Sunday, September 6, 2009

SMRA 4% Rate Extended Till Dec 2010

Our Manpower minister has announced that the 4% floor rate for the Special, Medisave and Retirement Accounts (SMRA) will be extended till Dec 2010. Originally, it would have expired by the end of this year.

If not for the extension, based on the yields of 10-Year Singapore Government Securities, the SMRA interest rate will only average around 3.4% (including the extra 1%, excluding the extra 1% for the first $60k). In fact, the interest rates would have went down to 3% at around 1Q to 2Q 09.

By right I shouldn't be dissatisfied with this news. However, it seems that this "pegging rule" only goes to show that the SMRA interest rates will definitely go below the minimum 4% without the floor rate in effect.

Why do you want to introduce the pegging rule if you very well know that the citizens will definitely prefer a floor rate of 4%? I believe the reason for this pegging rule is to allow the rates to follow the market. However, it seems that whenever the rates go below 4%, Singapore / global economy is usually in some sort of trouble, and thus the government will most probably step in to keep the floor rate.

I do not believe that there would be a situation where interest rates go down and no country is in sort of trouble. Highly unlikely.
So why introduce the SMRA pegging? Why not abolish it and replace it back with the floor rate since most probably the government would maintain the floor rate when times are bad?

I guess only time would tell us the answer.

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