Maintain CPF Social Contract

Source : TODAY, Friday, August 31, 2007

Fairer if CPF minimum interest rate is preserved

I REFER to Minister of Manpower Ng Eng Hen’s recent proposal to change the interest structure for CPF members’ Special, Retirement and Medisave accounts.

Currently, the interest rate for the Ordinary Account is based on the 12-month fixed deposit and month-end savings rates of the major banks. For balances in the Special and Retirement accounts, members earn an additional 1.5 per cent above the normal interest rate. From 1 Oct, 2001, this also applied to the Medisave account, to help CPF members build up their Medisave savings faster in view of escalating medical costs.

Under the CPF Act, the Board pays a minimum interest of 2.5 per cent per annum when the CPF interest formula yields a lower rate. The corresponding minimum for the Special, Retirement and Medisave accounts is 4 per cent per annum.

The provision of the minimum rate is commendable and serves as a basic safety net to preserve the value of CPF savings over the life of the working population. This has underpinned the social contract for CPF savings between the Government and the people. The importance of this minimum rate can be seen from the fact that the rate from the CPF formula had yielded a lower rate for eight years, from July 1999. I am sure many people are thankful for the minimum rate during this prolonged period of low interest rate.

Recently, Dr Ng proposed to unravel this contract, and peg the interest rate for the Special, Retirement and Medisave accounts to “long term bond rates” with no minimum.
He said that based on the prevailing low interest regime, the new interest rate would initially be lower than the present 4 per cent.

Going by past trends (for example, from July 1999 onwards) and the current outlook, I am concerned that “initially” is likely to be a fairly long period, when the interest rate could be shaved by 1 per cent or even more.

I suggest that the longstanding social contract on CPF interest rate be preserved — that is to peg the rate to long term bond rate, but subject to the current minimum of 4 per cent per annum.

Or, the Government could defer any change until the target date of 2012. This would be fairer and dispel any notion that the Government is taking from the Special, Retirement and Medisave accounts to fund the 1 per cent bonus interest rate on
the first $60,000 of CPF members’combined accounts.