[ST forum]: Protect CPF savings from inflation
-
The Straits Times; Published on Mar 8, 2012
Protect CPF savings from inflation
TO ENSURE the adequacy of retirement funds, Central Provident Fund (CPF) members should consider their 'real' returns on CPF savings, after subtracting inflation, which reduces future purchasing power ('CPF Life: Wouldn't the monthly payout be eroded by inflation?' by Mr Christopher Teng; yesterday)[alt link].
The Minimum Sum is adjusted for inflation, yet the Ordinary Account (OA) and Special Account (SA) 'nominal' interest rates are not; and neither, it seems, are the CPF Life payouts, which thus create significant exposure to inflation.
For example, if the SA nominal rate is 4 per cent, and inflation is 6 per cent, one loses 2 percentage point purchasing power.
From 1995 to 2006, this was not so important because inflation was low, between a negative 0.4 per cent and 2 per cent, averaging 0.87 per cent annually.
But from 2007 to last year, inflation rose dramatically - as high as 6.6 per cent (2008) and 5.2 per cent (last year), averaging 3.5 per cent over this five-year period, which is four times higher than that for the 1995-2006 period.
So, at a 4 per cent SA rate, the real return from 1995 to 2006 would have averaged 3.13 per cent (4 per cent minus 0.87 per cent), and from 2007 to last year, a low 0.5 per cent (4 per cent minus 3.5 per cent).
To demonstrate the magnitude of these real return differences over a career, compound $10,000 annually over a 30-year period.
Using a 3.13 per cent real return yields $25,200 after 30 years, while 0.5 per cent correspondingly yields only $11,600. Thus, today's real yields will leave retirees with only half the real purchasing power of the earlier period, and their CPF Life payouts are also exposed to inflation.
While future inflation and OA/SA rates are unknown risks, it is clear that inflation can affect retirement purchasing power dramatically.
Without inflation indexing, CPF members seem to have no means to maintain purchasing power over the long haul should inflation continue or escalate rapidly.
Perhaps returns in CPF retirement accounts should be set at a minimum real yield to factor in inflation.
Many countries offer inflation-protected notes and bonds, so this is a mainstream practice.
The Government of Singapore Investment Corporation, which invests the CPF capital, has a target long-term real return that takes inflation into account.
Factoring inflation protection into the SA rate assures CPF members, who will rely on their retirement savings, that these are protected from the unpredictable ravages of inflation.
Michael Dee
Copyright © 2011 Singapore Press Holdings. All rights reserved.
http://www.straitstimes.com/STForum/...ry_775061.html
=========
[full size]
=========
My idea is perhaps that in the interim, the govt can give a bonus interest over and above the ordinary CPF interest rate which is tagged to the annual rate of inflation: e.g. if inflation that year is 6% and ordinary rate is 2.5%, then bonus interest of 3.5% is payable on the original principal sum, so that total interest will always at least negate the problem of inflation resulting in no erosion in the principal value of CPF savings. CPF life should also be made equally transparent: each year should end with a bonus payout based upon that year's inflation rate with the baseline payout rate being raised. Should deflation occur, then the bonus would automatically be reduced or cut, ditto the base rate for the next year although an early warning would allow pensioners and annuity holders to adjust their respective expenditures accordingly.
PS: Actually, the BEST idea is to pay interest based upon annual inflation rate: e.g. inflation rate plus say 0.1%: so if there is inflation of 10% that year, interest payable by govt is 10.1%, if there is deflation, then only 0.1% interest is payable: this is a much more stable system since it is the real value of their savings that people are concerned about: no point earning 4% interest when the rate of inflation is 10% becos one would have then lost approx 6% in value of one's savings as everything in the marketplace now costs an average of 10% more now anyhow.
PS: In a state of HYPERINFLATION:where by one definition it is- inflation exceeding 50% each month [Wiki: Hyperinflation], the 2.5% that the CPF OA pays, or even the 5% that the SA might pay is peanuts, peanuts really...
Caption: YOUNG KID .....ALREADY BILLIONAIRE
[Pict source: 'HYPERINFLATION IN ZIMBABWE..' (Sept2008/ [link])] __________________ -
People use most of their cpf money to pay for hdb flat.
Not much left to protect.
-
30 years is a long time.
Haiz.
-
Originally posted by bic_cherry:
The Straits Times; Published on Mar 8, 2012
Protect CPF savings from inflation
TO ENSURE the adequacy of retirement funds, Central Provident Fund (CPF) members should consider their 'real' returns on CPF savings, after subtracting inflation, which reduces future purchasing power ('CPF Life: Wouldn't the monthly payout be eroded by inflation?' by Mr Christopher Teng; yesterday)[alt link].
The Minimum Sum is adjusted for inflation, yet the Ordinary Account (OA) and Special Account (SA) 'nominal' interest rates are not; and neither, it seems, are the CPF Life payouts, which thus create significant exposure to inflation.
For example, if the SA nominal rate is 4 per cent, and inflation is 6 per cent, one loses 2 percentage point purchasing power.
From 1995 to 2006, this was not so important because inflation was low, between a negative 0.4 per cent and 2 per cent, averaging 0.87 per cent annually.
But from 2007 to last year, inflation rose dramatically - as high as 6.6 per cent (2008) and 5.2 per cent (last year), averaging 3.5 per cent over this five-year period, which is four times higher than that for the 1995-2006 period.
So, at a 4 per cent SA rate, the real return from 1995 to 2006 would have averaged 3.13 per cent (4 per cent minus 0.87 per cent), and from 2007 to last year, a low 0.5 per cent (4 per cent minus 3.5 per cent).
To demonstrate the magnitude of these real return differences over a career, compound $10,000 annually over a 30-year period.
Using a 3.13 per cent real return yields $25,200 after 30 years, while 0.5 per cent correspondingly yields only $11,600. Thus, today's real yields will leave retirees with only half the real purchasing power of the earlier period, and their CPF Life payouts are also exposed to inflation.
While future inflation and OA/SA rates are unknown risks, it is clear that inflation can affect retirement purchasing power dramatically.
Without inflation indexing, CPF members seem to have no means to maintain purchasing power over the long haul should inflation continue or escalate rapidly.
Perhaps returns in CPF retirement accounts should be set at a minimum real yield to factor in inflation.
Many countries offer inflation-protected notes and bonds, so this is a mainstream practice.
The Government of Singapore Investment Corporation, which invests the CPF capital, has a target long-term real return that takes inflation into account.
Factoring inflation protection into the SA rate assures CPF members, who will rely on their retirement savings, that these are protected from the unpredictable ravages of inflation.
Michael Dee
Copyright © 2011 Singapore Press Holdings. All rights reserved.
http://www.straitstimes.com/STForum/...ry_775061.html
=========
[full size]
=========
My idea is perhaps that in the interim, the govt can give a bonus interest over and above the ordinary CPF interest rate which is tagged to the annual rate of inflation: e.g. if inflation that year is 6% and ordinary rate is 2.5%, then bonus interest of 3.5% is payable on the original principal sum, so that total interest will always at least negate the problem of inflation resulting in no erosion in the principal value of CPF savings. CPF life should also be made equally transparent: each year should end with a bonus payout based upon that year's inflation rate with the baseline payout rate being raised. Should deflation occur, then the bonus would automatically be reduced or cut, ditto the base rate for the next year although an early warning would allow pensioners and annuity holders to adjust their respective expenditures accordingly.
PS: Actually, the BEST idea is to pay interest based upon annual inflation rate: e.g. inflation rate plus say 0.1%: so if there is inflation of 10% that year, interest payable by govt is 10.1%, if there is deflation, then only 0.1% interest is payable: this is a much more stable system since it is the real value of their savings that people are concerned about: no point earning 4% interest when the rate of inflation is 10% becos one would have then lost approx 6% in value of one's savings as everything in the marketplace now costs an average of 10% more now anyhow.
PS: In a state of HYPERINFLATION:where by one definition it is- inflation exceeding 50% each month [Wiki: Hyperinflation], the 2.5% that the CPF OA pays, or even the 5% that the SA might pay is peanuts, peanuts really...
Caption: YOUNG KID .....ALREADY BILLIONAIRE
[Pict source: 'HYPERINFLATION IN ZIMBABWE..' (Sept2008/ [link])] __________________The kid looks very rich holding all that paper.
Somebody should tell him he could have just looked at his bank statement.
-
Vietnam interest rate lagi better at 14%
but inflation at 18% - and these ppl can cross the dots, figure out the issue.
Singapore GST at 7%
but Ordinary Account 2.50%, Special & Medisave Accounts 4%, Retirement Account 4.%
http://mycpf.cpf.gov.sg/Members/Gen-Info/Int-Rates/Int-Rates.htmnot to mention inflation rate
yet Singaporeans cannot cross the dots n figure out the issue - sad!
-
since they insist on holding on to our cpf they should at least protect it against inflation. but then who are we to say right? its our money but not our money. if you get what i mean.
-
Originally posted by dragg:
since they insist on holding on to our cpf they should at least protect it against inflation.
but then who are we to say right?
its our money but not our money. if you get what i mean.
protect against inflation?
there are many sporadic articles circulating around that our cpf have gone down the wrong rabbit hole.
up to u to believe.
-
Since we are making so much profits from TH, why cannot put some of it back into cpf accounts?
-
Originally posted by charlize:
Since we are making so much profits from TH, why cannot put some of it back into cpf accounts?
the law of the jungle states that
the lion always takes the lion share ......first
follows by the lioness
follows by the cubs
follows by the jackal
follows by the hyena
dont cut queue, pls
-
i am sick of the cpf investment account. when we buy stocks with cash we pay brokerage fees to the brokerage houses. but when we use cpf we have to pay the banks on top of the brokerage charges. then why do we still have to pay service charges? since they are already charging for every transaction they shouldnt charge when there is no transaction. what service did they render if there is no transaction?
-
Some banks, if your savings account drops below a certain amount, you have to pay them.
Go figure.
Maybe, cpf should do this also.
-
Hi, as you know inflation in SG is about 4% now. With unstable food and commodity prices, COE, housing restrictions, this 4% looks set to increase for the next 5-10 years at least.
So how are we to make sure the value of our savings is not eroded? No choice but to invest! But how to invest people may ask. I tell you this- the smart investors make more money in uncertain markets as compared to a bull market. Why?
This is because to make money through investing, one has to buy low and sell high right? If there are no fluctuations, how to buy low and sell high? By utilizing a simple strategy called dollar-cost averaging (email me if you want to know more), even non-professional investors or traders can spread out the risk and make money when the time is right.
Consider investment tools such as investment-linked life polcies (ILP) and unit trusts as a way to diversify and manahe your risk. Through some ILPs you can put in as little as $100/mth to invest in a diverse range of equity in companies like DBS, OCBC, Starhub, Singtel, Sembcorp, SIA engineering, etc..
-Sashti ([email protected])
