https://www.straitstimes.com/business/debate-on-cpf-ordinary-account-interest-rate-resurfaces-as-those-for-special-medisave-accounts-rise
2023-05-30
SINGAPORE – The debate over the interest rate for the Central Provident Fund (CPF) Ordinary Account (OA) has been reignited on news that the rates for the Special Account (SA) and MediSave Account (MA) will go up by 0.01 percentage point, from 4 to 4.01 per cent, in the third quarter of this year.
This is the first time since 2008 that the interest rates for SA and MA will go above 4 per cent.
The Government implemented a floor interest rate of 4 per cent for the SA, MA and Retirement Account (RA) in 2008. The 4 per cent floor has been extended every year since then.
Putting the numbers in perspective, a 0.01 percentage point increase for a CPF member who has met this year’s full retirement sum of $198,800 represents an increase of $19.88 a year.
Dr Chua Hak Bin, regional co-head of macro research at Maybank, said: “This increase is minuscule relative to the rise in inflation and market interest rates.”
But he added that though small, it is “perhaps large in symbolism as the Government has not adjusted the rates for more than a decade”.
Economist Walter Theseira at the Singapore University of Social Sciences said the 0.01 percentage point increase “will add up to some money” if the entire population’s CPF savings are taken into account.
The interest rates for SA and MA are pegged to the average yield of 10-year Singapore Government Securities (10YSGS) over a 12-month period and are reviewed quarterly.
Associate Professor Theseira said SA and MA rates could go higher in the fourth quarter of this year as bond yields go up.
“The only question is whether the long-term yields will go up. They will only go up if expectations for future inflation are to rise significantly. In general, people think that inflation will be higher in the foreseeable future than it was in the past couple of decades,” he added.
Meanwhile, the interest rate for RA will remain at 4 per cent per annum. This is because the RA rate is reviewed annually, unlike SA and MA rates, which are reviewed quarterly.
The Government announced in 2022 that the RA rate will be maintained at 4 per cent from January to end-December 2023.
The OA interest rate will remain at 2.5 per cent per annum in the third quarter. This is because the calculated OA rate is 0.66 per cent, and therefore remains below the legislated minimum rate of 2.5 per cent.
The OA rate is based on the average of the three local banks’ savings and fixed deposit rates over a three-month period.
Mr Christopher Gee, senior research fellow at the Institute of Policy Studies, said the SA and MA rates are benchmarked against bond yields because the funds are for the longer term – retirement and hospitalisation expenses.
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As OA funds can be used for housing finance, the interest is therefore based on shorter-term rates, he added.
Prof Theseira said the way of calculating the OA interest rate is “from the era when the basic deposit account was the main instrument that the banks offered to retail customers”.
Today, banks give bonus interest rates on their primary banking accounts to get customers to do all their banking transactions – such as salary crediting, credit card spending, savings or investments – with the bank, he noted.
He said the OA rate should reflect the banks’ special bonus rates as the “real opportunity cost of funds”, and therefore should actually be higher.
Still, he does not think it will cross the 2.5 per cent floor because the banks tie a lot of terms and conditions to the highest rates they promise.
Any changes to the OA rate will have to be thought through carefully, Mr Gee said, because the concessionary interest rate for Housing Board loans is pegged at 0.1 percentage point above the OA rate.
Prof Theseira said there is no reason the HDB loan rate has to be pegged to the OA rate. “The interest rate that you pay to buy a home could be different from the rate that you earn from OA savings,” he added.
He said one possibility is to peg the HDB loan rate to the tenor, for example, to the yields of 20-year or 30-year government securities.
Any changes to the OA rate will also impact a segment of the population who have used their CPF funds for their homes.
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Data from CPF showed that $2.9 billion was taken out from the fund by HDB flat and private property owners in the fourth quarter of 2022. These people will have to refund the principal they took out, plus accrued interest, to their CPF account when they sell their property.
Accrued interest is the amount of interest a home buyer would have earned if he had not used his CPF savings for housing. A rise in the OA rate would mean the accrued interest he needs to return to his CPF account will be higher.
“There are implications for those who have purchased their homes using their CPF OA,” Mr Gee said.
“You cannot just ask for interest rate increases without thinking about the implications. You will also need to have a policy to help those people who are currently paying off their loans with their CPF (money).”
Some CPF members have, however, argued that CPF money is meant for retirement needs and should not be used for housing.
Mr Gee said the CPF system was designed to cater for both purposes.
When a CPF member is younger, more of his CPF contributions go into his OA to help finance his property purchase. As he gets older, more of his contributions will go into his SA and MA to meet his retirement and healthcare needs, respectively.
“By the time he retires, the housing loan would have been paid off. His MA then takes care of medical bills and his RA is his retirement income. That is the CPF model,” Mr Gee said.
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