12 March 2014

CPF Sense And Nonsense Part One

Much criticism has been levelled at the Central Provident Fund ("CPF").

Let's examine some of them in this first part of a two-part article.

CPF contributions are a tax on members
Income taxes and GST, once collected by Inland Revenue Authority of Singapore, are paid into the consolidated fund that belongs to the State. They no longer belong to the individuals who paid the tax.

CPF contributions are paid by us and our employers into our own CPF accounts and credited to sub-accounts (Ordinary, Special, Retirement and Medisave) in our own respective names. Unlike taxes or the proposed pre-funded portion of MediShield Life premiums, the moneys that we pay into our CPF accounts belong to each of us individually. Even the moneys paid into CPF LIFE, other than the portion that is pooled to ensure (or insure) annuity payments to us after our Retirement Account is exhausted, belong to us.

CPF contributions are regressive
CPF contributions are not required to be deducted or paid for any part of a person's salary above $5,000. The more a person earns beyond $5,000, the less (expressed as a percentage) of his salary is deducted for CPF contributions.

This does not mean that CPF contributions are regressive.

As mentioned above, CPF contributions are not tax.

CPF contributions are tax deductible. Capping CPF contributions limits the tax relief of high-income individuals. It also caps the amount of employer CPF contributions that high-income individuals would otherwise receive.

Capping CPF contributions at a salary of $5,000 is progressive, rather than regressive.

CPF moneys are not enough for retirement
Many people do not have enough in their CPF accounts for their retirement.

This, however, is not a defect of the CPF scheme.

The main reason is that we are allowed to use their CPF moneys to purchase our homes, and our homes cost a lot.

If we were not allowed to our CPF moneys to purchase our homes, we would have lots more money in our CPF accounts. However, we would have much less disposable cash because we would have to pay for the purchases of our homes with cash. Perhaps, too, many of us would not be able to afford to buy our own homes, although the flip side may be that residential properties, especially HDB flats, may cost much less than they do now, simply because not many people can afford them.

Interest should not accrue on CPF loans
When we sell a property that we had bought using our CPF moneys, we must put back into our CPF account the amount that we had withdrawn plus interest that we would have earned had we not withdrawn our CPF moneys.

Some people argue that we should not be required to put back the accrued interest because our CPF moneys belong to us. Why should we pay interest when using our own moneys? This argument holds water only if we are required to pay interest into our CPF account every month for as long as we own the property. However, we don't have to refund the accrued interest unless and until we sell our property.

Furthermore, if the sales proceeds are not enough for the full CPF refund, we do not have to top up the shortfall in cash, provided the flat is sold at market price.

When we sell the property after our 55th birthday, we are required to refund into our CPF accounts just enough to meet any shortfall in our cohort Minimum Sum and the current Medisave Minimum Sum, which likely means that no interest needs to be repaid to our CPF accounts.

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