Where Do We Go From Here? Reform or Deform?
On this last page, I will highlight the what the authors of several books papers say about key challenges that our CPF faces and the possible solutions, and also end off with my own thoughts.
The PAP Government was Given Ample Warning in 1986 and 1999 but Refused to Change Course
Now, it is not that the PAP government has not been given adequate advice on the management of the CPF. They were, as the CPF Study Group had done so in 1986. But the PAP government chose to turn a blind eye to it. It might be clear now why they choose to do so. The addiction to Singaporeans’ CPF is akin to a gambler without any self-control and in spite of all sorts of help to get him/her out of addiction, only led him/her to further sink him/herself into the addiction. One wonders if at the rate the PAP government is so uncontrollable that whether Singapore would go the route of a gambler finally having lost everything and Singaporeans’ CPF, before the PAP government would awaken to its follies.
By then, will it be too late for Singaporeans?
In fact, 1986 was not the only time the warning came. In 1999, The Straits Times also carried an article, filled with the foreboding of the CPF.
Linda Low had said, “The CPF is slave to so many schemes, it cannot serve all its masters simultaneously.” She also “cited the Government’s decision to allow money in the Special Account to be used to finance mortgages earlier this year as her “greatest disappointment”, (as) implicit in that decision, she notes, was that housing, not retirement, took priority.”
As to how the CPF has become too deeply intertwined with the HDB, Koh Seng Kee also forewarned that, “As most properties are sold with 99-year leases, Singaporeans are investing their lifetime savings in depreciating assets” and “Unless and until the Government signals that it is prepared to renew property leases, Singaporeans’ savings will not last beyond two generations.”
B.C. Ghosh perhaps succinctly put that, “The CPF, to me, kind of lost direction during our great growth days,” he says and like many others, “call for the CPF to go back to basics and restore old age as its key focus.”
The PAP Has Sunk Too Deep
Indeed, Linda Low asked the very pertinent question, “Should the CPF be ultimately delinked in whole or in part from the fiscal system? … What are the implications of the government’s commandeering of the CPF as a “cash cow”, and government revenue from implicit taxation on the political legitimacy of the People’s Action Party regime?”
She also asked, “As the CPF-fiscal link has fulfilled the deficit financing needed in the 1960s and early 1970s, especially in development spending as for public housing, is it timely for the government to either reduce the element of implicit taxation if not an outright delink?”
Low explained that the CPF in its current uses “is perceived to serve the state, not its members especially when deficit turned into chronic government budget surplus since the late 1970s.” However, the PAP would not want to let go of this as “Perpetuating the CPF-fiscal link or implicit taxation enables the People’s Action Party regime to commandeer both financial resources to finesse the political economy of its developmental state as well as dictate CPF members’ choices in consumption, saving and investment.”
However, she also expressed that, “What worked for the CPF in the initial phases of Singapore’s economic growth and political economy development may not have been as effective with a mature economy and ageing population. The multiple nature and unfortunate coincidence of both economic cyclical and structural crises … have shaken CPF.”
Low thus ventured to say that, “The CPF has worked successfully and brilliantly, but is in need of some makeover in the new millennium with greater social insecurity.” But she also stated that, “p;olitical will and commitment are as imperative in its remaking.”
Perhaps thus when we talk about how the PAP “has run out of ideas”, it is this old modality of working that they are hanging on to, unwilling to let go of the “cash cow” that has brought their salaries to sky high limits. How to reinvent is the question, but the question that must topmost on their minds is – but how to we reinvent while ensuring that our salaries can still be maintained, and the network of crony capitalism that has helped our political legitimacy to stay afloat has to be similarly maintained via the high salaries? For implicit in the idea of reinvention is that delinking would also put an end to the crony capitalism as the PAP knows it and has created as such, and would mean that the economic growth that they has so fiercely pursued would finally have to be shared with Singaporeans. But how can this possibly work for them, when this would directly contravene with the political structure that they have developed, based on the inequitable distribution of wealth to those in their favour.
As such, the steadfast pursuit of growth-at-all-costs and the continued siphoning off of Singaporeans’ CPF into their coffers only goes to affirm one thing – the PAP is more dogmatic about maintaining their political dominance and would rather lock the citizens into their system of control, rather than to kickstart the economy towards a new momentum, for shared growth.
If indeed this is how the PAP wants to protect their hegemony, at the expense of Singaporeans and against our will, perhaps the time of the PAP has run its course and it might only be possible for Singapore to move forward, if Singaporeans delink the PAP from the government, and allow our country to have a new lease of life. Then, the question would be – are Singaporeans ready to emerge from our denials and release ourselves from the lock-in that the PAP has tied Singaporeans into.
Do you have too much to lose, or will you have more to lose if you do not do something about it now?
The CPF System has Become Corrupted
Asher surmised the current problems facing the CPF, that “The CPF scheme has come to occupy a pre-dominant position in the pension arrangements of Singapore. The recent parametric reforms of the CPF scheme … do not however address the main limitations of the current arrangements. These limitations include inadequate balances at retirement, leading the low replacement rate; lack of inflation and longevity protection, lack of survivors’ benefits, lack of transparency and accountability, particularly in investment management; inadequate weight fo fidiciary responsbility as compared to socio-economic engineering objectives; and virtual absence of tax-financed redistributive tier. The limited nature of health insurance, and the issue of long-term care of the aged also pose major challenges to the policymakers.”
In comparison, “Most social security systems tend to be somewhat progressive, paying a higher rate of return on payroll tax contributions, the lower a person’s income. By contrast, the Singapore system is slightly regressive in three ways. First, people get back exactly what they put in, plus any buildup. Second, although the practice of not taxing social security contributions (at least the employee’s share) is common throughout the world, this practice also favors those in higher tax brackets. Finally, the investment options discussed in the text favor high-income earners.”
Yasue Pai added on, by saying that, “Furthermore, highly unequal wage structure, high rate of pre-retirement withdrawals, low returns credited to members, and high transactions costs of investments all contribute to the low balances and low replacement rates of CPF (CPF average annual compound growth rate). In the case of Singapore’s one-tier system, low replacement rate may become more of a serious problem than anticipated if social attitudes of the younger generations change given there is no pillar to rely on for subsistence income.”
If There is No Political Will, there is No Way
Asher explained that “The existing Central Provident Fund (CPF) system is based on direct-contributions, which implies that individuals and households implicitly bear macroeconomic, longevity and inflation risks. It was intended to alleviate absolute poverty and does little to combat relative poverty”. He also proposed that “A willingness on the part of the government to make substantive inroads against relative poverty could be signalled by initiating a non-contributory, budget-financed but means-tested basic social pension to work alongside the CPF system.”
He went on to explain how this can be easily done as “Estimates by fiscal economists suggest that such an arrangement is unlikely to be a heavy burden on the fiscal budget: assuming benefit levels at 20 per cent of the annual median wage income with universal coverage, the cost is expected to be less than 2 per cent of GDP. Fiscal surpluses averaging 6.2 per cent of GDP over 2000–13 suggest there is ample fiscal space available for such an initiative.”
Thus the PAP government can very well afford to spend more on social protection for Singaporeans, to boost our retirement savings. In fact, “The share of wages and of private consumption in GDP, at around 40 percent in 2000, however, remains low. This suggests that Singapore has the resources to meet the challenges of financing old age.” Also, “The fact that Singapore has persistent and large budgetary surpluses suggests that Singapore has the resources to meet the challenges of financing old age.”
However, Asher added that “whether the political system enables a greater proportion of the elderly … to express their preferences for meeting these challenges … will depend on the extent to which the current mono-centric power structure evolves to accommodate greater political and social contestability.”
Indeed, he makes clear that “Singapore has the fiscal, institutional, and organizational capacity to make rapid progress towards more adequate, efficient, and equitable multi ‐ tier system.” “But this will require fundamental changes in the political and social philosophy.”
However, he doubted the possibility of such changes as “The government has both the financial and administrative capacity to do this but has instead placed disproportionate importance on achieving high economic growth while not taking sufficient account of the negative implications on social protection.” He critiqued that government’s growth-at-all-costs model and explained that “The constraints on promoting fairness and sustainability are not financial nor are they due to a lack of institutional or organizational capacity. They instead arise because of the disproportionate importance given to achieving high economic growth while not taking sufficient account of its negative implications on social protection.” As such, “Social safety-net pensions are either non-existent or have very low coverage: five per cent of retirees in Hong Kong (but) less than one per cent in Singapore.”
Indeed, the Singapore government spends the least on social protection among the developed countries.
As to the reforms needed for the CPF, Asher said that, “The key decisions in promoting fairness and sustainability in the pension system will therefore be political and will require reducing the nearly exclusive reliance on mandatory savings in the CPF, increasing the very limited scope of social assistance and pension programs, reducing the reliance on implicit taxes on CPF wealth.”
Importantly, the CPF system also needs to “shift away from administered interest rates, and improving member choices in investments merits consideration.” where “An initial step would be to eliminate the implicit tax on CPF balances. In the short term, this can be accomplished by crediting the weighted average of returns of government investment companies, which are actually making decisions on the deployment of the CPF funds.”
The First Step to Reforming the CPF Requires the Unlocking of the CPF from Its Chains
From a macro perspective, Phang Sock-Yong explained how the interlocking effects of the CPF in the Singapore economy has (already) detrimental effects:
Low and Aw suggested (before the 1998 recession) that the CPF as a macroeconomic stabilization tool has probably reached its limits as ‘it would be too disruptive economically and politically to change the rules with so many people committed to large housing mortgages and repayments. This lock-in effect of many CPF schemes must also be noted as they effectively reduce the degree of flexibility the next time CPF adjustments are considered in any macroeconomic stabilization exercise’.
Singapore’s housing strategy has been criticized for over-allocation of resources to housing, resulting in crowding out of consumption, as well as human capital and corporate investments. Despite widespread homeownership and rapid increase in housing wealth, Phang (2004) found no evidence that house price increases have produced wealth or collateral enhancement effects on aggregate consumption. Instead, due to the mandatory nature of the CPF as well as households’ inability to withdraw housing equity to finance consumption, households in Singapore face strong liquidity constraints. In addition to the welfare loss from consumption denied, Bhaskaran (2003) is of the view that the low percentage of disposable income spent has hurt the development of the retail sector in Singapore.
The CPF has also been blamed for a weak domestic corporate sector (since potential entrepreneurs are unable to access their savings for start-ups), and the crowding out of domestic private sector investments. The corporate sector in Singapore is dominated by MNCs and government-linked companies — a recent study by Bhaskaran (2003) confirms that indigenous firms earn lower returns than foreign-owned firms within Singapore, and lower returns as compared to listed companies in Hong Kong, Japan Korea, Taiwan the US. Krugman (1994) and Young (1992, 1995), for example, have questioned the basis and sustainability of Singapore’s economic growth in a series of studies as far back as the early 1990s. Pointing to the low contribution of total factor productivity (TFP) growth, Krugman referred to the Singapore miracle as having been based on ‘perspiration rather than inspiration’ – ‘All of Singapore’s growth can be explained by increases in measured inputs. There is no sign of increased efficiency.’
However, Linda Low and Tar Choon Aw explained how the PAP government got themselves stuck in a rut by ignoring the numerous warnings by economists and academics since way back in 1986 on the pitfalls of the over-indulgence in “cheap” CPF monies to over-engage HDB construction:
In any case, it would be too disruptive economically and politically to change the rules with so many people committed to large housing mortgages and repayments. This lock-in effect of many CPF schemes must also be noted as they effectively reduce the degree of flexibility the next time CPF adjustments are considered in any macroeconomic stabilization exercise. In any case, private individuals cannot be expected to use their CPF savings directly in productive investment, except in portfolio investments through the purchase of approves shares in the stock market.
Another difficult issue is the impact of CPF utilization on future inflation which may require macroeconomic adjustment later. Housing purchases and the encouragement to upgrade have created some artificial demand and led to speculation in real estate. With rising asset inflation, Singaporeans may speculate even more, engendering a vicious cycle.
Inflation in the future could also come from postponed consumption, that is, inflation occurring in the future period when baby boomers reach the withdrawal age by the next century. While the save-consume cycle is wholly reflective of the traditional life cycle or the permanent income hypothesis, it may actually be ameliorated by the continuous managed investment approach.
This would explain why the PAP government would be more eager to delay the withdrawal age for our CPF, so as to stem the expected inflation today from the baby boomers, and also why they would demand the baby boomers to pay higher MediShield premiums to mop up what they consider as excess inflation.
Asher went on to also point out the flaw in the current management of the CPF-HDB interlock and how it is necessary to reform the CPF along international best practices:
But there is a perception that this arrangement has contributed to public housing prices being less flexible to market forces, and may have indeed enabled over-investment in housing. The political need to maintain high (and rising) property and land values in turn are acting as a severe constraint on restructuring of the CPF scheme.
In Singapore’s mono-centric power structure, the need for provident and pension fund trustees who are simultaneously independent and competent has posed severe challenges. Absence of any provident and pension regulatory agency has made it difficult to take a system-wide perspective from the viewpoints of fiduciary responsibility to the members and international benchmarking in governance.
Nevertheless, it is important to examine several reforms designed to enable provident (and pension) fund members to more fully benefit from international investment diversification. This is undertaken with a view to advance informed public debate on these issues, and in the firm belief that views of current decision-makers should not act as a bar to a discussion of reform options.
Singapore policymakers face a stark choice. Either they can continue to use the CPF for socio-political control and engineering, or they can bring its objectives and governance in line with international best practices, to improve the return accruing to members, and to make a greater proportion of CPF contributions available for retirement needs. The choice is politically difficult, but it is unavoidable given the objective realities.
Low and Tar also explained why the PAP government decided to shift their focus towards investing the CPF:
To the save-consume cycle, we add investment, making it save-invest-consume and drawing the distinction between the possibility of members consuming certain services like housing, health and education even before one retires. Thus, the lifelong provision of these services makes the artificial line between the working and non-working parts of life more porous and even non-existent; they would no longer have to be compartmentalized as now under a life cycle model. There would thus be a widening and diffusion of consumption throughout a worker’s lifetime rather than a retirement binge.
If this thesis on lifelong investment holds, consumption would be better spread out. The impact on inflation while still possible, would also be correspondingly amortized out and thus be lower than all consumption bunching at around the same time. How these changes affect macroeconomic stabilization and microeconomic behaviour would be interesting topics for future research.
Low and Tar hoped that such an approach via investing the CPF would bear fruit but as Professor Lim Chong Yah had rightly pointed out, ” this would be acceptable if there is a guarantee that future governments would be as honourable and as capable as the present one, but can such a guarantee ever be forthcoming?”
Finally, the solutions for the CPF are simple – to go back to the basics by delinking the uses that CPF have currently been mired in, as Asher explained:
If de-linking the CPF scheme from housing finance is considered too risky, then the CPF scheme could be formally divided into three components: housing, health care, and retirement.
Second, the investment policies and performance … should be completely transparent, and de-linked from government investment companies. The investments should be mark-to-market and publicly available.
Third, all investment returns must be made known and fully credited to the account of the members.
But are Singaporeans Barking Up the Wrong Tree?
However, as it is, it is evident today that the over-intervention by the government and their several attempts to patchwork the problems are only causing these problems surrounding our CPF (and its related uses) to become further entrenched.
The PAP government cannot go on denying the need for a large-scale reform, when it is clear that its working model which could perhaps be necessary in the 1960s and 1970s is no longer capable of taking Singapore into the next stretch, but might in fact collapse Singapore on ourselves, with how the economy has interlocked itself.
Otherwise, it might be obvious to conclude that the current PAP administrators have sincerely run out of ideas of how to manoeuvre the Singapore economy, and have really pushed themselves into a corner. Understandably, a wide-spread reform might not sit well with both Singaporeans and the PAP government itself, used to championing its own model of success, which have in a way blind-sided themselves. But not taking the immediate steps towards reform would lead to more disasterous effects down the road in the near future, as the Singapore economy threatens to break at its seams, on an unsustainable high cost-driven model fuelled on exaggerated housing prices and wage depression which have aggravated the debt situation in Singapore and would no doubt put Singapore on the path of social breakdown, unless swift reforms are taken boldly.
But it is unlikely a PAP government too comfortable in its seat for over the past 50 years would have the courage and clarity to take the necessary steps required. And if so, the Singapore society might endanger itself into oblivion, unless it is able to pick itself up when the implosion occurs in the near future. Bold reforms to delink the interlocks and the over-intervention by the government in the economy and allow the economy to function once again on fresh air, to kickstart itself, will give our country a chance, without which our nation will need to prepare itself for impending adversity, which would test our peoples’ resilience and strength, and only if we pull through.
It is perhaps ironic that in the PAP government’s earnest appeal that Singapore is a small country which cannot afford to make a wrong move that it has closed itself to the realisation that if Singapore is indeed required to be nimble, that it has to start with a light-weight economy which is not so bogged down by the PAP government’s impinging that the economy is no longer able to move. But perhaps where a self-made elite pays themselves such extravagant salaries that the protection of one’s own wealth becomes impediment and a nationalistic homeownership programme which has enslaved Singaporeans to their motherland that self-denial thus becomes a self-fulfilling prophecy – the very fear that the PAP government might put upon Singaporeans to believe might indeed result, and that the very result of the PAP’s compulsive policies.
Might Singapore go the way of Rome? It all depends on whether the populace is willing to be awakened and enlightened, if not.
3rd Edition Of The #ReturnOurCPF Event
On 23 August, there will be a third edition of the #ReturnOurCPF event.
Join us at the third edition and take a stand. The government cannot take Singaporeans’ CPF to use and tell us that they do not know what they are using it for. This is a derision to Singaporeans and daylight robbery!
On 23 August, we will see you at Hong Lim Park. Let’s come together, be united and speak for change, for the better for our lives, and our children’s.
You can join the Facebook event page here.
Also, my first court case will be held on 18 September 2014, at 10.00am. It will be a full-day hearing.
- Revealed: How The Pap Uses The Wage-CPF/HDB-Debt Cycle To Stab Singaporeans In The Back
- Truth Exposed: The Dirty CPF-HDB Scheme To Trick Singaporeans
- Truth Exposed: How The PAP Will Crash The Singapore Economy
- When The PAP Started Turning Against Singaporeans Traced (shorter version of ‘Revealed: How The Pap Uses The Wage-CPF/HDB-Debt Cycle To Stab Singaporeans In The Back’)