cpf useful tool irrational humans

CPF Is A Useful Tool For Us Irrational Humans

We have individuals min-maxing CPF to give themselves a fat retirement while we also have individuals complaining that the government wants to control their hard-earned money in CPF. Generally, the former has CPF as one of their multiple pillars for retirement while the latter will have to depend on CPF and cash savings.

There won’t be as much of a need for such a retirement scheme if humans are perfectly rational with self-control. No matter how strong we think our self-control is, humans have problems with delayed gratifications. We tend to prioritize the short-term over the long-term. This is especially so for the latter group, it will be a problem for themselves, their families and the country if they have unfettered use of their CPF funds, leaving them without any retirement plans.

We will look at how CPF is a useful tool for us irrational humans.

What Is The Purpose Of CPF?

purpose of cpf

Photo by Galen Crout, Ashkan Forouzani, Towfiqu barbhuiya on Unsplash

For those not familiar with CPF, it is a mandatory social security savings scheme funded by both employers and employees. A portion of our salary will be contributed to the 3 accounts of our CPF.

Ordinary Account (OA) Primarily for housing and retirement needs
Special Account (SA) Primarily for retirement needs
MediSave Account (MA) Primarily for healthcare needs

The primary purpose of CPF is for our housing, healthcare and retirement needs. Besides the big three, there are also other usages of CPF, we are also able to use our CPF balances for education, investing and insurance.

When we reach 55, a Retirement Account (RA) will be created using our OA and SA balances. A premium will be deducted from our RA when we join CPF LIFE (which can be from 65 to 70) to fund our CPF LIFE plan to provide us with monthly payouts till we die.

What Complaints Do People Have About CPF?

Here are the complaints some Singaporeans have regarding CPF.

My Money, My Say

They feel that since it is their money, they should have the liberty to spend it however they want to. The next paragraph aggravates this complaint.

CPF Rich, Cash Poor

Those that have complaints about CPF usually have liquidity problems. They might have tens or even hundreds of thousands in CPF, but due to various reasons, they do not have enough cash flow to finance their lifestyle. This does not mean that all of them have made bad irresponsible financial decisions. Many times, shit just happens and you are stuck in a bad situation.

When one needs money and there is a sum of money belonging to you that you can see but cannot touch, it can be especially frustrating.

Retirement Sum Keeps Increasing

The retirement sum keeps increasing on an average of 2 – 3% every year. This will reduce the amount one is able to take out of our CPF when we reach 55. It might feel that the finish line gets further and further every year. This is especially agonizing for low-income individuals where their CPF plus interest can barely cover the yearly increment in FRS after paying for their HDB flat using OA. With rising interest rates, if one decided to use a bank loan to finance their HDB purchase, their CPF balances will take an even bigger hit.

Can Get Better Returns Than CPF

Some individuals feel that they are able to get better returns than CPF. This is particularly so  that when the market is doing well, any random investment made would probably outperform CPF, especially OA.

Humans Are Irrational

humans walking crosswalk road

Photo by Ryoji Iwata on Unsplash 

If humans are perfectly rational with complete information, we should be able to make perfect decisions. However, this statement is far from reality.

First, we do not have perfect information. Next, even with perfect information, we don’t have the brain processing power to make use of all the information to make a perfect decision.

Additionally, humans can also put a higher priority on short-term gratification while long-term gratification takes a back seat. We can directly see and feel the effects of short-term gratification. However, even if we know consciously that we should take care of our long-term needs, we might place lesser weight on them due to short-term wants and needs taking the front seat. This might result in sacrificing our long-term needs, but we just can’t help it.

CPF is a form of forced savings, even the most hardcore financially savvy person will be tempted to use their CPF if they have unfettered access to their CPF funds, let alone those that are not so financially well to do. The financially savvy person might even feel that they are making a rational decision by using the money to invest as they think that they are guaranteed to make better returns than CPF and it’s for their long-term needs and not “succumbing” to short-term wants and needs.

Remuneration Without CPF

Some individuals might choose to get a higher paid-out amount without CPF even though the total amount with CPF is higher, despite a lower net pay amount. I understand that for some, the high paid-out amount is more important as there are urgent short-term needs. However, if you can help it, it is not rational to accept a salary without CPF as in the long term, you will be left without any retirement sum.

On top of that, for government programmes like Workfare Income Supplement Scheme, if you don’t have CPF, you will not qualify for the programme. You can potentially lose up to S$1,700 – S$4,000 in cash and CPF a year depending on your age. In most, if not all cases, if you are an employee, you should receive CPF. If you suspect that you are being underpaid by your employer when they persuade you to accept a salary without CPF, you can contact CPF here to make a complaint. You are also probably not paying taxes, which is illegal.

Do take note that this complaint would probably mean that you will lose your job so you should look for another job.

How Is CPF A Useful Tool?

metal tools on wall

Photo by Joanes Andueza on Unsplash 

So how can CPF help us irrational humans reach our goals?

Out Of Sight, Out Of Mind

We are only able to have limited access to our CPF for the needs mentioned above. CPF is deducted from the source so we don’t overly feel the pain of deduction although we understand that our take-home pay is lesser than our gross salary. We also won’t consider CPF in our calculations for our monthly budgets and lifestyle needs.

This is a similar budgeting technique where we have separate accounts for spending and saving. When we set away a sum of money for saving and investing, we will only spend what is budgeted as the money in the saving account. We will be less tempted to touch the money we allocated for savings and investments, as we have already set it aside using mental accounting.

In CPF’s case, it is even less flexible (in a good way) so we won’t be able to use the funds frivolously. This is especially useful for those without budgeting habits or have lower liquid cash flow in the first place.

Fuss-Free Budgeting Tool

A predetermined amount will enter our three accounts to fund our housing, healthcare and retirement needs. As long as we stay working, our CPF balances will continue to grow in addition to the annual interest. We don’t really have to bother about our CPF balance and let it grow naturally. If you like to boost the growth of your CPF balances, you can also perform additional top-ups. The earlier the top-ups are made, the more time we give them to grow via compound interest.

We won’t have to worry too much about inflation’s effects on our CPF balances as it has already been accounted for. The interest rate should be able to cover the average inflation rate (not so average nowadays) and the FRS amounts also increase accordingly to make sure our monthly payouts are enough. The high risk-free (essentially) interest rates can be very significant in helping grow our CPF balances over the years.

CPF Account Interest Rate
OA 2.5% + 1%*/2%**
SA, MA, RA 4% + 1%*/2%**
*For those below 55, first combined S$60,000 earns an extra 1% (capped at S$20,000 for OA)

*For 55 and above, first combined S$30,000 earns an extra 2% and the next S$30,000 earns an extra 1% (capped at S$20,000 for OA)

Interest Rates No. Of Years To Double CPF Balance
2.5% ~28 years
4% ~17.5 years
5% ~14.5 years
6% ~12 years

Without over-relying on the taxpayers, a portion of our housing, healthcare and retirement needs are self-funded via CPF. For those that need extra help increasing their CPF balances, the government will also provide some top-ups. Our national welfare program will have a relatively lower burden on the taxpayers when a portion of it is self-funded via CPF.

Tax Relief

By topping up our SA, MA or RA, we will be able to get tax relief. This is especially worth it if we are in a higher tax bracket. We will not only pay less tax, but we will also boost our CPF for our retirement and medical needs.

As we are unable to enjoy tax relief using SA/RA beyond FRS, some of us might want to wait till our income hit a higher tax bracket before making use of our top-ups. However, you must take note if you top up later in your career, you will lose out on the interest earned should you top up earlier in the first place.

Situation Effects
Top-up CPF early Enjoy compounding effects

Less tax relief overall due to losing out on future tax relief on higher income (assuming income increase in future)

Top-up CPF late Lose out on compounding effect

More tax relief overall due to future tax relief on higher income (assuming income increase in future)

However, we are unable to determine what happens in the future (career change, stop working, lower income) so it can be more straightforward to just top up early to let compound interest do its job.

Not Market Dependant And Essentially Risk-Free

Even if the market is not doing well, we can depend on CPF to give out the appropriate returns. The rates for OA, SA and MA are reviewed quarterly and if certain market conditions are met, they can be raised accordingly. The interest rates (2.5%/4%) that we are used to are actually the current floor rate.

Unless the market conditions change drastically, the floor rates should remain as they are. If the floor rates get breached, it can seriously affect the population as plans made based on the CPF interest rates can be severely disrupted.

Just on a side note, from August 2021 to July 2022, the 12-month average yield of the 10-year Singapore Government Securities is 2.06%. When this amount hits above 3%, we should see the interest rates of SA, MA or even RA increase at least temporarily. With interest rates rising in an attempt to curb inflation, the possibility to see this occurring is not low. Based on the latest news, the US Federal Reserve is expected to increase the interest rates to 4.4% from the current 3% – 3.25% by the end of 2022.

There are also individuals that fail to account that CPF is essentially risk-free and such returns at zero risk are unheard of. Alternatively, they underestimate the amount of risk in other investments like stocks or property. I say essentially risk-free as CPF will only default if there is major fraud, the government fails or some freak accident. However, the chance of that occurring is minuscule.

Untouchable, Even By Creditors

When we cannot touch our CPF without regard, creditors cannot touch them too. If you have to declare bankruptcy, your CPF balance will not be included in your assets which will be liquidated to pay off your debts. Our CPF is protected by the law and is protected from legal liabilities. Even if you become bankrupt, at least you have some funds in your CPF to fund your housing, medical and retirement needs.

Find The Right Tool For Your Problem

CPF is for our housing, retirement and medical needs. If we need help stemming from other issues, we should use the appropriate tool. If we touch our CPF for our daily needs, we are spending our “future money” which will leave us in a bad situation in the future. We can’t touch CPF to fund our lifestyle anyways so we should look for other solutions.

For Those With Low Income 

If we need help with our daily lives, we can look at social programs. A good place to start is at SupportGoWhere where we can fill up a questionnaire and they will show what programs are available to us. We can also go to one of the 24 social service offices near us to ask for help.

The welfare programs are there to help us so if we really need help, we don’t have to feel pai seh. Some of us just need some help to tide over a bad period.

For Those With Middle To High Income

It might be time to brush up on your personal finance skills. There are plenty of free resources out there to help you learn how to better manage your money. I have some links under the sidebar that you can access for free.

Get your finances in control first before thinking about making investments. A good place to start is to start budgeting and saving up some emergency funds. Your income might be high now but life is unpredictable so you should control your financial commitments. You should not expect your income to remain high indefinitely. Lifestyle creep is a thing and if you get used to a certain lifestyle, it can limit your flexibility in life. It is safer to be more financially prudent than to be careless with money.

For Those In Debt

We can contact Credit Counselling Singapore, a voluntary welfare organization, to help manage our debt by counselling, education and facilitating debt repayment arrangements.

CPF Is Not Perfect

CPF is a useful tool but not a perfect one. I won’t pretend I have the solutions to these problems but here are some issues I find with CPF. However, I still strongly feel that the benefits outweigh the inflexibilities so CPF is a net good for society.

Limits On Medisave

There are limits on how much we can claim per year on various medical needs. If what we need exceeds the yearly limit, we will need to find alternative methods to fund them. Although I understand the purpose of the limits (to prevent overspending), it can be frustrating when we need to pay out of pocket when we still have a thick MA balance.

Trying To Do Too Many/Little Things

Initially, CPF is used for retirement purposes but has since evolved to become a fund to meet our various needs. Some might argue that CPF is trying to do too much while some might argue that CPF is too limited.

CPF Interested Credited Yearly

Unlike banking accounts, interest for CPF is credited yearly, despite being computed monthly.

We are losing out on some interest if interest is credited monthly instead. However, the argument can be made that the yearly interest has already been “adjusted” upwards to make up for the loss.

Monthly And Yearly CPF Contribution Limits

This is more of a first-world problem. This should not affect the average Singaporean. Even though the FRS amounts have been increasing, the Ordinary/Additional Wage Ceiling that attracts CPF has been capped at S$6,000 a month and S$102,000 a year. This makes it relatively harder to reach FRS amounts should everything stays constant.

If there are more legitimate issues and you have something to say, do feedback to REACH, the government feedback unit. If the problem is serious or widespread enough, hopefully, they will come up with new or enhanced policies to help alleviate the issues.


Humans are irrational and CPF is a useful tool to help us fund our current and future needs. If we need help with other issues, we should look at the appropriate tools besides CPF. With that being said, CPF is still not perfect, future tweaks and enhancements can help make it better for everyone.

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