What are the drivers behind the failure of CPF as a retirement scheme for Singaporeans?

There are a few reasons which I believe to be significant factors behind the inability of most Singaporeans (now) to meet the CPF minimum sum. 1. Excessive withdrawal of CPF for housing, medical and educational expenditure There is no cap on the amount you can withdraw. Basically, most people use a large chunk of their CPF to pay for their houses, leaving them with almost nothing for retirement. This is partly because housing is the only viable alternative to chunking your money in the CPF account. 2. Lack of low-cost investment options in equities By default, the money in CPF is invested in interest-bearing government securities. Right now, money in the CPF ordinary account (OA) earns you 3.5 percent per annum which is a great return. On the other hand, before the current low-interest rate environment, the CPF OA paid a paltry 2.5 percent interest which could barely keep up with the inflation rate. If you are going to save money for 20 years, it is generally a bad idea to put it all in securities. Generally, starting from your twenties, your portfolio should be heavily invested in equities (shares basically) because in the long term, returns from equities are on the average higher. As you approach your retirement, the balance of your portfolio should be weighed more heavily towards securities. Right now, most Singaporeans have most of their money in securities, regardless of age. This means that they are not taking advantage of the higher returns from equities which gives greater investment growth when combined with the effect of compounding. The current CPF system does allow the account holder to investment in approved investment products from Singapore banks under the CPF Investment Scheme (CPFIS). However, these banks know that the CPF investors are essentially a captive market and offer only expensive retail investment products (e.g. unit trusts) with high sales charges (3 to 5 percent) and annual management fees (at least 1.25 percent) to CPF investors. The fact of the matter is that most of these unit trusts will perform worse than passively managed index funds or ETFs. Yet, most CPF investors have no way to invest in index funds or ETFs because banks do not offer them under the CPFIS although you can get them as a normal retail investor. For the average Singapore family man who can perhaps spare $300 to 400 a month in his CPF after paying for his flat, the only way he can buy an index ETF is if he buys them directly from the stock market under the CPFIS. Oh, he has to pay a $18 commission which works out to be 5 percent of his initial investment. To see how much investing in equities can help grow the sum in the CPF account of an ordinary Singaporean with $400 to spare per month, I'll do three simulations. (A) A monthly contribution of $400 per month over 20 years with an average return of 0.1 percent (fixed deposit) yields... $96,932. (B) A monthly contribution of $400 per month over 20 years with an average return of 2.5 percent (CPF Ordinary Account) yields... $124,013. (C) (A) A monthly contribution of $400 per month over 20 years with an average return of 8.4 percent (Straits Times Index annualized return in last decade, see http://www.fool.sg/2014/03/25/straits-times-index-etf-generated-8-4-annualised-returns-over-past-10-years/) yields... $238,349. Clearly, investing in securities is a really slow way to manage your retirement savings. Yet, for the average Singaporeans, he or she has no way to access option (C). Let's consider option (D) where he buys a unit trust that yields 8.4 percent on average over the long term like in option (C) but with an annual fee of 1.5 percent plus a 5 percent sales charge. (D) A monthly contribution of $400 per month over 20 years with an average return of 8.4 percent less 5 percent sales charge and 1.5 percent management fee yields $190,688 or about 25 percent less than the passively managed fund in option (C). Yet, option (D) is really the best option available today to the average Singaporean who tries to invest in equities with his CPF money.

I don't have the numbers, but I suspect a large part of CPF contributions are tied up in housing. CPF allows withdrawals to pay for housing with the notion that it can be used as a retirement asset. What some folks would do is rent out spare rooms their kids used to stay in to supplement their income during retirement. The alternative is to liquidate and downgrade to a smaller unit, but I imagine that will be emotionally quite painful. A second contributing factor would be that CPF contributions only became mandatory in the mid 1980s. Which means that a portion of the folks currently at 55 only started saving a few years into their career.

It's a failure because of the way people have failed to understand what it truly is.. Due to the focus on it being a savings account of which interest earnings are provided for by the legislators, the people then assume that they will get an additional 2.5% on top of their contribution.However they have little idea that a substantial part of that CPF interest is paid for by themselves, from left pocket to right pocket. Thus a S’porean who have utilised CPF for housing will not only not earn that 2.5 % compounding interest, they have to pay that amount back.Let's say CPF taken out to buy a home is $X, and you need to pay back $X + A into the account, how are you going to find that extra amount of CPF money if your contribution is only until $X ? Well, you pay for it through your own cash on hand, or cash that you are supposed to get from selling your hdb.This is called Accrued Interest on CPF.Let me properly explain what the CPF account really is. It is a shared central account between the people and legislators. Whoever borrows from it has to pay an interest on the sum borrowed, never mind that the money is only there because some are working to put the money in. Let's say the legislators borrow it for investments, they pay the 2.5% p.a. compounded monthly, as generally known. However they are not borrowing because a substantial number of people use CPF on housing, so these people will have to pay the same rate of interest compounded monthly on the amount they have withdrawn for as long as they have a home.When they use CPF to pay the bank for housing loan instalments, they are borrowing from a more expensive interest rate 2.5% of which is charged on the total of the bank loan including bank interest payments, remember its CPF interest charged on total amount withdrawn, not just the amount on housing. Compounded.Little attention has been paid to CPF accrued interest. People always talk about how much they will earn, assuming they are earning, and what's funny is most people utilise all of their CPF for housing before they will even take out cash. If they had used cash instead, they wouldn't be so short of cash later. Ironic isn't it?Some argue that it ultimately goes back to their account so it's not a big deal. Well it is a big deal where that extra money will come from especially when the figure is huge. From their own liquid cash on hand or from some place else as commonly thought?Suppose you buy a new HDB BTO 5-room.Purchase Price = $375kDownpayment 20% = $2k (by Cash), $73k (by CPF),Bank Loan 80 % = $300kMortgage i/r : 2.0 % p.a.,Loan Tenure : 30 years.Mortgage instalments = $1,109 / monthAfter 30 YearsYou would have paid $99,198 to the bank as interest.You would have to pay Accrued Interest of $81,420 on the CPF used for downpayment. $202,746 on the CPF used for loan instalments Stamp fees (negligible for HDB new purchase but substantial for private homes). A total of $284,166 for Accrued interest to CPF.Your total interest paid up for getting a 5 room HDB BTO after 30 years, going by the popular payment scheme of dumping all CPF into the home, is:Bank interest + CPF Accrued Interest= $99,198 + $284,166= $383,364.I've the calculations here - I've also added 4 options for buying a property, from the most preferred to the least preferred.Edit: made wrong calculations but have corrected them.