Should the CPF System be abolished?

If you’re a Singaporean, chances are you’d have heard of these 3 words: Central Provision Fund, also fondly known as CPF. The CPF is broken down into 3 categories: Ordinary Account, Special Account & MediSave Account. CPF contributions will amount to 37% of your monthly salary, with 17% contributed by your employer, and 20% contributed by yourself, with varying percentages going into OA, SA & MA as you move on to different stages in life. CPF contributions have divided Singaporeans, with some in support, and some opposing it strongly. To most of us, we see CPF as our “nest egg” for retirement or for big purchases, when it comes to purchasing your first home. Today, we’ll look at the pros and cons of CPF, and why I still think it’s important for most Singaporeans, despite a huge proportion of Singaporeans not being happy with it.

Does any country have a CPF system too?

You might be surprised to hear this, but the CPF system is not exclusive to Singapore. In the U.S., it is more fondly known as 401k, with the exception that it is an optional thing, where employees can choose to opt in. According to the U.S. Census Bureau, only 32% of Americans are making use of this tax-free option, where they can get matching amounts from their employers, essentially amounting to “free money” for them.

This has led to a lot of social issues in America itself. Lifestyle inflation is something that most of us is guilty of, and sometimes even subconsciously, without knowing it yourself. This has led many Americans to have limited disposable income, whereby they live paycheck-to-paycheck, without much savings for rainy days or for their retirement. In fact, in a 2021 study by Natixis Global Retirement Index, over 59% of Americans accept the fact that they’ll have to keep working longer, while 36% believe they will never have enough money to be able to retire.

Homelessness is also another key social issue in America. As of 2021, based on official data, there are over 500,000 cases of homeless people, representing 0.2% of the American population. However, realistically, this number is expected to be higher.

The pros of CPF

I would love to think that as Millennials have more access to financial literacy online (Literally, there’s so many places to learn from these days!), they would be more financial-savvy, and would see savings and investments as a more important part of their lives. However, statistics seems to prove otherwise, with Singapore’s Gross Savings Rate dropping since 2010, showing that people are saving/investing less. These sentiments seemed to be echo-ed out too upon checking in with some of my old acquaintances.

This reminds me of a study by OCBC back in 2020, whereby it was mentioned that 2 in 3 working Singaporean adults do not have enough savings to last them more than 6 months. This is actually a worrying trend, given that we are ranked one of the top few countries in the world with the highest GDP/capita.

So, to put this into perspective, if Singaporeans don’t even have enough money to last 6 months, what makes you think they would have enough money for retirement? Or even to BTO, whereby the median BTO costs approximately $400,000 these days?

This is where CPF comes in, to help them offset some of these costs, to be able to retire without worries and have a flat to stay in. This is also partially the reason why Singapore’s homelessness rate stands at one of the lowest in the world.

The cons of CPF

I’m not going to lie, I’m not a fan of the CPF system itself. Whilst I understand that it was for a better cause, I believe that there is some form of missed opportunity cost over there, especially when it comes to a huge chunk of your funds being locked up, and you having to miss certain opportunities due to the lack of funds.

Is there a best-case scenario for CPF?

Looking at the pros & cons of CPF, I do believe there is a best-case scenario where things could work out to both sides. The solution might be to make CPF optional, BUT only for a certain criterion of people: perhaps only those people who can prove that they have sufficient retirement funds and/or can afford housing in Singapore. However, then again, this might bring about talks of discrimination, so it might not be the best solution after all.

My Overall Stand

In general, Singaporeans are not saving enough, and most will have problems with retirement or purchasing of residential buildings without the help of CPF. If the CPF system was abolished today, I believe the proportion of Singaporeans unable to retire and the homelessness situation would be worse than it is today.

However, the one thing I would like to note is that you should never depend on CPF alone for your retirement funds. If you’re reading this, chances are you have a long life ahead of you, with a lot of runway to accumulate wealth.

This new year, do up a resolution and look at where your money is being spent, and cut down on any unnecessary spending to help build up your retirement fund. Remember: Compound interest works in an exponential way, and use your money to help make more money.