Mar 4, 2009

How to Borrow Money From Yourself

A letter from Tan Kin Lian to the Straits Times:

ST March 4, 2009
Consider a relief loan scheme for needy workers

MANY businesses are suffering from a severe drop in consumer spending. They are not able to earn enough revenue to pay their wages and other expenses.

These businesses are not able to get the bank credit needed to tide them over until the economy recovers. The banks are reluctant to take the credit risk, even though the Government has agreed to underwrite 80 per cent of any loss.

The Jobs Credit scheme may help these businesses to reduce their operating costs by 5 per cent to 10 per cent, but will not be sufficient to stem the losses. These businesses will then have to retrench their employees.

Many thousands of employees face the prospect of losing their jobs in the near future. The $20.5 billion resilience package will not help them. Job fairs will also not help.

I suggest that a relief loan scheme be introduced. This scheme is to be administered by a government agency and will allow a worker who has suffered a loss or drop in earnings to apply for a loan to cover the shortfall (subject to a monthly cap).

This loan will be subject to an interest rate of 2.5 per cent and can be drawn for a period of up to 24 months. The loan has to be repaid from future earnings or withdrawal from CPF savings.

This is a loan, not an unemployment benefit. It will provide financial relief to affected people who will then not need to rely on credit cards or loan sharks and bear a high interest burden. It will also reduce the bad debt burden from the banking system.

The idea doesn't really make sense to me. Instead of giving the jobless man a loan, charging him 2.5% interest, and having him make repayments later with his own CPF money .... you might as well let him use his own CPF money straightaway.

Among other things, this way he would save on the interest. It's not nice to charge desperate people interest.

Of course, from past experience, we already know how the government feels, about letting needy people use their own CPF money to support themselves (even during indisputably difficult times).

The government is very concerned that you must save enough money to support yourself in your old age. So concerned that it doesn't care if you die of poverty-induced starvation, long before you grow old.

Oh well.

I actually have an idea which modifies Kin Lian's loan scheme, such that it might be more palatable to our pig-headed government.

Instead of the government lending money to the unemployed, it could allow the unemployed person to borrow a (limited) sum of money from his own CPF account. This would be on an interest-free basis (why would you make a person charge interest to himself).

Later on, if/when the chap does find a job, you could make him contribute more money per month, to his own CPF account, to repay the "loan". For example, instead of contributing 20% per month, the person might be required to contribute 30% per month.

The extra 10% goes towards repaying the "loan". After the "loan" is repaid, the person's contribution rate then reverts to the usual 20%.

A neat, elegant idea, isn't it? And our ministers couldn't think of it. Hrrrmph. How very "world-class" they are.

37 comments:

Anonymous said...

Great idea! Give yourself a pat on the back.....wait, you already did.(:

Just out of curiosity, any idea why the government refuses to even consider letting us touch our CPF money?

Cheers.

Anonymous said...

Yeah it's a neat idea, except that maybe there's not enough $$$ in our national coffers to go around should everyone start getting out the money from their CPF account.

Anonymous said...

"Just out of curiosity, any idea why the government refuses to even consider letting us touch our CPF money?"

Bodoh, there ain't no money there anymore!

Anonymous said...

Mr Wang,

Not so simple. There may be hundreds and thousands of such cases. Where and how do they come up with the manpower and resources to evaluate all the cases and the followup? What sort of criteria for eligibility? Too relaxed end up the CPF no longer locked up. Too strict defeats the purpose.

Anyway, what's the big deal if you folks suffer? Time and again, at least 66% will vote for them at every election. If held during recession like in 2001, even better, over 70%. Any wonder why they will likely be holding one soon?

The PAP may screw up or worry about other things but definitely not on whether they will win an election. They are also definitely not pig headed.

Tan Ah Beng said...

I've long ago understood that my CPF is not my money. If I can live long enough to see it, that'll be a bonus.

fr0z said...

That is a great idea, but I'll be very surprised if the government actually allows this to happen.

I don't understand how our national reserves is linked to our CPF. If they are indeed linked, then it makes CPF an even more stupid idea.

Locking up the CPF contributions until you reach some arbitrary "retirement age" is bad, and not letting the people touch it in times like these is pig-headed.

The government should stop being nannies to the people. It's about time for everyone to start thinking for themselves.

Jim said...

When students borrow money from their parents' CPF to pay for tertiary education, they also need to pay interest.

Borrow your own money without paying interest? Over the government's dead body.

Jimmy Mun said...

To be fair to the Singapore government, there are plenty of Singaporeans who cannot be trusted with money. These are the people who would rush to max out their credit to buy a car, two flatscreen TVs, and three smartphones, usually with zero dollar down and assume some future bonus/increment/4D/Toto will arrive to clear their debt. And when shit hits the fan, they go to their MPs seeking a bailout.

Because of the format of Singapore politics - most MPs dwell in their elite upper class caves, emerging only during Meet the People sessions to spend time only with the most irresponsible Singaporeans, before returning to their caves, most MPs will perceive Singapore as an island of irresponsible zombies who needs to be protected from their self-destructive instincts.

Hence the pig headed policies to prevent the abuse/wastage of CPF.

So, if you want to help Singaporeans, you have to know who the cavemen you are dealing with. Tan Kin Lian's proposal may not be the smartest, but it is by far more palatable than Mr Wang's, as far as the MPs are concerned.

Anyway, we do have an unemployment problem, so hiring a few hundred social workers (most of whom should be the middle aged, educated, speaks local dialects and structurally unemployed) to do the evaluation for such loans cant be a bad thing, especially when the alternative is to hire more young and abled bodied men as bouncers for MPs.

As a libertarian, I also think we should overcome our socialist instincts to play nanny.

We should equalise the CPF contribution of citizens with that of PRs/foreigners, and force Singaporeans to save or prepare to starve.

Touching whatever left in the CPF ought to be a painful and costly last resort. Let the extra interest earned go to the prudent Singaporeans who can save for a rainy day.

Anonymous said...

"No Money No Talk".

How abt borrowing from the oil shiekdoms? No? How abt printing our own currency? No? How abt digging deeper into our reserves (sorry PAP)? Then spend our CPF till good times appear.

The said...

Mr Wang, last week PM Lee said Singapore could see -8% GDP growth this year. This evening, MM Lee said the same thing. What took them so long? I saw that coming one and a half months ago in your other thread "300,000 Job Losses is a Scary Thought".

https://www.blogger.com/comment.g?blogID=4405345292513335071&postID=6253080387963010644

Blogger The said...

Looks like the perfect storm is brewing for the Singapore economy. The economists at the MAS/MTI, even if they are cognizant, are unlikely to put up a realistic forecast for fear of panicking the people. The private sector economists are too polite or too kiasu to go against the official forecast.

Let me, a non-economist, cast the first stone and stone the first cast-in-stone forecast.

The composition of Singapore's GDP (2007) are as follows:
Manufacturing 23.7%
Financial & Biz Services 24.6%
Wholesale & Retail Trade 16.0%
These 3 sectors alone account for some 64.3% of Singapore's economy.

Given the global financial tsunami and contraction in trade, it is realistic to assume a contraction of 15% in these sectors, which means GDP shrinking by 9.6%. Assuming a more conservative contraction of 10% for the 3 sectors, GDP will shrink by 6.4%.

So, my quick and dirty forecast for Singapore's 2009 GDP growth - a decline of 6.4% to 9.6%. Let's take the mid point -- minus 8.0% GDP growth for 2009.

And the official MTI forecasters are still mucking around -2% to +1% growth for 2009.

You heard it here first - from a non-economist.

20 January, 2009 15:59

P/S - the above was written before the government revised its forecast (within 3 weeks of the previous one) to -2% to -5%.

I think they are still pussyfooting with their forecasts - my amateurish forecast is -8%.

January 22, 2009 8:56 AM

TeE said...

The no interests part sounds pretty palatable.

When you take money out of CPF, you've already lose the 2.5% interests.

But I guess sometimes, perception counts more than actuality. ;)

themis-euterpe said...

Following on Jim's point, it is cheaper for a university undergraduate to take a bank loan than to borrow from her parent's CPF account - the interest on the CPF loan runs immediately, whereas the interest on the bank loan only starts running six months after graduation. I like your idea Mr. Wang, but you know and I know that it is not happening.

Anonymous said...

Agree with Jim above...we're ALREADY paying interest on money with borrow from ourselves or our parents (in the form of CPF) to study.

but then, since the Gov already have a system to allow students to borrow money to study, why can't the system be expanded to other cases?

I do see potential abuses though. What happens if the person who does it then LEAVES the country and never returns, finding job overseas and becoming a real "quitter".
And there're those who'll never again find jobs, or will have jobs so low paying they'll take an eternity to return the sum borrowed. This effectively drains the coffers without a clear "recovery" date, unlike students who LL have to pay once they graduate!

Anonymous said...

Just out of curiosity, any idea why the government refuses to even consider letting us touch our CPF money?

Because it is a ponzi scheme? Need new entrants and limit withdrawals to keep feeding the pool.

Anonymous said...

Seems like there are more cons than pros to the CPF scheme. Who really benefits from it anyway? So much redtape on its use. If its not doing good for the people, then isn't it time we question the real reasons why it was implemented? Maybe we should do away with it? Does it help if more and more people are made to suspect and associate it as another type of ponzi scheme in the long run? Questions, questions and more questions...

Anonymous said...

Dear Mr. Wang,

I like your idea. As you mentioned, it's simple and elegant.

On a side note, it worries me that a potential candidate for the Presidency was outdone so simply. What's with Singapore?

Anonymous said...

Mr Wang, i think you know the answer why the gahmen reluctant of us drawing our CPF money.

In this time of needs, the gahmen needs our CPF money to continue to pump into the investment arms like DamnLostMoney Holdings.

if this scheme of your is approve, who know how many SG will be affected by the downturn, and that could mean a good portion of the CPF reserve be channelled out as interest-free loan.

The said...

/// Mr Wang, i think you know the answer why the gahmen reluctant of us drawing our CPF money.

In this time of needs, the gahmen needs our CPF money to continue to pump into the investment arms like DamnLostMoney Holdings.

March 5, 2009 8:11 AM ///

Anon @ 8:11 AM,

No, I don't subscribe to such conspiracy theory or hidden agenda. The reason, to me, is simple. The CPF was conceived and meant to be a retirement scheme. Along the way, it has morphed into all kinds of things - you can buy shares, properties, gold, etc, etc. The outcome is that most people have properties (and some below valuation) and shares (many under water). The result is the well-known phenomenon of "asset rich, cash poor".

For most CPF account holders, the cash portion is not enough to lead a comfortable retirement, unless one lives on subsistence existence. So, now they have to come up with annuity schemes, reverse mortgage, etc so that retirees have enough monthly income to get by.

My take - the CPF Board is trying to ensure that account holders have a long enough income stream to sustain those who may live decades beyond retirement.

The typical reaction from CPF holders is that - no, you don't have to tell me what to do - just give me my money on retirement age and I can take care of my needs.

The harsh reality is - oftentimes, the retirees just blow the lump sum away within a few years. The real life examples are many. The temptation to splurge when suddenly landed with a big sum of money is real.

yamizi said...

Sir,

I think 'cos TKL was from that side before and he knows very well touching CPF is a no-no thing which is why he came up of this other idea of his.

Mr Wang Says So said...

But if touching the CPF money is a no-no thing, then giving a loan and letting the borrower repay with CPF money later should equally be a no-no thing. So TKL's idea doesn't make sense anyway.

Mr Wang Says So said...

"What happens if the person who does it then LEAVES the country and never returns, finding job overseas and becoming a real "quitter"."

That's a non-issue. If you emigrate, you get to withdraw all your CPF money anyway.

Mr Wang Says So said...

"When you take money out of CPF, you've already lose the 2.5% interests."

True, but not so simple. Several nuances to consider.

Eg CPF Special Account accrues interest at 4%.

And an extra 1% of interest is now paid on the first $60,000 of a member's combined balances, with up to $20,000 from the OA.

Anonymous said...

I believe it is similar to insurance where u take a loan against your policy.

Anonymous said...

There is not capital in our capitalist nation all because of the CPF. It's funny that not much people think about the problem of capital getting stuck in the CPF, and not allowing peasants to try create value.

For those who believe that all the peasants will squander away their CPF money at one go, please take a break and see the other side of the equation.

Maybe peasants with access to capital will be keen to start businesses, creating value, innovate and generate employment bringing in money? Or maybe not....after all I'm only a peasant myself.

Anonymous said...

Why gahmen refuses to let us touch our CPF even though it is our money ? I bet they used our money somewhere else but refuses to say, no need to guess how much left in CPF if GIC and Temasek already lost billions !!

Anonymous said...

I agree with you Lucky on your statement "The idea doesn't really make sense to me. Instead of giving the jobless man a loan, charging him 2.5% interest, and having him make repayments later with his own CPF money .... you might as well let him use his own CPF money straightaway."

I also wonder why Mr. Tan didn't think of this. This tells me why we don't have enough credible people to run for President and the opposition parties.

The said...

/// I believe it is similar to insurance where u take a loan against your policy.
March 5, 2009 10:35 AM ///

Actually, Mr Wang's suggested alternative is more akin to using the CPF savings to buy property and it is workable. I would like to modify Mr Wang's suggestion as follows:

Like the property scheme, the loan is not really interest-free, but there will be no loan servicing for, say, 3 years. In the meantime, the interest will accrue. At the end of the loan period, the principal plus accrued interest has to be repaid to the CPF account (similar to paying back your property loan when you sell your property). To make it more manageable, the repayment can be spread over the next 36 months. This is similar to Wang's suggestion of 30% contribution instead of 20% contribution.

The Dude said...

Anonymous said... "Just out of curiosity, any idea why the government refuses to even consider letting us touch our CPF money?"

Bodoh, there ain't no money there anymore!

--> Can I also add that if everyone is allowed to take out CPF, then how the hell those pesky financial advisors and insurance agents ask you to invest and make their money off you??

Mr Wang Says So said...

It is quite easy to put various parameters around the withdrawal of CPF funds, to prevent a situation where too many people withdraw too much from their CPF accounts.

For example, you could simply put a cap on the maximum amount that can be "borrowed"; eg not more than $10,000 in one year.

Possibly the government could put in higher or lower limits, depending on factors like how many dependents you are supporting.

Other parameters could be that you must have been unemployed for at least [3] months, before applying for the loan.

Another idea is that funds borrowed from your CPF accounts can only be used for an approved category of basic, necessary expenses eg

(a) mortgage payments;
(b) utility bills;
(c) medical expenses;
(d) children's school fees etc

The borrowed money could be deducted from CPF and paid directly to the relevant creditors.

Anonymous said...

"...It is quite easy to put various parameters around the withdrawal of CPF funds, to prevent a situation where too many people withdraw too much from their CPF accounts..."

i know you need to keep a certain pool size to make considerable gains but my beef is this:

y should the government prevent such a situation??? the fact that you need to prevent "too many" ppl from withdrawing money is a dangerous proposition especially when it is concerning retirement funds...

just like banks and insurance companies, MAS require the insurance company to set aside a certain percentage of capital guarantee or liquidity or something like dat so that in event of "too many" ppl withdrawing their money, policy holders or bank accounts can be safe in getting their monies.

i'm very sure the cpf does not have this requirement and that is where lies the danger. the whole cpf scheme can be operated like a ponzi scheme and monies can be invested haphazardly and when one day this bubble bursts, the ppl that are going to lose big time are the man in the street. not the agents, not the investment bankers, not the fund managers, certainly not the gahmen and our ministars!

pls lets learn from this financial crisis and and learn from OTHER country's mistake!

Anonymous said...

".... The harsh reality is - oftentimes, the retirees just blow the lump sum away within a few years. The real life examples are many. The temptation to splurge when suddenly landed with a big sum of money is real...."

The said.,

true and not true.. i believe there are more and more eduacted ppl in singapore who are more and more financial savvy who are smart enough to take care of their own finances. we have moved beyond the days where 50% or less of our population has zero education!

my father only has 3 o level passes, he is coming 59, but he knows shit like he should invest his savings in much much low risk low return investments as he cant afford to lose any of his savings now...

i met a elderly couple (maybe mid to late 60s?) with grown up kids during my house hunting a few mths back as i was looking for a rented place. we introduced ourselves and got to know each other better and i ended up getting a lesson on property investments and the importance of being financial savvy to survive in this country...

and to think most of us young ppl learn all these things from MBAs or CFA!

lau min-tsek said...

Mr Wang's idea is not new.

http://en.wikipedia.org/wiki/Superannuation_in_Australia

Have a look. It is workable with the right policies and controls.

To quote: ".....strict government rules prevent early access to preserved benefits except in very limited and restricted circumstances, including severe financial hardship or on compassionate grounds, such as for medical treatment not available through Medicare."

On the other hand......

I can see where TKL is coming from. As he used to be part of the establishment, he probably can see how to make a suggestion more digestable to the higher powers. Or maybe it is just in his jeans.

Many ways of trying to interpret why an interest rate is needed. One, is to act as a barrier for people to treat this as an easy opportunity to withdraw their CPF earlier.

Two, it can be argued that since CPF ordinary account is meant as pension/retirement fund with 2.5% interest, when you pay back the CPF you borrowed, you will need to top up the interest for retirement. If this is the thinking, I don't agree, but I can see where he is coming from, and how such a concept may be more acceptable to the government.

TKL is prob only looking at the ordinary account as the special account is usually not touched. Hence the 2.5% he mentioned.

Thirdly, any proposal to touch CPF will be met with strong opposition from the government. No doubt there will be debates that there are lots of social programs that will help poor people that will provide for minimum quality of life without touching the retirement funds. Having a penalty of 2.5% interest may be more acceptable to the government as a proposal for a "last resort" source of funds. (frankly, I don't think so if this is TKL's thinking.)


Fourthly, I think it is going to be a bit difficult to have a clear cut definition of the criteria for hardship cases to withdraw CPF. Some hardship cases are very clear cut, some are not. For eg, a bankrupt person in his 20's may be desperate, but he is young, protected by bankrupcy laws, has less commitments etc etc, so it may be argued that he should not be allowed to withdraw his CPF.

However, if you RESTRUCTURE the idea of CPF withdrawals as a LOAN, it becomes a bit easier to administer and sell to the government. The burden to proof that you are really really really really really desperate is lesser. It is a loan after all, not a withdrawal.

The basic idea from TKL says you pay 2.5% interest deducted from future salary and contributions. It does not say what happens if you have no salary or contributions forever. I assume that you never have to pay back under TKL's proposal if you REALLY are a desperate hardship case and could never pay back.

In other words, for real hardship cases, this plan is in effect a withdrawal. For the not so clear cut hardship cases, this is a loan, which perhaps is fairer.




Frankly, I don't think TKL's idea or Mr Wang's idea will be accepted any time soon.

For one, the CPF has been butchered by all sorts of national policies that it is no longer able to adequately fulfill its original intention as a pension/retirement fund. Adding another dimension to its use and early withdrawal will not sit well with government planners.

lau min-tsek said...

BTW, all these discussion is well and fun, but why not just ask the man himself?

http://www.tankinlian.blogspot.com/

Ah.... the powers of the internet....... maybe he may even drop a message here......

Tan Kin Lian said...

Hi friends

Here is my reply to several comments in this blog.

My proposal of giving a loan at 2.5% is similar to withdrawing money from CPF. The borrower earns 2.5% on his CPF account and pays 2.5% on his loan.

There are two subtle, but important, differences:

1. The borrower can pay back his borrowings from the savings in the future. This keeps his CPF savings, intact, as it is intended for his retirement.

But, if he cannot repay, the borrowings will be deducted from the CPF savings on withdrawal ... As the interest charged is the same as the interest earned, the borrower does not really incur any cost.

Perhaps I should have also mentioned that the interest charged on the loan can be accumulated with the loan, and do not have to be paid monthly.

2. My scheme also helps people who has fully withdrawn their CPF savings, e.g. for property purchase. They can have borrowings even if their CPF is fully exhausted.

Some comments said ... "The Government will never agree". This type of remark is not helpful. Let us give our idea, and let the Government decide on what they think is best.

It is more helpful for people to give support to an idea, rather than to be negative and say, "The Government will never agree".

Tan Kin Lian

Mr Wang Says So said...

Hi TKL:

Firstly, I understand the constraints of writing a letter to the ST Forum. It's not exactly the kind of place where you can spell out all the nitty-gritty details, even though they're important.

One of the difficulties of the idea of the govt giving a loan is - what if the borrower is unable to pay back? Eg he remains unemployed for a long time.

Politically, it is a very tricky situation for the government. It is after all not a private corporation such as a bank. It is most unseemly for a government to be suing needy, unemployed citizens in court, to get a loan back.

That is why it is much better to let people borrow from their own CPF accounts, than from the government. Then the key, as I see it, is to place appropriate controls on factors like:

(a) who is eligible to borrow; and

(b) the amount that can be borrowed.

Logistically, allowing people to borrow from their CPF funds is also an idea that is much easier to implement, than setting up a brand new loan scheme. The simple reason is that the CPF system already exists; it's been around for many years; and people understand it. To let people borrow from their CPF funds is simply an idea that can be overlaid on a system that is already existing and in operation.

Going back to your idea, consider the situation where the unemployed person has no meaningfully available CPF funds (eg because all or almost all of his monthly OA contribution goes towards his mortgage payments).

In such a case (which is probably a very common scenario), you propose anyway that the govt extends him a loan and charges him interest, and the person will then repay from his future earnings. As I said, it's somewhat unpalatable for the government to charge unemployed people interest for a loan that they need for what are effectively survival purposes.

Anonymous said...

Dear Mr Wong:

I think this is a brilliant idea. I was thinking of something along the same line (aka borrowing from our own cpf) but I couldn't have said it as simple as you did.

Thank you.

Anonymous said...

Dear Mr Wang,

I like your idea better! If ultimately the repayment of the loan is going to be via CPF. Why go to the extent of setting up a loan scheme to borrow money from our CPF when the same objective can be achieved using the method as you hv suggested. We can skip the whole interest part.

cheers,
Shirley