Sunday, January 09, 2005

Social Security versus CPF — Part 2 

A reader commented on my previous post comparing the Social Security system in the United States with the CPF system in Singapore. I thought there were a few points which merits elaboration.

The reader wrote, “Like the US, our government is thinking of privatizing CPF”. But the similarity ends there.

If the Singapore government privatises the CPF, the impact would be relatively limited. But the impact of Social Security privatisation is large. Essentially, it would turn the system from one with an insurance component to one that is essentially a saving and investment vehicle, just like the CPF — which is precisely the shortcoming of Singapore’s system, in my opinion.

The reader also asks why I think the CPF is good at protecting what is already in the fund.

Well, the reasons are mainly those listed in Steven Schlosstein’s article, with the emphasis on the fact that the purposes for which funds from the CPF can be used are relatively limited.

The CPF is a vehicle for overall retirement planning. That includes investment. As an investment vehicle, it is inevitable that some risk be taken. In that context, the risk allowed by the CPF for investment is not generally excessive.

The reader did make the point that the CPF allowed Singaporeans to over-invest in property. Personally, though, I blame overall government housing policy rather than the CPF for the over-investment. In any case, the government appears to have learnt its lesson and modified the rules for property financing. I think we should judge the CPF based on its current rules rather than old ones.

Ultimately, I think that the problem with the CPF concept is that it requires individuals to rely largely on their own savings and investments. If they don’t save enough, they’ll have to invest more and earn better returns. But as the investment adage goes, to get better returns, you have to take more risks.

In other words, when you face the risk of under-saving, the only way that the CPF can help you compensate for it is by letting you take on more investment risk.

There’s a missing link somewhere. No prize to anyone who guesses what I think it is.


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