Monday, June 30, 2014

CPF interest returns are bad.... aren't they?

There's been a recent hullabaloo over CPF monies. I won't go into the blogger vs the PM issue, that's been done to death on many other sites.This post is rather about the articles and commentaries that began to spring up in the wake of that saga, along the same vein of how the Government is stealing from the people using the CPF scheme, how the Government lost billions of taxpayer monies due to investment losses, how people are losing out because the CPF returns are so little, and so on.

Most of these arose purely from a lack of understanding of how the CPF works and why it exists. But some treaded closely into the realm of being downright dishonest. Many of them were written by people angry with the Government for other reasons.

I usually stay on the sidelines, because unless I know any of these angry people personally, it will usually do more harm than good to try to explain things to them. In any case the information is available out there if they want to try to understand the issues; most don't because it's not about truth, it's about finding other voices that support the position they've already decided they want to take. If they were intellectually honest, they would give some serious thought as to the social safety net trade-offs that every country has to face and weigh whether we want to follow the models set by other countries that have failed or are in the process of a slow but spectacular failure.

One recent incident, however, bothered me. I know someone who has gone through some difficult times recently and, I can only surmise, has come out of it bitter about things. He has gone on some kind of anti-PAP rampage, posting article after article about the bad things that the Government has done. On one occasion, he posted a link to an article which claimed to have done research about bond rates and other investment instruments over the past few years, which showed what kinds of returns could have been gotten if people had been given their CPF monies to use for investments instead of collecting the "paltry" interest from the CPF Board. This is a very common thread among the anti-CPF bloggers out there.

Before even going into complicated discussions about foreign exchange rates and investment returns that can be obtained from the market (which itself presumes you are a savvy investor), there is a big glaring problem with the argument. From the get-go this particular argument makes no sense at all because the tax rate is completely (and conveniently) left out of the analysis. I've not seen a single such article even mention the fact that CPF monies are tax-exempt. Which means, if you earn enough money to even have disposable income to invest, above and beyond your living expenses, you are likely to be paying anything from 6% to 17% tax at the top end of your income. This means, if the extra, say $600/- or $1,000/- a month that you are currently contributing into CPF comes home to you instead in the form of hard cash, you would already be "losing" 6% and above from the tax liability on that income. Which means that CPF monies that are earning you 4% interest in the CPF bank are in effect earning you as much as the equivalent of 21% interest, the kind of rate you would have had to get from an outside source to get the same amount, after tax. Of course, at this point, someone will say that the tax rate is too high. Before venturing further down this rather shaky ground, one ought to realise that we are 94th in the world in maximum income tax rates, with just about every other country in the world with similar or higher standards of living having higher tax rates than us.

But of course, this fact will weaken any anti-CPF argument, so would people hide it from public knowledge? Turns out, that's exactly what they do. When I posted a comment describing this on that person's Facebook page, the comment was immediately deleted. No counter-argument, no disagreement, no facts to disprove this, the whole comment was just deleted. I have to say, I lost a lot of respect for him straightaway. Don't get me wrong. I think the current PAP government is rather a mess, has lost its moral compass and has too many incompetent people occupying important positions. The good leaders seem to almost be dragging the weak ones along by sheer force of will. I wouldn't be surprised if several opposition candidates in 2016 far outshine their PAP opponents. And of course, who can forget this. However, it's one thing to have an axe to grind against the Government. It's another thing to perpetuate lies. If that's what people will do to push their political goals, I fear for what kind of future government these people will end up electing. Let's hope we don't all live to regret it.