up into their Special Account (SA).

AK71 said...

Fong said...
I suppose what I will do now is to stagger my VC until Dec so that in the event of exceeding the annual ceiling due to the year end bonus(we can always hope right :-D), then the balance of the VC will just be refunded(in cash?)
Weird...I kept re-reading the CPF website and your blog but it just didn't seem to register that I can do a VC to my own MA even when it is clearly shown in the photos above, but thanks for the clarification!

AK said...
Yup. If we should exceed the annual limit, excess contribution will be refunded without interest in the new year. Gambatte! :)

Do online contribution to CPF-MA and get $88 Ang Bao!

AK71 said...

iamalazypig said...
Hi AK,
Does it mean that if monthly contribution from employer is SGD2,200,
means annually without bonus will be SGD26,400, and if bonus contribution exceeds (37,740-26,400) means we cannot do VC?

AK said...

If your annual mandatory contribution (i.e. any contribution from employment) hits the CPF annual contribution limit, don't do voluntary contribution.

If you do it, it will be refunded in the following year.

AK71 said...

Hogan Yeo:
I tot capped at $6000 income ceiling. How can employer contribute $2200monthly?

Siew Mun Kwan:
It is employer/employee contribution

Ah John:
If have extra bonus at that month, monthly cpf contribution can be higher, won’t cap at $6000 salary, that’s my experience.

Hogan Yeo:
So cant be every month contribution $2200 frm employer.

Yes...only when bonus happen.

AK71 said...

Ah John says...

I think most of people complain CPF because they don’t really have much money in cpf and cash too, that maybe because lack of financial literacy.

Then hard to explain how cpf works to them too.

AK71 said...

A comment in my YouTube channel from @ljh2027:

I like that you used the letter as proof that this is not a Ponzi scheme. Quite a simple refutation that works all the same.

Some additional points to share why CPF is not a Ponzi scheme:

1. It fails when you consider our ageing population. We would be seeing a lot of warnings earlier with our dwindling younger workforce, but so far, it works fine.

2. Retirement payouts are determined by how much you put in. Our government has always been firm on this and they have been using other ways to issue that kind of handout.

3. How it grows interest is based on what you have shared. GIC takes on all the investment risks so that we can enjoy risk free 4%. A lot of messaging has been done on this lately and I am very appreicative of it. But there is organic growth as shared. New contributions are even capped too as you shared.

And so long as CPF continues its current system, it will never be a Ponzi scheme. CPF may not be a perfect scheme, but it is certainly not a fraud.

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