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DPM Tharman defends CPF system, saying it "works well"

Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam launched a stout defence of the country's national pension scheme in Parliament amid recent criticism from some quarters.

SINGAPORE: There has been robust debate of late over the effectiveness of Singapore's national pension scheme, with some Singaporeans asking how CPF monies are invested; if interest rates could be pegged higher; and whether there is a need for the Government to hold on to what some say is their hard-earned money.

In Parliament on Tuesday (July 8) Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam put things in perspective, saying that "there is a looming pension crisis in most of the advanced countries, and the challenges remain largely unsolved." 

The first challenge, he said, is financial stability. Mr Tharman said the "pay-as-you-go" social security system has become unsustainable in many advanced countries. As more citizens retire, the pensions promised become increasingly unaffordable and the buck is passed to younger citizens through social security taxes.

"In the US for example, most public pension funds still overestimate their future investment returns and understate their liabilities. With more realistic assumptions, it is estimated that about 85 per cent of US public pensions will go bankrupt within the next 30 years," said Mr Tharman.

The second challenge is to give individuals a fair return on their retirement savings, but avoid exposing them to more risk than they can bear.

Mr Tharman said that as more countries struggle to cope, they shift to pension plans where the workers' savings go into their own accounts, from which they eventually draw their savings. The workers choose their own investment plan and bear the risk, but the problem is most individuals under-perform in the market. In addition, one could retire when markets are down and interest rates low.

"I have provided this backdrop to explain why our CPF system has worked well and provides a strong foundation for the future. It has protected members from risk,” said Mr Tharman. “The scheme is aimed at meeting basic retirement needs. As many members have had relatively small balances, it has been right to shield them from risk. The CPF has also avoided imposing risk on tax-payers, unlike many countries where ordinary citizens face a much larger tax burden in future."

Mr Tharman acknowledged that though the CPF is not a perfect system, it is among the better-regarded internationally. The Government has also pledged to improve the system to give Singaporeans greater peace of mind in their retirement years. But in doing so, he said the Government should not lose sight of the basic strengths of the CPF system.

For instance, he pointed out that the system here is sustainable, as there are no unfunded or sudden liabilities that will burden future generations. Also, the Central Provident Fund offers some flexibility for members to withdraw savings - for example, to pay for their homes, with nominal out-of-pocket cash.

While the scheme does not offer the highest returns, Mr Tharman said it is fair and one of the safest in the world. "Few systems offer the guaranteed floors on interest rates - 3.5 per cent for OA (Ordinary Accounts) and currently 5 per cent on SMRA (Special, Medisave and Retirement Accounts) for those with smaller balances, who comprise the majority of members, and 1 per cent less for larger balances. The interest rates are guaranteed by one of the few remaining triple-A rated governments in the world.”

“The CPF also offers the option to members who wish to place more money in their Special Account or take higher risks through the CPF Investment Scheme in the hope of higher returns."

On top of the guaranteed interest rates, Mr Tharman said the Government subsidises CPF members through the Budget - for example, through housing grants and Medisave top-ups. Thus, taken as a whole, the CPF system prepares Singaporeans well for the future, Mr Tharman stressed.

He said based on current policies, a new entrant into the workforce today can expect to draw a retirement income of about two thirds of his last-drawn pay, if he is a median-income earner.

"This is around the OECD average. He gets a much higher ratio of his previous pay if he is a lower-income worker, chiefly because of Government subsidies," Mr Tharman added. 

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