The Central Provident Fund (CPF) has been the government’s main vehicle to provide for the essential needs (housing, medical care, retirement) of Singapore citizens and permanent residents, and a key tool in mobilizing a ready pool of capital for public investment purposes. The CPF was originally set up by Singapore’s British colonial government in 1955 as a mandatory savings plan for old age. While the CPF has gone through many changes, it remains a mandatory, fully-funded scheme based on asset accumulation by its members through individual accounts. As a fully-funded system, the payout for members in retirement – or how much they can withdraw for other purposes at an earlier time – is limited to the savings (plus interest or dividends) members have set aside. There is therefore no cross-generation subsidy, mitigating the possibility of future unfunded liabilities. As of September 30, 2002 the CPF had 3.0 million account holders, with total savings of S$95.4 billion (US$53.7 billion).
The CPF Board invests its funds in bank deposits, properties and other authorized investments to generate earnings. Income is paid to CPF members as interest, with the rate determined quarterly based on market conditions. A summary of CPF contributions and withdrawals, and the Board’s income is tabled in the Annex.
Currently, members’ CPF balances are divided into three accounts:
- Ordinary Account (for housing, approved investments, CPF insurance, tertiary education and topping-up of parents’ Retirement Accounts). The interest rate for the Ordinary Account is calculated as an average of the 12-month deposit and month-end savings rates of Singapore’s major banks, subject to a minimum nominal rate of 2.5%/annum.
- Special Account (for old age, contingencies, approved investments, CPF insurance). As of end-December 2002, the interest rate for the Special Account was 4%/annum.
- Medisave Account (for hospitalization expenses, Hepatitis B vaccinations, chemotherapy, radiotherapy, approved outpatient treatments and approved medical insurance premiums). As of end-December 2002, the interest rate for the Medisave Account was 4%/annum.
In addition, at age 55, members must start a Retirement Account and set aside a minimum sum of S$75,000 (about US$42,000) for withdrawals by installments at the age of 62. Effective July 1, 2003 the minimum sum will be increased to S$80,000 (US$45,000).
In July 2002, the Government announced plans to increase the contribution rate to the Special Account by one percentage point for members age 55 years and below, and while the rate to the Medisave Account by one percentage point for members age 60 and below, and by 0.5%-point for members age 61 and above. These higher contribution rates will be matched by corresponding reductions in contributions to the Ordinary Account. The increases will be effective when the total CPF contribution rate is restored to 40% for those workers age 55 and below. These changes are meant to raise the retirement and healthcare savings levels of CPF members as, presently, only half of CPF members, at age 55, have S$55,000 in their Special Accounts.
In the early years, the CPF adhered strictly to its original objective of providing for old age. However, over time the CPF evolved such that savings meant for retirement could be used for other needs. The first step in this evolution came in 1968, when the Public Housing Scheme enabled members to pay for subsidized public housing built by the Housing & Development Board (HDB). Facilitating home ownership remains a key Government goal for the CPF; in July 2002, Singapore’s Minister for National Development reiterated that there will be no change to the government’s commitment to provide basic housing through subsidized HDB apartments.
The CPF Board provided additional add-ons in the early 1980s with the aim of helping Singaporeans meet other basic needs. These additions include a “Residential Properties Scheme” to allow members to buy private homes for investment (1981); a “Home Protection Scheme” to protect CPF members against losing their homes in cases of death or permanent disability (1982); and the “Medisave scheme” to help members meet hospitalization expenses (1984).
While providing for medical care in old age is accepted as an integral part of the CPF, many observers question the huge withdrawals of CPF savings for housing needs. As of December 30, 2001, CPF statistics (latest available) showed that S$57 billion had been withdrawn for public housing and S$33 billion for private housing since the inception of the housing schemes. The government moved in July 2002 to reduce the cap for CPF withdrawals for non-subsidized housing loans from 150% to 120% of the property value; officials said the action was intended to redress the over-concentration of members’ CPF balances in real estate. However, the effect may have been undercut by a nearly simultaneous move to allow CPF savings to be used to pay half of the 20% down payment requirement for the purchase of new residential property. Some analysts charged that the government could not resist using the CPF as a tool for boosting the sluggish property market.
The Singapore Government can be justifiably proud of the role played by the CPF in mobilizing savings and underpinning Singapore’s high home-ownership rate. Yet despite the country’s high savings rate, many average Singaporeans remain, paradoxically, generally unprepared financially for retirement, because of the low returns on CPF balances, the high-investment related costs and poor performance of most CPFIS investment products, withdrawals for non-retirement purposes (like housing and education), and the over-concentration of members’ CPF balances in real estate. These problems are exacerbated by the sharp downturn in property prices since 1996 and by Singapore’s aging demographics. In July 2002, a Government committee bluntly stated that "the current rates of return on CPF balances are not adequate for retirement funds with a long-term horizon,” and that returns on CPF savings are “significantly lower than pension funds in most countries”.
Merely increasing members’ contribution rates – as the Government has done with respect to the Special Account – may be ineffective, assert some analysts. One researcher argues that basing Ordinary Account returns on short term-interest rates when the purpose of the funds is long-term is lacks economic rationale, unless the government is seeking to use CPF balances as a source of cheap funding for itself. He posits that in many years the real interest rate has been negative, while returns on CPF balances investment by the Government are presumed to have been positive.
Observers question whether the newly announced changes to the CPF structure are sufficient to address these challenges, although for their part, most Singaporeans are relieved that there are no radical changes to the CPF system. The changes that have been introduced are likely to impact middle-aged Singaporeans in the middle-income bracket, whose CPF savings will grow at a slower rate as a result of the four percentage point cut in employers’ contribution and the new $5,000 ceiling cap. The change may be intended to make these workers more employable, but the policy shift may not address the underlying problems confronting the CPF.
Addressing the challenges outlined above is politically charged; any drastic shift by CPF away from non-retirement public policy goals would be hugely unpopular, and government officials stress they have no intention of any radical overhaul of the entitlements that have grown up around the CPF over time. The Government also continues to find the CPF a useful channel for pump-priming activity in times of economic difficulty. For example, it has made repeated direct contributions (i.e., “top-ups”) to members’ accounts through a series of special transfers since 1995. Whether the CPF is the most appropriate vehicle for such largesse remains an open question.
It is clear that officials agree that the system needs to be adjusted in order to provide a framework which allows CPF members to save enough for retirement while taking charge of their own CPF savings. Providing low-cost privately-managed pension plans to CPF members may help. But with a finite horizon for addressing the needs of a rapidly aging population, especially amid a more modest outlook for longer-term economic growth, some commentators assert that the time may have come to
return CPF to its roots, while shifting other entitlements or public policy goals to separate, stand-alone programs.