Mr Tan Ah Kow is a Singaporean in his mid-30s. He has about $80,000 in his POSB savings account, and about $80,000 in his CPF Ordinary Account.
Every month Mr Tan needs to pay about $800 for his HDB loan. Should he pay with his POSB money, or with his CPF money?
Note that Mr Tan's CPF OA earns interest at 2.5% per annum. Meanwhile, Mr Tan's POSB money earns interest at a much lower rate of about 0.125% per annum (20 times less).
If this difference in interest rates was the only consideration, Mr Tan would surely use his POSB money to pay his mortgage. After all, his POSB money is earning so little interest.
However, in reality, most likely Mr Tan would use his CPF money to pay his mortgage.
Why? Because Mr Tan wants to reserve his POSB money for all his other financial needs and purposes. In other words, Mr Tan wants to maintain his core liquidity.
Mr Tan also knows that if he doesn't use his CPF OA money to pay his mortgage, then all that money would remain largely locked up until he reaches the age of 55 years.
Or 62 years. Or 65 years.
(Or maybe 85 years, depending how the government decides to fiddle with the rules, over the next few decades).
In other words, Mr Tan's CPF funds are subject to long-term political risk. The more money Mr Tan has in his CPF Ordinary Account, the greater the political risk he is exposed to.
Mr Tan may not know the technical terms - such as "core liquidity" or "political risk" - but Mr Tan is not stupid. The extra interest he could earn on his CPF monies (in comparison to the interest on his POSB savings) is almost certainly not going to be sufficient to entice him.
Almost instinctively, Mr Tan will seek to spend as much of his CPF money as he can, on his home loan. In fact, Mr Tan may even use his surplus CPF OA funds to prepay a large portion of his HDB loan.
Meanwhile, if Mr Tan is a prudent man, he might also save for his retirement needs, by investing some of his POSB savings in shares, bonds, ETFs, unit trusts, investment-linked policies and the like. With some care and a little luck, Mr Tan can build up a tidy sum of money over time, to meet his retirement needs. It's just that this money won't be coming from his CPF account.
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If Mr Tan's case is common among Singaporeans, then what does this say about the CPF? Possibly, one could draw the the following conclusions:
(1) The CPF is a mandatory savings scheme, not so much for your retirement, but for your housing needs. Thus the success of the CPF scheme should be measured not necessarily by the number of Singaporeans who can retire comfortably with their CPF savings, but by the average age and the number of Singaporeans who own their own homes and have fully paid up their mortgages.In addition, due to the long-term nature of the CPF scheme and the government's power to write and rewrite the rules, one may also conclude that your CPF monies are exposed to a significant degree of political risk.
(2) If you actually expect your CPF money to cover your retirement needs, you could be seriously screwing your own financial health. Instead you should be actively saving and investing for your retirement, with your non-CPF funds.
But then, just like Mr Tan, you already knew that.