There have been many articles and blogs lately about the fairness and viability of the Singapore CPF. As a new PR to Singapore, I know that I have much more to learn and understand on this topic; in no way do I claim to be an expert in it. But I am quite familiar with the US Social Security scheme, its current status and future viability. Since one blogger in particular has compared the two retirement schemes, skewing his findings in favor of these western schemes, I would like to shed some light on some of the “heart truths” about the US Social Security system (all backed by references, of course).
About 4 years ago, I received a letter from the SSA (Social Security Administration) attempting to address some issues with the scheme’s future solvency. The letter had a section entitled “Will Social Security be around when I retire?” This was the first time I had ever seen this section of the letter. The SSA answered with “yes, but” and went on saying that by 2040, based on its current estimates, it would only be paying out 78 cents on the dollar. Let me start off by saying that the US government typically understates a situation to make it appear and sound better than it actually is or will be (e.g., before invading Iraq, the US told the public that it was going to execute a single targeted attack on just one particular person and not wage an all-out, long-lasting, and resource-consuming war – most of us know how that turned out!) so this 78 cents is probably the absolute best case scenario (scary!). Secondly, why do you think a government would even send this letter to its citizens? It’s as if they know something and they are attempting to cover their a**, or they are preparing their citizens for an even worse scenario in the future.
Social security is paid to the US government in the form of the FICA (Federal Insurance Contributions Act) tax. Yes, it is called a tax and not a fund or account! It’s a tax of 15.3% of eligible income, with a portion going toward Medicare. The reason why I believe it is called a tax and not a fund is because the money does not actually go to you or go toward funding your account, but it goes to pay for federal programs that provide benefits for all current retirees, the disabled, and dependent survivors of deceased workers. It is set up like a Ponzi scheme, with the younger workers funding the system to make payouts to current beneficiaries. It has worked well in the past because the Baby Boomers, the largest generation of working adults, were paying into the system to fund the Silent Generation retirees, whose lifespans were relatively short (Life expectancy at birth in 1935, the year Social Security was founded, was only 60 for men and 64 for women). Do you think it was a coincidence that the US set the retirement age to 65 at the time the Social Security system was created?
According to an article published by the White House Government Accountability Office, in 2007, Medicare payouts exceeded revenue, and from then onward, the US government has run a deficit in Medicare spending. In 2011, the Social Security Trustees, who oversee the program, reported that program costs are exceeding its non-interest revenues (insolvency), and by 2033, the fund is expected to be exhausted. But because it is set up as a Ponzi scheme, so long as people pay into it, there will always be something to be paid out, but the amount may be much smaller than promised (that’s where the 78 cents on the dollar estimate comes in).
According to Wikipedia, the trust fund does not represent a legal obligation to Social Security program recipients, and Congress could cut or raise taxes on such benefits if it chooses. Because the income from the Social Security tax is added to the overall US government general fund (i.e., it’s savings account), the government also has the power to “borrow” from the fund and use it for other means, from paying government employees to perhaps even funding wars. The US government also taxes the income received from Social Security. This bears repeating: the money you get from Social Security will be taxed so before you even get to collect your benefit, a portion goes right back to the government (and the US has one of the highest personal income tax rates).
Keep in mind also that the US runs a huge deficit every year, has more than 17 trillion dollars in debt, all while still considered the world’s reserve currency (this means that they, unlike other countries, have a monopoly on money and can freely print money from nothing whereas other countries must trade goods in order to obtain US dollars). Could it get any worse? This is definitely not a model country to look up to. The system is insolvent, unsustainable, and downright laughable.
Singapore’s CPF, I believe, is not set up this way. Funds are deposited into individual accounts that are pooled together and invested. It’s like you own a share of a giant mutual fund. The money is not spent on war, or on public works, but invested in interest-bearing investments so that you can earn a guaranteed return of 2.5% and 4%. Some people have complained that the guaranteed rate of return is low compared to what those funds are invested in. Again, I would like to point out that with Social Security, my return is expected to be -28%, and that is probably the best case scenario! As with any investment, risk is highly correlated with return. For a guaranteed return of 2.5% and 4% that is basically risk free, this is a phenomenal amount. Sure, you might get 17% in a stock one year, but it may nose-dive the next year. Most Certificate of Deposits (CD’s) will not even give you 2.5%. It is the Singaporean government’s responsibility to safeguard your money and I believe it is quite generous to be giving even 2.5%.
I don’t expect to receive anything from Social Security, despite paying many years into it. Many of my cohorts will tell you the same thing. But with Singapore’s CPF, I do expect that it will be there. There is some level of transparency that tells me what it is invested in, how much is in the fund, and how the fund is performing. Though, I believe more transparency would be better. Also, I believe the Singaporean government should perhaps do more to educate and appease the public, especially after the recent kerfuffle that has ignited.