Appendix B:
Medisave Accounts in Singapore²⁹

In 1955, Singapore introduced a compulsory savings program that covers about three-fourths of all Singapore workers. ³⁰ Employer and employee contributions are made to the Central Provident Fund (CPF), which is controlled by the government and has a monopoly status. In the beginning, the CPF invested its funds entirely in government securities, and withdrawals were essentially limited to lump sum retirement benefits or survivor benefits. Over the years, however, the program has acquired flexibility. Workers can now direct the investment of up to 40 percent of their CPF funds³¹ and withdraw funds to purchase a house, buy life or home mortgage insurance or borrow funds from their accounts to pay college expenses for a family member. ³²

The required rates of contribution to CPF accounts over the past 25 years are shown in Table B-1. Remembering that employer contributions on behalf of employees are undoubtedly made in lieu of the payment of wages, the table shows that the forced savings rates in Singapore have been quite high - totaling 50 percent of the first $41,000 of wages (in U.S. dollars) in 1985. ³³ For the future, the government is committed to gradually move toward a contribution rate of 40 percent, 20 percent each for employees and their employers. ³⁴

All employees in Singapore have a private property right to the funds which accumulate in their individual CPF accounts. These funds may be withdrawn at retirement, in the event of permanent disability or if the individual emigrates from Singapore or Malaysia. At the account holder's death, the funds are payable to the individual's heirs.

Prior to 1987, funds were withdrawn as a lump sum at the time of retirement. Beginning in 1987, however, the government required retirees to use the first US$18,600 (single) or US$27,900 (couple) to purchase a monthly retirement annuity equal to $143 (single) or $214 (couple). Retirees can use the balance of their fund for any purpose. However, as Table B-2 shows, the bulk of CPF withdrawals have been used to purchase a home - usually well before the time of retirement. About 86 percent of the housing in Singapore has been built by the government and of these units, 70 percent have been purchased by their occupants - with CPF money.

Beginning in 1984, the government of Singapore extended its program of forced savings to require that a certain portion of CPF contributions be put into "Medisave accounts" to provide a source of funds for hospitalization expenses. The funds may be used only for treatment at a government hospital or an approved private hospital. ³⁵ Strangely, Medisave funds cannot be used to purchase outpatient care, including physicians' services or expensive outpatient renal dialysis and long-term care. People also cannot borrow against future Medisave deposits to pay current bills at private hospitals, although family members can pool their Medisave balances to pay another member's hospital bill, and people who enter some government hospitals can settle their bills from future Medisave deposits.

Currently, 6 percent of an employee's salary is placed in a Medisave account until the balance reaches approximately US$8,522. Once that total is reached and maintained, any additional contributions are automatically placed in an individual's ordinary account. In Singapore, $8,522 would be sufficient to cover hospitalization expenses except in very rare catastrophic cases. The Singapore government currently is negotiating with private health insurance companies and is apparently committed to allowing some portion of the Medisave account funds to be used for the purchase of health insurance coverage. In 1985, 145,000 members of the CPF (out of a total Singapore population of 2.6 million) made Medisave withdrawals averaging about US$171 per person. As Table B-2 shows, between 1985 and 1988 the use of Medisave funds quadrupled.

Funds in a Medisave account are self-insurance for hospitalization throughout the employee's working life. At retirement, people are required to leave about US$4,830 in their Medisave account to cover medical expenses after age 55. ³⁶ Singapore's Medisave program, therefore, is a more general application of the concept of the medical IRA, which has been proposed in various forms in the United States.

Like most other provident fund systems around the world, the Singapore system forces people to save but allows them to make withdrawals for many of the purposes for which people ordinarily engage in private, voluntary savings - retirement, disability, death expenses, medical expenses and the purchase of a home. Singapore's provident fund differs from others in that there is very little insurance (and therefore no pooling of risks) for adverse contingencies such as hospitalization, disability or death. What individuals receive in the event of these contingencies is based solely on their own contributions. An exception is compulsory mortgage insurance, for which the premium is paid from the buyer's CPF account.

The Singapore system is far from perfect. Restrictions on the use of Medisave funds encourage people to over-use hospital care and under-use less expensive alternatives. Certain restrictions favor public over private hospitals (although Singapore is privatizing its public hospitals) and discourage the development of a competitive market for hospital care. And some restrictions against borrowing from future Medisave deposits to pay current expenses seem unwise. The timing of medical expenses over a person's working life may not match the timing of the buildup of Medisave funds.

On the other hand, Singapore has established one of the most innovative ways of paying for health care found anywhere in the world - a vast system of individual self-insurance. The philosophy of the government of Singapore is "no subsidies." Each individual is expected to pay his or her own way, and the government forces people to save for the needs that are often met by government in most other countries. The program has been highly successful. The Singapore welfare state has steadily shrunk over the past two decades and is now largely devoted to helping the low-income elderly, who participated in the program for only a few years. As the Singapore program has matured and the savings requirements increased, only among older workers are there many who have failed to accumulate substantial savings. For example, about 70 percent of all middle-aged workers have savings of more than $17,000.

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