Today’s blog post is a very old one that has been sitting in my Drafts folder, and it was partly inspired by the idea of threat modeling. Figured it would be a good idea to dust it off and post it, because why not?
Sort of like “thinking out of the box” type of articles.
Couldn’t remember whether it was something I wrote while I was attending a security conference? From the sound of that, it was obviously more than a year ago.
Decided to keep most of it in its very raw form and made minimal changes, largely to correct typo errors etc.
I suppose the topic regarding the transfer of CPF-OA to CPF-SA has been discussed to death. Rather than dwell on the specifics any further, why not let me poke around the topic instead of looking at it as a mathematical question.
From Wikipedia, it states that the “British colonial authorities in Singapore created the Central Provident Fund in 1955 as a compulsory savings scheme to assist workers to provide for their retirement without needing to introduce a more extensive and costly old-age pension.”
Note that there wasn’t any mention of housing initially.
Later on, we see that “as Singapore’s economy developed, the Central Provident Fund was expanded in 1968 to provide for housing expenses under the Public Housing Scheme.
In 1984 the Central Provident Fund was again expanded to cover medical and care expenses. As the Central Provident Fund developed, dedicated accounts were created for the different expenses the Fund was designed to cover, to ensure a more targeted savings approach.”
What was originally a system to cater purely for retirement has a new found purpose.
And perhaps, agenda?
Source – National Library Board (NLB)
What We Already Know
Enough with the background story.
First, the basics from CPF official website.
- Ordinary Account (OA) - For housing, insurance, investment and education.
- Special Account (SA) – For old age and investment in retirement-related financial products.
- Medisave Account (MA) – For hospitalisation expenses and approved medical insurance.
- Retirement Account (RA) – On your 55th birthday, a fourth account, the Retirement Account (RA), is automatically created.
When you turn 55, a Retirement Account will be created for you using savings from your Special Accounts (CPF-SA) and Ordinary Account (CPF-OA) to form your retirement sum.
A Gentle Nudge
Also, we can’t really talk about CPF-OA without linking it to housing, or HDB. When a system is put into place, there are options made available to nudge people towards a certain direction.
I mean, it’s obvious right?
With CPF-OA at 2.5% vs HDB Loan at 2.6%, we know what is the expected behavior. People would tend to be better of by prioritizing the repayment of HDB loan and gravitate towards a state of lesser dollars in OA and zero debt by shortening the loan and maximizing repayment.
Except that now you still owe money – to yourself, that is.
Asset rich and cash poor. But hey, this is good, right? You are 100% invested in your home and a proud home owner. We have “skin” in the “Singapore game” now!
See above – Lee Kuan Yew’s intention. Worst case scenario, part of the place can be rented out for income, or simply enroll in the Lease Buyback Scheme to monetize the flat. Probably enough to sustain the occupants till they pass away.
As long as we don’t end up being a liability for anyone (or the system).
Obviously they are not so concerned with this aspect with a mere 0.1% just to effect a psychological difference.
A gentle nudge coupled with natural adversity against debt is an excellent first line of defence?
When People Don’t Play By The Rules
We will then end up with folks like me who, for example, have $70,000 in CPF-OA and outstanding HDB loan of $60,000, but refuse to pay it off. Instead, I’m happy to drag the loan on for another 20 years.
What if we can do stupid things and lose a significant portion of our CPF-OA in investment, though? Now we’ll end up owing HDB and myself money, which is still bad but not the end of the world.
Just committing ourselves to a longer period of repayment. Thanks for continuing to be part of Singapore’s workforce and contributing to the economy till old age.
No early retirement. Last resort? Still can live off the HDB – see above.
A Stronger Nudge
Perhaps let’s tackle an even higher level of social stability.
How about letting you invest in CPF-SA for 4% returns. It has to be substantial, in order to lure people in. Yes, it’s for their own good too. But at such substantial returns, we gotta have big-ass conditions tied to it.
Irreversible. Can’t withdraw until 55. Can the rules of the game change in future? How much is flexibility worth?
CPF website gives a helpful word of caution before a transfer.
4% is significant, but what it buys for the system is inherently worth much more. Citizens are now even more invested in their own retirement and of course, the country.
Stability and predictability is priceless. And they would be more inclined to keep working, too – believing they’re getting a good deal out of it and securing their retirement.
Come to think of it, it is probably a win-win.
Scared Of Commitment
The more you commit, either through buying an expensive HDB/EC or topping up from OA to SA, the more you are tightly intertwined in their grasps.
Moving back to CPF-OA. Home ownership, for many, is buying something you can not afford. We are just leveraging on debt. Everyone’s favourite is HDB.
Just because we’re using CPF-OA money makes no difference to me. It is like a smokescreen to lure people to buy the most expensive property they can get. Because compounding interest kicks in, this means the apartment will have to appreciate at least at the same pace or we end up underwater.
Just because it is money that we cannot touch? On more than one occasion, this is what people have been telling me.
Entrapment is what the system loves. Stability, remember? Continue to work – is it by choice?
Is It A Mathematical Question?
It is a personal choice that I don’t do transfers from CPF-OA to CPF-SA.
Consider a newly graduated couple who is applying for a new 4-room apartment in Bidadari – it will cost an average of $500,000. If they had kept 10% in CPF-OA for downpayment (5% each at $25,000/pax) and transferred the remaining to CPF-SA, they will need to borrow $450,000 (from HDB, for simplicity).
Assume the following –
- HDB Loan @ 2.6% : 25 years (max)
- Combined Salary : $7,000
The initial year(s) are going to see a shortfall of $431.51 monthly Ouch.
I’m one of them who don’t play by the rules. If I do a transfer from CPF-OA to CPF-SA, I’m losing flexibility and security.
Even though CPF-OA money is moolah that I cannot touch, I went for a very affordable apartment and max-ed out the loan at 30 years.
I still have about 20 years to go. Even after parking $60,000 in my mum’s CPF-RA account and investing $20,000 with Endowus, I have enough to pay off my portion of the HDB loan – but choose not to.
With that, even if I stop full-time employment and decide to pursue other interests etc, I would have no housing loan to worry about – plus my remaining (not topped-up) CPF-SA and CPF-MA will continue to compound to form my CPF-RA.
If I die before the thirty years are up, then my wife gets the apartment for free without further repayments.
There are long routes, and there are short routes. There are safe routes, too. People always like to ask, which route is the best? Best, for whom?
All roads lead to Rome, right? Will Rome still be there in 20 years? Do I even want to go to Rome?
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Hello! I’m Kevin, Turtle Investor
At the age of 30, I am the Personal Finance Blogger who laid claim to a negative net worth of minus $25,755 – and decided to turn things around.
- Seven years later in 2019, I hit CPF Full Retirement Sum (FRS) of $176,000 without making a single cent of CPF top-up.
- In eight years, I added $453,000 to my net worth (excluding the value of my HDB apartment).
- I made over $12,000 in alternative income in 2020 (and $20,000 in one month) in addition to my full-time job.
I am married to a lovely wife and that means dual income with no kids. In my free time, I chase miles so that we can fly in business class. My hobby is making pocket change off this blog and sharing everything I know with you!