Why has the CPF failed as a retirement vehicle for Singaporeans?

As I've read (as part of the Singaporean diaspora, I've found it harder to experience) with some dismay over the past months at the difficulties facing retired/retiring Singaporeans, I've often wondered why the CPF, which ostensibly aims to secure Singaporeans' retirements has not achieved this goal.

The Central Provident Fund Board says in its Mission and Vision statement:

Mission

“To enable Singaporeans to save for a secure retirement.”

Vision

“A world-class social security organisation providing the best national savings scheme for Singaporeans to enjoy a secure retirement.”

Even a cursory glance through the CPF website, and a quick search of the literature indicates that the CPF doesn't function simply as a retirement savings vehicle for Singaporeans, but as a public and economic tool by the Singapore Government.

...CPF has also been used to accelerate national growth....

The CPF has been used as a social and economic tool to:

• Encourage a greater sense of belonging to the fledging nation by building up greater home ownership
  
• Stimulate the economy
• Approved Investment Scheme (1986) was the first of many schemes to allow Singaporeans to invest their savings into the securities market
• Manipulation of the CPF contribution rate as a means of macro-economic stabilization

With all these differing (and underlying) objectives at hand, it is not surprising that the CPF has not been able to function as efficiently as it could have, if it had existed solely as a retirement funding vehicle.


Poor investment Returns

As Professor Mukul Asher of the Public Policy Programme at NUS estimates in his 2004 paper ("Retirement Financing in Singapore"), the compounded annual real returns on CPF Member balances, at 2.1% p.a., has been significantly lagging Singapore's real GDP (8.2%) and wage (6.1%) growth.

Considering that the CPF member funds are used to purchase relatively illiquid Singapore Government bonds, which, since the Singapore Government has consistently run a surplus, are turned over to the Singapore Government Investment Corporation (GIC) and Temasek Holdings for investment overseas, amounts to an implicit (and regressive) tax on the population. In effect, Singaporeans are getting returns of bonds, with potentially the risk of private equity and hedge funds.

But you ask, what about the CPF Investment Scheme (CPFIS), which allows members to invest in approved assets such as unit trusts, shares and insurance. There has been a generally low participation rate in this scheme - only 15% of members chose to invest in equities. With the low financial knowledge of most Singaporeans, the rate of return on the SA and OA accounts has been negative.

The unit trusts offered by the CPF (and generally in Singapore) generally suffer from extremely high expense ratios and sales loads. The CPF does not appear to have used its pricing power to negotiate lower expense ratios for its members. This might be a corollary of the impetus to build Singapore up as a financial centre by attracting fund management firms to Singapore with these higher returns.

From planning my own retirement, most (80%) of actively managed funds in the US manage to underperform their benchmark indices, and that the biggest driver of long-term returns is investment costs and asset allocation.

The low uptake of the CPFIS might also be attributable to the sheer and bewildering choice of funds and stocks available to CPF members. Studies of the 401k program (a defined contribution program in the US where employees can defer part of their income into investment choices offered by their employers) show that if employees are presented with too many choices, they often make the choice of not choosing at all.

Thus most Singaporeans choose to invest their CPF balances at a low return, and those who try to invest are either faced with high investment costs, and/or make poor investment choices.

High rate of "savings" but not into investment assets

Professor Asher estimates that 75% of CPF contributions over the years have been withdrawn over the years, primarily to for housing and real estate investments. This means that a large proportion of Singaporeans' forced savings are not going into investment assets that will be financing their retirement. Most financial planners do not treat the primary residence (in the case of Singaporeans, this will be their HDB flat) as a financial asset. The equity in a primary residence can be tapped to provide retirement income (e.g., reverse mortgages, downsizing the flat, etc) but the transaction costs of doing so are high.