Move over MPF and let citizens save themselves

Is there hope for the MPF?

SCMP headline, June 4

No, there isn't. Why beat around the bush? The Mandatory Provident Fund drains its beneficiaries of money they could better invest themselves, it overcharges them, it strangles them in red tape if they change jobs and no serious attempt to improve things has been made in all of the scheme's 12 years.

The reason there is no change, and will be none, is the same reason that the Law Reform Commission will never countenance any reform that threatens lawyers' incomes.

The people who swing the biggest weight in the MPF are the money managers. They are its architects; they designed it in their own interests; they made sure it would be very difficult to sack any of them; and they will never willingly cut their fees or do any hard work to improve returns for beneficiaries.

But, of course, when people protest about it these money managers cannot very well tell the complainants to go to the warmest place mentioned in the Bible. They have to pretend that they are listening and that reform is being considered. Please be patient.

Hah! The prospects of any real MPF reform are about as good as those of the proverbial snowball in that warmest place mentioned in the Bible.

But the flaws of the MPF are so many that I cannot deal with them all in the short space of this column. I shall therefore restrict myself to a recent suggestion that our model should be the Central Provident Fund of Singapore because it is run by the government rather than by greedy bankers. The CPF is also better administered and beneficiaries can withdraw some of the money before retirement.

All of this is true. The most salient features of the CPF, however, are that it gouges Singapore workers for a painful 36 per cent of their wages (10 per cent maximum for the MPF), and generates an average investment return for them of only about 2 per cent a year.

Singapore is the first country in the world to have achieved communism in the classic Marxist sense of the word and there you have communism in action. The people are poor in a rich country. Government takes the money. I don't think much of the CPF as an alternative to the MPF.

But this raises the question of whether either Singapore or Hong Kong really needed to institute compulsory retirement savings in the first place. Did people take so little thought for their future that they saved no money for retirement?

The question is easily subjected to statistical analysis. The proportion of income that goes to savings in any economy can be calculated as gross fixed capital formation plus net trade in goods and services as a percentage of gross domestic product.

That's a good mouthful but, ask any economist, it's also a good benchmark for savings.

The chart shows you this savings rate for three different economies. The top line represents Singapore, with an average savings rate of almost 50 per cent for the last ten years - more than enough for comfortable retirement. Singapore has room to cut back CPF contribution rates.

This would mean allowing people to spend their own money, however, which hardly accords with communist principles. It won't happen.

Next down is Hong Kong. When the MPF was started, our savings rate was 31 per cent of GDP. It is now 25 per cent. The MPF has evidently given savings a bad name. I can understand why. A level of 25 per cent, however, is still high by developed economy standards. Hong Kong people are still savers.

And finally, at the bottom we have the British doing their best to take the 'Great' out of Great Britain. The savings rate of the nation is a dismal 13 per cent of GDP and it has been going steadily down for a long time.

I think I know which economy could do with a compulsory savings scheme. Hint: It is neither of the two city states of Asia.