Medical Savings Accounts: The Singapore Experience

Studies | Health

No. 203
Monday, April 01, 1996
by Thomas A. Massaro, M.D., Ph.D. and Yu-Ning Wong


The Central Provident Fund

The cornerstone of Singapore's social welfare structure is a government-mandated savings program managed by the Central Provident Fund (CPF). Singapore's provident fund system was originally designed to force citizens to save for their own retirement. With the passage of time, the government has permitted account holders greater freedom to use their funds for a wide range of options, including purchasing a home, buying investments, paying medical bills, purchasing health insurance and paying college expenses. [See the Appendix.] With about 2.4 million participants, CPF accounts totaled $57 billion, or 72 percent of GDP, at the end of 1994. Because of its size and the inclination of the government to use it for a variety of purposes, the CPF plays a very important role in the economic and social life of Singapore.6

"Singapore's provident fund system was originally designed to force citizens to save for their own retirement."

Although the deposits are made by both employee and employer, the accounts belong to the individual employee. Currently, required deposits equal 40 percent of wages up to S$6,000 per month (the average annual wage, including the employer's contribution, is S$30,038),7 with 20 percent each coming from employer and employee. All savings, at both the time of deposit and the time of withdrawal, are tax exempt.

Members maintain three accounts with the Central Provident Fund Board - Ordinary, Medisave and Special accounts. Among these three, the total contribution of 40 percent of income is credited as follows:

  • 30 percentage points go to the Ordinary account, which can be used for housing, approved investments, certain types of insurance, loans for college education expenses and topping up parents' retirement accounts.8
  • Between 6 and 8 percentage points, depending on age, go to the Medisave account for hospitalization and certain other medical expenses.
  • 4 percentage points go to the Special account for old age retirement and contingencies.

This targeting of different accounts for different purposes encourages members to spend money on some goods and services (e.g., housing, health care, education) rather than others. Presumably, society as a whole has an interest in encouraging people to obtain these so-called merit goods, many of which are provided by the government - through taxes - in other developed nations. The targeting of accounts for specific purposes also may encourage members to regard their CPF contributions as personal savings rather than as taxes, thus minimizing the work disincentive effects of the contributions.


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