CPF may have some issues, but it's nothing like the US Social Security system, and that's a good thing!
CPF may have some issues, but it’s nothing like the US Social Security system, and that’s a good thing!

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).


The Social Security Administration’s Response to “Will Social Security Still Be Around?”

About 4 years ago, I received a letter from the SSA (Social Security Administration). In that letter, there was a special highlighted section answering the question, “Will Social Security be around when I retire?” This was the first time I had ever seen this section of the letter.

And their response (in their own words) was alarming. In short, it was “yes, but“. And then it went to say that by 2040, based on its current estimates, it would only be paying out 78 cents on the dollar. Let me restate that. Of all the money you contributed, you are getting a negative 22% return. No, you don’t get any interest. No, the power of compounding didn’t do a damn thing. Yes, you are still required to contribute to this losing account. And when you finally get your measly payout, you will still get (income) taxed on it (so overall, it’s even worse than -22%). And lastly, you could have done much better had you just kept your money in the bank at 0% interest.


A Best-Case Scenario

Since this is a letter directly from SSA sent to all the members, you have to assume it has been thoroughly examined and scrutinised. The US is known to underestimate negative situations and consequences. And embellish the positive. For example, I think most Americans expected the “War in Iraq” to be small and quick.

So this 78 cents is probably the absolute best case scenario. And 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 @$$. Perhaps the real rate of return is much lower. But they are setting an anchor (a marketing tactic) to preparing their citizens for an even worse scenario in the future.


Why Is Social Security a “Tax”?

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 contribution to a retirement fund or account! The tax is 15.3% of eligible income, with a portion going toward Medicare. 

When it is collected, it does not get set aside and put into a fund specifically for your retirement. Instead, it is spent every year, as part of the government budget. The money mostly goes to pay for federal programs that provide benefits for all current retirees, the disabled, and dependent survivors of deceased workers. Younger workers therefore fund older retirees. (Does this sound like a ponzi?)

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. And their expectancy was relatively short. The life expectancy for someone born in 1935, the year Social Security was created, was only 60 for men and 64 for women. Social Security payouts at the time were set to age 65. (Coincidence?)

And no matter how you feel about CPF, whether you think it’s fair or not. You should consider this one obscure fact about Social Security: The US is under no legal obligations to pay it. Social Security is not your money; it’s the US government’s money.


Social Security is Insolvent


According to an article published by the White House Government Accountability Office, in 2007, Medicare payouts exceeded revenue. So 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. In other words, it is currently insolvent. 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. Though the amount may be much smaller than promised (that’s where the 78 cents on the dollar estimate comes in).

The US has been running huge deficits 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, 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.


How CPF is Different

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/unit trust. The money is not spent on war, or on public works, or to fund current retirees. But it is put into interest-bearing investments so that you can earn a guaranteed return of 2.5% and 4%.

Some people have complained that the guaranteed 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 -22% (before taxes). 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% to be basically risk-free, is quite generous. 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%.


Some Thoughts

Honestly, 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 might 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.

It amazes me that a negative 22% doesn’t enrage Americans, but a positive 2.5% can frustrate so many Singaporeans.


2 Comments on How the Singapore CPF compares to US Social Security

  1. 7.15% is paid by the worker and the other 7.15% is paid by employer. In addition, the benefit distribution stays at the level till you die. With CPF, it is based on how much I put in. This author is not familiar with social security or is misleading

    • Hi Thomas, Thank you for your comment. The Social Security’s rate is actually 15.3%, split two ways. So 7.65% is paid by the employer and 7.65% is paid by the employee. States may also charge SDI (at 0.8%).

      What you get from Social Security does depend on what you put in. Each year, the Social Security office will send a statement that reflects the earnings you made (which also determines the Social Security money you had put in), and makes a calculation of what you “should” get when you retire based on these amounts.

      CPF is also split between employer and employee, though the rates are much higher, starting at 17% contributed by your employer and 20% contributed by yourself. But (and this is a big but), you can use CPF to pay for housing (you definitely can’t do that with Social Security). So while 20% may seem high, a lot of it is used for housing.

      Lastly, like Social Security, CPF is distributed for life. This was a recent, but much welcomed change.

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