Monday, November 13, 2017

CPF is NOT a ponzi scheme

Some people describe CPF as a ponzi scheme. This is not correct.

Under a ponzi scheme, the promoter offers an attractive return on an investment, say 2% per month.annum. He cooks up a story that he is very smart in investing the money to earn a good return. The investors believe the story.

The promoter is not able to earn this kind of return. He takes the money invested by the current investors to pay the return to the earlier investors.

He has no problem with the cash flow. More people are putting in money for this great scheme, compared with the amount that is being withdrawn.

The earlier investors like the gain, so they put up reinvest and put in more money. They tell their friends about the great schem and more people come in to invest as well.

So, the scheme continues to grow very fast. The growth can be astronomical.

At any point of time, the cash available is much less than the amount invested. The difference goes to pay the attractive gain enjoyed by the earlier investors. The promoter also takes out a lot of money for marketing and for their own use.

This is a ponzi scheme.

Now, let us look at the CPF. It pays an interest rate of only 2.5% or 4% per annum. It is able to earn this return from government bonds.

As more savings goes into the CPF, the board buys more government bonds to earn the interest that is paid to the CPF members.

At any point of time, the total savings in the CPF is matched by the total amount of government bonds. The Singapore govenrment bonds are rated AAA. The government could issue the same bonds to foreign investors who will buy these bonds at the prevailing coupon rate.

CPF is not a ponzi scheme. It is a growing fund with assets in the form of government bonds that match its liabilitiies, i.e. the total savings of CPF members.

Tan Kin Lian

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