Raising interest rates can help lower-income workers

Raising interest rates can help lower-income workers

One way to help our Central Provident Fund (CPF) members achieve retirement adequacy is to increase interest for the first $40,000 of a CPF member's Medisave Account (MA) and Special Account (SA) from 5 per cent to 6 per cent.

This solution promotes an equitable society because members with a large CPF balance (owing to their higher wages) will not benefit much as only a small proportion of their CPF savings will enjoy this increase in returns.

However, for low- and middle-income workers, the first $40,000 in their MAs and SAs is likely to constitute a large proportion of their CPF savings. Therefore, the increase in returns will be a great boost towards meeting their medical and retirement needs.

While others may highlight that increasing these returns would mean the Government has to take on greater investment risks, this may not be necessarily true.

It is possible for our current system to fund my suggested proposal.

This is because the Special Singapore Government Securities' proceeds are deposited with the Monetary Authority of Singapore, which subsequently converts them to foreign assets that are then managed by GIC.

GIC has been able to generate annual returns of 6.5 per cent over the past 20 years from a diversified portfolio managing all our nation's assets, despite the market volatility.

Using this as a track record, increasing the interest for only the first $40,000 of a CPF member's MA and SA from 5 per cent to 6 per cent is viable.

Chan Choon Yuan

This article was first published on June 13, 2014.
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