Associate Professor Hui Weng Tat ("How to raise CPF returns"; last Friday) says that whether the amount in a Singaporean's Central Provident Fund (CPF) account is adequate for retirement does not just depend on the amount saved; the rate of return on the savings is also important.
Over the years, detractors have criticised the CPF scheme as one that cheats members by using CPF monies to generate a higher return but paying below the rate of return achieved.
What the detractors do not highlight is the fact that the investment returns generated are subject to fluctuations and volatility while the CPF rate paid to members is guaranteed.
This reflects the difference between investing for wealth accumulation versus protecting wealth after retirement.
When an adult is still earning an income, a reasonable investment risk may be acceptable because if the investment results in a loss, it can still be recovered over time.
But for retirees, should there be investment losses, there may not be another source of income or time to recover.
Therefore, increasing the interest rates of CPF savings by 1 percentage point across the board or raising the extra interest on the first $60,000 to 2 per cent cannot be permanent features, unless the income from the investing of CPF monies exceeds the payout permanently without risk of loss.
However, the Government could take a transparent approach and pay more in the years when investment returns exceed the 2.5 per cent and 4 per cent for the Ordinary and Retirement accounts respectively.
This would silence the detractors and encourage members to leave their savings in the CPF simply because they can earn better interest.
Let all Singaporeans rest content, knowing we have an umbrella to protect us when it is most needed.
Letter by Geoffrey Kung
This article was first published on June 10, 2014.
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