CPF Review Wish List - Inflation Indexed bonds

There is an ongoing debate on CPF and its minimum sum scheme in supporting the retirement needs of our local residents. Today, the return on our CPF OA is pegged to a weightage of 80% of the average of 12-month fixed deposit rate and 20% of the average savings rate published by major local banks. As you know, fixed deposit rates and savings rates are very low now, and the computed pegged rate will probably give you a return of less than 0.5% per annum on CPF OA. This is really worrying because the latest CPI rate is close to 2% and we will get -1.5% (yes, negative 1.5%) for our CPF OA on real return basis if not for the legislated minimum of 2.5% per annum return on our CPF account. Nevertheless, CPI is expected to hit between 2% and 3% this year, and this will leave us with close to 0% real return on our CPF OA even with 2.5% per annum. I believe it is time to look at something that Monetary Authority of Singapore has mooted a couple of years back – inflation indexed bonds.

Imagine you buy an inflation indexed bond with real return of 3%. If there is no inflation, the return will stay at 3%. If inflation rate goes up to 2%, then the actual return will be adjusted accordingly to 5% to account for the 2% inflation rate. In a way, your investment is protected from inflation risk and you will get 3% for your investment. And, if CPF OA can be invested in inflation indexed bonds, this will help, in a great way, to alleviate the worries that we have today regarding whether our CPF is enough for our retirement. We are assured of a positive real return on our CPF saving over the years.

I really like this idea although I believe the implementation of such scheme will not be easy. There will be concerns like the credit ratings of these investments, risk-free or not risk free and others. However, at the end of the day, inflation will eat away our savings if we do not do anything about it. We definitely need more innovative ideas to protect our CPF savings.