Friday, January 07, 2005

Social Security versus CPF 

Which is better for funding workers’ retirement: The US Social Security system or Singapore’s Central Provident Fund (CPF) system?

An earlier post of mine points out the advantages of Social Security in mitigating risk. A commentary by Steven Schlosstein
in The Tullahoma News titled “Thinking about Social Security Singapore has some useful answers” points out the advantages of the CPF.

First, the problem with Social Security according to Schlosstein:

Social Security...relies on contributions from today’s workers to pay the benefits of yesterday’s retirees. And it works fine, as long as there are more people working than retiring. But...today, there are fewer workers paying into the pool to support the retirement claims of yesterday’s retirees. This is why your FICA taxes keep going up.
The Bush Administration is pushing for privatisation of Social Security through the creation of personal accounts to alleviate the increasing demands of Social Security.

Privatization advocates argue that personal retirement accounts, by investing in higher-yielding assets like equities, can provide a higher level of benefits to retirees than any government-administered system can. But opponents maintain that higher returns mean higher risks, and that the government should not let individual, last-resort retirement income be subject to the whims of the stock market.
And that’s where Singapore’s CPF comes in.

The Republic of Singapore dealt with a very similar issue about half a century ago when it created the Central Provident Fund, or CPF. It was created in 1955 as a “save-as-you-earn” program, rather than the “pay-as-you-go” scheme that characterizes our Social Security... [T]hese enforced savings were not funneled into a government-administered pool; the contributions went into individual accounts for each employee... CPF regulations prevent individual accounts from being invested in only one market segment or instrument... Privatization is not a wolf in sheep’s clothing, providing it includes, as the CPF does, adequate safeguards to protect prudence and defend diversification.
Schlosstein is correct: The CPF is good at protecting what is already in the fund (some would say too good). However, the CPF is not good at protecting the retiree from the risk of not having enough in the fund to begin with, something that Social Security is better at.

See also “Retirement risk” and “Planning for retirement”.


“the CPF is not good at protecting the retiree from the risk of not having enough in the fund to begin with, something that Social Security is better at.”

You are right to point that out and I think this is the crux of the matter. If, as the government promises, we have a long period of economic growth ahead of us, what is the floor that the CPF should provide? As we grow richer, surely we would not want those at the lower end of the income scale to be left behind.

But the ERC committee says that half of CPF members will not be able to accumulate even $80k by the time they reach 55. In other words, many Singaporeans residing in our newly developed economy will live more like a third world country.

And yet, what has been our response? It amounts to little more than wishing the problem away.

Like the US, our government is thinking of privatizing CPF, subjecting as Schlosstein puts it “last-resort retirement income to the whims of the stock market.” It is a foolish idea.

The other plan is to extend the retirement age. But that’s not a real solution either. We have no minimum wage and open borders. How much do you think the guy who has accumulated only $40k in his CPF all his working life will be scrapping by at his job at 65 (that is if he can still find a job)?

Schlosstein is silly. Singapore does not have any useful answers when it comes to social security simply because Singapore has no social security.

“The CPF is good at protecting what is already in the fund”

I’m not sure why you say that.

I would have thought that the CPF allowed too much money to be directed towards the property market. As far back as the mid-1980s, there were already a number of reports warning of this. But when Goh Chok Tong took helm and proclaimed an era of asset enhancement, they allowed even more CPF funds to be put in property. And as part of the package, the CPFIS was launched as well. Unfortunately, political ambitions led to reckless behaviour.

As guardian of “last-resort money”, they haven’t been very good at protecting what is already in the fund.

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