A Better Balance Of Interest?

Source : TODAY, Monday, September 24, 2007

DURING the last sitting of Parliament, there seemed to be a disconnect between the questions and the answers in reply, on the issue of Central Provident Fund (CPF) interest rates.

Members of Parliament including Mr Inderjit Singh, Mr Ong Kian Min and Mr Sin Boon Ann, asked if the returns on CPF savings could be higher, particularly considering the annual returns on investments ranging from 8 to 18 per cent that the Government of Singapore Investment Corporation (GIC) and Temasek Holdings have obtained over the past decades.

Manpower Minister Ng Eng Hen's answer — that the new CPF interest rate structure is "more than fair" and matches what is available in the market for such a risk-free investment — left the question unanswered.

Even so, should CPF members get the benefit of the better returns earned by investment of CPF funds?

The Manpower Minister said it was not realistic to expect CPF interest rates to mirror the returns of Temasek and the GIC in their investments. To illustrate, he used the example of bank deposits: "You put it there and you get 2 per cent. The bank publishes a report and says ... it earned 8 per cent. You go to the bank and say, 'I want 8 per cent'. It doesn't work."

Comparing the compulsory retirement fund managed by the Government with a profit-making entity like a bank cannot be the end point. Unlike a bank, the board holding the retirement fund does not exist to earn a profit. The Government would be better characterised as a trustee of retirement funds. And trustees are duty bound not to profit from their position.

Nevertheless, yesterday, Prime Minister Lee Hsien Loong pointed out that the GIC invested long-term, and its portfolio was affected by the ups and downs of the stock market. A downturn would mean "not just your interest is less — that means your capital gets less".

There have been attempts to account for the different rates of return by reference to the different risks borne by the CPF and the Ministry of Finance. But even the Government-assured CPF interest must be based on investments generating adequate returns.

Second Finance Minister Tharman Shanmugaratnam admitted as much when he said: "The CPF Board will pay for (the additional percentage point in interest to members) through the interest it receives on the bonds it purchases from the Government. Government's debt servicing costs will therefore increase. And we will have to meet this through returns on investing the CPF monies."

But the bottom line is that, over the past few decades, CPF funds have been earning investment income that is at least between three and five times more than what CPF members have been receiving in interest.

The most obvious proof that a higher rate of interest can be paid on CPF balances is the very proposal to raise the interest rates now. There has been no apparent change of circumstances except that the Government now feels that members need better returns to provide for their retirement. So it would seem that the capacity to pay better interest rates was always there. And the capacity to pay higher rates is still there. The question is only whether it is the best way to utilise surplus investment gains from investment of CPF funds.

The starting point is this assurance from Mr Shanmugaratnam: "There is no money that is disappearing here. Nothing being squirreled away that disappears from Singaporeans." Few Singaporeans will doubt that.

The Minister explained that the surplus investment income was used to fund housing grants and other subsidies. Some surplus would go towards building on the national reserves. He stressed that even if the surplus income from investment of CPF funds does not result in higher returns to CPF members individually, it ultimately does benefit Singaporeans.

Fair enough. But can't a better balance be struck between group and individual interests? That is, pay more interest without unduly affecting the eventual plough-back into the economy and social reform measures?

Nominated MP Siew Kum Hong quoted a 2002 Asian Development Bank Institute paper that stated: "To the extent the Government earns a higher rate of return on the CPF funds than what it pays to members; there is an implicit tax on CPF wealth. This tax is likely to be fairly large and regressive, as low-income members are likely to have most of their non-housing wealth in the form of CPF balances."

With projections that CPF members may not have enough funds to retire on, it may be a good time to review if such a regressive form of indirect taxation is apt, especially considering the formidable amount already sitting in the national coffers. As noted by Mr Shanmugaratnam in an earlier speech, the trick is to aim for additions to the national reserves "that will neither result in over-saving at the expense of the current generation, nor deplete what should be protected for future generations".

Why can't this be better achieved with a more generous return on CPF savings? Let the brilliant minds in and outside the Government provide ideas that can enhance the CPF debate and bring about a better understanding between the Government and the people.

The writer is a legal academic. These are his personal views.