How the PAP Government Manipulates the CPF Contribution Rates to Manipulate Demand
As explained, the CPF contribution rates “have varied depending on economic conditions and changes to contribution rates have been used as a macroeconomic stabilization instrument to limit inflation or to reduce wage cost.” “Changes in either the employers’ or the employees’ contribution rate can have significant effects on macroeconomic variables.”
What are the effects of changing employees’ rates? This will “affect disposable income and consequently the level of aggregate demand. Lowering the employees’ rate whilst keeping wages constant, stimulates aggregate demand, while increasing the rate lowers aggregate demand.” Also, “In a sense raising, the employees’ rate will shift aggregate demand from the present to the future. Today’s disposable income falls, but increased CPF savings will translate to greater purchasing power (higher aggregate demand) for retired persons.
However, “Increased employee contribution rates (also) mean larger amounts are available for the pre-retirement CPF (housing purchases etc) discussed earlier. Thus changing the employees’ contribution rate will also affect the distribution of aggregate demand among different uses. For example, an increase in the rate may depress the demand for holidays and cars but increase the demand for housing and shares.”
As such, by increasing employee’s’ contribution rate and by keeping it at a constant 20% whilst only changing the employers’ rate to response to the economy allows the PAP government to force Singaporeans to commit a larger share of their wages into housing (because “since I cannot take my CPF out anyway, I might as well use it to pay for housing loans”).
On the other hand, “Changes in the employers’ rate of contributions do not affect current disposable income or aggregate demand. (Although post retirement purchasing power will be affected, as will the amounts available under the preretirement withdrawal schemes.) The major way changes to the employers’ rate affect the economy is by changing unit labour costs, i.e., the cost per unit of labour divided by the output produced by the unit of labour. If productivity increases (more output per unit of labour), unit labour costs decreases, ceteris paribus. Alternatively, if unit labour costs are increasing, wages (plus other costs of labour to the employer) are growing faster than productivity. Obviously, raising the employers’ rate increases unit labour costs and vice-versa for reductions in the rate.”
“The CPF rate thus became an economic lever for wage flexibility and cost competitiveness in good and bad times. As the economy recovered from 1988 to 1994, restoration of employer’s contribution rate was made in stages of 2% in 1988 and 3% in 1989, followed by smaller quantum increases in subsequent years. Employees’ contribution rates were also reduced by 1% in 1988 and 1989. The long-term contribution rate of 40% was achieved in July 1991 and remained at this level till 1 January 1999 when the contribution rate was lowered to 30%. In April 2000, the CPF rate was restored by 2% to 32%. This was based on projected economic growth rate and wage pressures.”
“In any event, steady increases in the employees’ rate of contribution from 1955 (five percent) to 1984 (25 percent) probably played a role in restraining aggregate demand and consequently the inflation rate.”
Indeed, “In both the 1985 and 1998 recessions, the Singapore government utilized a cut in the employer’s mandatory CPF contribution rate as a means of reducing wage costs and restoring competitiveness (from 25 to ten percent in 1986 and 20 to ten percent in 1999) (but) In the absence of other measures, and given the prevalence of the use of the CPF contributions for housing mortgage payments, the CPF cuts would have increased the mortgage default rate and possibly affected the stability of lending institutions.”
Yet again, why is there a need for the government to force Singaporeans to pay 40% into the CPF when this not only over-extends our CPF beyond retirement purposes, but also artificially inflate housing prices, which in terms sap up more of our CPF, and result in Singaporeans not having enough inside our CPF savings to retire on? As such, the CPF-HDB loop becomes detrimental to not only Singaporeans for longevity purposes but also to the economy as it skews demand and impedes on the other growth potential that Singapore would otherwise have, if not in an over-concentration in housing.
The PAP Government Continues to Determine CPF Contribution Rates Based on Housing Needs
“In the National Day Rally of 2003, Prime Minister Goh Chok Tong announced … that the 40% long-term target contribution rate would be replaced by a flexible range of 30%-36%,” which he said would allow “ the large majority of Singaporeans (to) still be able to save enough for their retirement needs, healthcare expenses and housing” He had said that, “a worker earning a 50th percentile income, or $2,000, will be able to purchase a 5-room HDB flat“, if “we tighten the withdrawal rule at age 55“.
As can be seen then, in 2003 and today, the government continues to lock-in Singaporeans’ CPF with the HDB, in spite of the inherent problems that have arose with the use of this model. Such a lock-in mechanism is thus questionable for its wisdom. Is there a limit to how far the CPF-HDB mechanism can be manipulated? In a situation where wages have become far too depressed and HDB flat prices too high, how much more can the CPF be manipulated to undo the stagnation effects that this has on the economy. The question to ask is – is it wise to have a complete lock-down of the Singapore economy due to the frivolous reliance on the CPF-HDB mechanism?
The housing approach adopted in Singapore has undoubtedly increased the savings and homeownership rates, mobilize resources for the housing sector and contributed to increase in housing loans and the development of the primary mortgage market. However, the approach is not without its detractors. Singapore’s housing strategy is inherently policy driven and centrally controlled, with major decisions on savings rate, savings allocation, land use, housing production, and housing prices being largely determined by the government. It is, in other words, a neo-classical economist’s nightmare.
However, two decades and 35 years later, it may no longer be ‘respectable’ to continue to argue for the continuation of a system that has outlived certain aspects of its usefulness. While the CPF-HDB housing scheme had its merits in the past, the objectives that the scheme set out to achieve have been surpassed and the policy problem has become one of how to reduce its dominance with minimal upsets to asset values, household wealth and lenders’ balance sheets.”
But the manipulation of the CPF contribution rates also has broader side-effects to the Singapore economy as a whole: “The CPF contribution also means a lower take home pay and hence less expenditure on consumption. Thus, the CPF system has created a shift of demand (and hence resources) from the retailing sector to the construction sector. Therefore, compared with other economies of similar level of development, the CPF system would mean a less developed retailing sector in Singapore. This also helps to explain why the retail sector in Hong Kong is more developed than that of Singapore.”
Indeed, because of the PAP government’s control over our spending patterns, Singaporeans have the lowest purchasing power among the developed countries, and which is lower than even Malaysia and on par with India.
Finally, “The government, through the mandatory CPF contribution rates which have escalated,” have resulted in the “over-saving and over-investment in residential properties.”
When seeing how Singaporeans actually pay the highest social security (CPF) contribution rate in the world, such an escalation needs to perhaps be called into question, especially when seen in light of the side-effects that it has caused to the lopsided economic growth.
Government Reduced CPF Interest Rates but Increased Housing Prices
This CPF-HDB lock-in mechanism also means that “Raising the CPF interest rate would have had the boomerang effect of raising HDB costs, as noted by the then Minister for Communications and Labour, Mr Ong Teng Cheong“. Thus it was explained that “financing low-cost HDB flats in this fashion (via the CPF-HDB mechanism) had kept the cost of living and hence, inflation rate low, and had contributed to Singapore’s competitiveness, and to her rapid economic growth and urbanization.”
Later on, “in response to public complaints that CPF interest rates were below bank rates and were also inadequate as a hedge against inflation“, the government suggested in 1982 to alter the CPF interest rates, by “pegging CPF interest rate to market rates“. The Minister for Labour and Communications then cautioned that CPF interest rates “could well be lower than what CPF is now paying” if market rates fall.
On the other hand, he also exhorted the advantages that since “a considerable amount of CPF money is borrowed by the HDB through the Government at 6% (the CPF interest rates then was 6.5%) to finance the construction of HDB and HUDC flats,… Those who buy HDB flats therefore benefit from lower CPF interest rates (from) the lower cost of CPF money used to finance the construction of HDB flats (which) will result in lower construction cost and hence lower selling prices of flats.”
It should be noted that since that start of the CPF, the CPF interest rates have been gradually raised from 2.5% in 1955 to 6.5% in 1974. The high interest rates of 6.5% continued for the next 12 years until 1986.
Thereafter from 1 March 1986,… the government decided to peg CPF interest rates to market rates. However, the government (also) warned that if CPF interest rates were tied to market rates, when the latter went up, HDB mortgages would have to pay more for their loans. This was because HDB would have to increase the concessionary loan interest rate, which was pegged at 0.1 percentage point above the CPF Ordinary Account interest rate. However, an interest rate floor of 2.5 per cent for the savings was still in place.
Thus the claims were made that if interest rates fall, HDB flat prices would become cheaper and in the event that interest rates increase, flats would become more expensive as well.
Now, the change in the CPF interest rates policy was made, with the assumption that Singaporeans would be able to earn higher interests (than 6.5%) to “hedge against inflation”.
However, as you can see in the chart below, after 1986, the CPF interest rates have only kept dropping and has never returned to the high of 6.5% – Singaporeans were earning lower and lower returns on our CPF.
Also, by right, according to the PAP government’s logic, flat prices would keep falling as well right?
However, as you can see below, not only did flat prices not decrease, prices even escalated beyond control!
In fact, housing mortgages from our CPF also spiralled out of control!
And today, we can see how housing prices have so escalated that the accrued interest has as well – a Singaporean who buys a 3-room flat today and sells it 30 years later would need to pay off more than twice the flat value, key because of the $220,000 accrued interest which would have accumulated. If so, then the wisdom of paying for the accrued interest might become flawed, when housing prices have been artificially inflated to confiscate our CPF, with which we would need to replace with the “accrued interest” and thus a reduced purchasing power with lesser cash on hand, and lower consumption for daily use.
Thus far, “It is obvious that the (PAP government has intended for the) CPF scheme (to be) biased in favor of residential investment. Indeed, many Singaporean households emptied their CPF balances to finance HDB mortgages. At the same time, the government also encouraged Singaporean households to upgrade from a small unit to a larger unit.”
Even as the “excessive investment in residential property was slightly inconsistent with the original objective of the CPF scheme which was purely to provide for old age living and disablement,” the PAP government continued in its wanton pursuit to use CPF to fuel the HDB market.
The PAP Government Changed the Policies Several Times to Give Singaporeans to Earn Lower CPF Interest Rates
Over the next few decades, the PAP government kept changing how the CPF interest rates are determined:
- From 1986, the CPF interest rates were pegged to “a simple average of a 12-month deposit (with a weight of 80%) and the month-end savings rate (with a weight of 20%) of the four major local banks, subject to a minimum nominal rate of 2.5% as spelled out in the CPF Act. The rate is revised quarterly. Additionally, the Special Account (would) … receive an interest rate 1.5% above the normal rate. Since October 2001, balances in the Medisave Account have also received a similar differential interest rate.
- In 2003, “the Economic Review Committee recommended pegging Special Account interest rates to the yield of long-term government bonds, which resulted in pegging the Medisave Account, Special Account and Retirement Account interest rates to the ten-year Singapore Government Securities rate. The government felt that it no longer needed to guarantee a fixed minimum return on these funds.“
- Then in 2008, “The rates of the Special, Medisave and Retirement Accounts were re-pegged to the yield of the ten-year Singapore Government Securities plus 1 per cent from 1 January 2008. To help members adjust to the new pegging, the Special, Medisave and Retirement account funds were guaranteed an interest rate of 4 per cent from 2008 to 2009. This guaranteed interest rate floor was extended until end-2011 in light of the poor global economic conditions and exceptionally low interest rate environment. An extra 1 per cent interest was also paid on up to $60,000 of total CPF balances, with up to $20,000 from the Ordinary Account.“
The CPF interest rates are thus not based on the returns of investment of the CPF but became “administered by the government and “computed monthly and compounded and credited annually.”
But as Asher had explained, “there is “no economic rationale” to pay a one-year fixed deposit rate on what is essentially a 35-year or more (the duration of one’s working life) savings plan”. He explained that “the CPF real rate of interest from 1987 to 1998 is zero, thanks to inflation. And this negative replacement rate defies the logic of accumulation.”
Indeed, in spite of what the PAP government had claimed that the change in interest rates were to hedge against inflation and potentially give better returns, after the first change in policy to the CPF interest rates in 1986, our CPF interest rates have never been able to see the high 6.5% interest earned prior to 1986. In fact, you can see that with each policy change on the interest rates, the CPF interest rates only became lower and lower.
And not only that, they have remained at a low of 2.5% since 1999, for the past 15 years now!
“The compounded annual real rate of return on CPF balances (nominal rate minus GDP deflator) averaged only 1.83% during the 1983–2000 period; and only 0.82% per annum for the 1998–2000 period, the period when the floating rate was introduced. During the 1983–2000 period, there were four years when the real rate was negative. The average return during the period was boosted by negative inflation rates, i.e. deflation in four years during the period. The above rates are quite low, and therefore they negate the potential disadvantage of mandatory saving in financing retirement.”
“The administered interest rate structure, and lack of transparency and accountability in the ultimate investments of CPF balances ($125.8 billion as of December 2006) have meant low real returns on these balances. Thus, from the 1987 to 2006 period the annual real rate of return credited to CPF members was 1.26%. As the returns are lower than their corresponding growth in GDP by about 8% and in real wages by around 4.5%, the replacement rate is likely to be low.”
“There are also two other factors which reduce the real value of CPF balances. First, Singapore increased the rate of its Goods and Services Tax (GST) from 5% to 7% in 2007. There is strong econometric evidence from international experiences that such an increase will raise the cost of living by the same percentage points as the increase in GST, i.e., 2%. This will act as a tax on CPF wealth. Second, in 2008, Singapore’s inflation rate is expected to be about 6%. To the extent interest credited to CPF members is less than the inflation rate, an erosion of the real value of CPF balances will arise. This will further accentuate the inadequacy of the CPF for financing retirement and health care. Singapore also has the highest negative real interest rate (3-month market rate minus official CPI inflation) of about 5.5% in Asia. This distorts household financial decisions.”
And so today, Leong Sze Hian has shown that Singaporeans earn the lowest interest rates on our CPF retirement funds in the world.
Most importantly, Asher and Nandy said that, “The centralized control of national savings by the government agencies and banks, however, is of considerable advantage to those controlling them,” which again explains the rising inequality in Singapore and the growing wealth among the richest, the PAP politicians among them.
But really, what is the true intent of altering the interest rates, if it has no relation whatsoever to how housing prices are determined, as the government had so claimed it would? Why did the CPF interest rates and housing prices go in two separate tangents, when they should supposedly follow the same (downward) path?
If so, now that we know that the government fixes the prices of the HDB flats and is able to manipulate the overall housing market, why has the government intentionally induce prices of flats upwards? Why does the government want to earn higher and higher profit through their real estate investment, while depressing wages and keeping the returns on our CPF low as well through their monopolisation of the economy, the housing market and the management of the CPF? And then, why does the government keep increasing the prices of flats, knowing that this will take up more and more of our CPF, and result in inadequate retirement funds, as we see today?
Most importantly, why did the government keep changing the policies, only to reduce the interest we can earn on our CPF further and further? What are the government’s real intentions? When today we earn only 2.5% (or an average of 3%) on our CPF while the government takes our CPF to earn more than 6%, is the real intention finally exposed?
An understanding of the history of the CPF-HDB lock-in mechanism and the movements of the CPF contribution and interest rates and HDB flat prices give us clear insight to the government’s motives.
Clearly, the change in policies for the CPF interest rates is for anything else, except to allow Singaporeans to earn more on our CPF.
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