• Depending on how CPF saving is defined, it equals between 16.3 and 30.4 percent of gross national saving.
• Gross national saving, in turn, equals about 48 percent of GDP.

• 30 percentage points go to the Ordinary account, which can be used to purchase a home, make certain investments, purchase certain types of insurance and pay college education expenses.
• 6 percentage points go to the Medisave account for medical expenses.
• 4 percentage points go to the Special account for old age and contingencies.

Introduction

• In 1990, 8.5 percent of Singapore's population (about 250,000 people) was above 60 years of age.
• By the year 2030, 29.4 percent of the population is expected to be over 60.

• In 1994, Singapore's fertility rate (the number of births per woman of childbearing age) was 1.75, well below the 2.10 required to replace the population, and an increase appears unlikely.
• In 1990, life expectancy at birth was 71.9 years for males and 76.5 years for females, and this is expected to increase.

"Singapore finances its social security system through a publicly managed, mandatory program of private saving."

How the Central Provident Fund Works

General features of the fund.

"CPF accounts belong to the individual, affording options not available under pay-as-you-go social security systems."

Members of the CPF get annual account statements. A telephone hotline allows members to check on their accounts' status at any time. Members also can write to the fund at any time for information.

Because a CPF account belongs to the individual, it affords its holder a number of options that are not available under pay-as-you-go social security systems. Unlike many private pensions in the United States, the accounts are portable, remaining with the employee through job transitions; the entire deposit belongs to the member's estate at death; and account funds may, to a limited degree, be shared with members of the account holder's immediate family. Participation is compulsory for most people. As Table II shows, about two-thirds of the total labor force actively participates in the CPF. This represents a decline from about three-fourths of the labor force in the early 1980s. Although details about the one-third not covered are unavailable, foreign workers, who constitute about 18 percent of the labor force, generally are not covered.8 Also not covered are casual and part-time workers and certain categories of contract workers. The self-employed are covered by the Medisave program (to be discussed later) and can make tax-advantaged, voluntary contributions to the other programs. Pension benefits are provided for certain categories of government personnel (e.g., the president, political office holders, Members of Parliament, certain civilian and military public officers). Beginning April 1, 1995, instead of pension payments being met from current revenue, a separate pension fund has been established.9 While most Singapore citizens and permanent residents not covered by the CPF (e.g., most of the self-employed and those with government pensions) will be able to cope financially with retirement, a significant minority of workers will face financial difficulty because their ability to save for retirement has been extremely limited.10

"Singapore has the highest savings rate in the world."

The rates of mandatory contributions are high. Singapore has the highest savings rate in the world, and one reason is that the rate of mandatory savings through the CPF is high.

• At the time of its inception in 1955, employees and their employers each contributed 10 percent of the employee's net wages, with a maximum of S$50 per month.
• The rate increased steadily, reaching a high of 50 percent of the net wage (25 percent each from employee and employer) in July 1984.
• In April 1986, in response to a recession, the rate was reduced to 35 percent.
• Since July 1994, it has been 40 percent (20 percent each by the employer and the employee), with a maximum contribution of S$2,400 per month.11

• Depending on how CPF saving is defined,13 in 1991 its contribution to Singapore's savings ranged from 16.3 to 30.4 percent of gross national saving (GNS) and equaled 7.8 to 14.6 percent of GDP.
• In 1991, Gross National Saving was 47.9 percent of GDP.

Deposits and withdrawals are tax free.

"Contributions by both employers and employees are excluded from taxable income, as is any buildup."

As discussed below, members can invest some of their funds in private securities, and the return on funds contributed and quickly withdrawn for other investments is much higher than on the long-term accumulations in the CPF. However, because members must have a minimum balance before withdrawing funds for other investments, higher-income groups are better able to withdraw and invest quickly.

There is nothing inherently regressive about a provident fund (forced savings) system.16 Governments may choose to subsidize investments in any number of ways, and they can also manipulate other taxes in order to create more progressivity.

Components of the System

• 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.17
• 6 percentage points go to the Medisave account for hospitalization expenses (8 percentage points for members age 45 and above).18
• 4 percentage points go to the Special account for old age and contingencies.

"Accounts are used to fund retirement pensions, medical care, housing, life and disability insurance and expenses for a college education."

Retirement income.

At least S$4,000 of the S$40,000 minimum sum must be in cash, and the remaining amount may be a member's pledged property.19 However, if a member sells this property, he must ensure that the CPF board gets the required minimum amount in cash. A member may dispose of the minimum sum in one of three ways:

1. Obtain a fixed-term annuity from the CPF board. The board will pay a fixed monthly amount to the member beginning at age 60 and continuing until the account is exhausted.
2. Obtain an annuity from a private insurance company. The member can purchase a fixed-term annuity or any annuity that pays until death from CPF-approved companies.
3. Place the funds in banks as fixed deposits. Under this option the bank has instructions from the CPF to release only a certain amount on a regular basis, similar to the first option.

Medisave accounts.

While the government generally has limited the use of Medisave funds to hospital care, it has been expanding its list of approved expenditures. For example, it now permits members to use Medisave funds for psychiatric care, renal dialysis and chemotherapy. However, members are still prohibited from using Medisave funds for outpatient care, physicians' fees, outpatient renal dialysis or long-term care. If money runs short, family members can pool their Medisave balances to pay a hospital bill, and some government hospitals allow patients to settle their bills from future Medisave deposits.

The Singapore health care system relies in large part on individual self-insurance rather than third-party insurance, and its hospital system accommodates people with different spending preferences. Thirteen of the country's 23 hospitals are run by the Ministry of Health. The other hospitals are private. Hospitals run by the government offer four levels of rooms, or "wards," which receive different levels of government subsidies. Class A wards are the nicest rooms, with private or semiprivate accommodations, and are meant to compete with the private sector. Patients must pay 100 percent of the cost of these rooms. Class B1 wards receive a 20 percent government subsidy, with the patient paying the balance, and accommodate four people to a room. Class B2 wards have six patients per room and no air-conditioning, but patients pay only 35 percent of the cost. Class C wards have 10 to 20 people in the room and are the least expensive, receiving an 80 percent subsidy from the government.

"The Singapore health care system relies in large part on individual self-insurance rather than third-party insurance."

Over the years, as Medisave accounts have grown, so has the desire for the higher-class accommodations. According to one study, patients opting for Class A accommodations grew from 2 percent in 1982 to 8 percent in 1992, while the number choosing a private hospital, where patients receive better accommodations, grew from 16 percent to 24 percent during the same period.21

The Medishield option.22

The government has established an endowment fund (Medifund) and uses the income to assist those with limited financial resources who need medical care and meet stringent means tests.25

Home ownership.

"About 85 percent of the people in Singapore own their own homes."

The government is now upgrading these housing units, with the homeowners bearing 25 percent of the cost and the government 75 percent. In addition, in 1981 the government began to allow members to use their CPF balances to purchase private residential properties, and in 1986 to purchase nonresidential properties as well. The rules governing these purchases have been progressively liberalized.

Interestingly, CPF balances have not been used to provide loans to government or to statutory bodies to build housing or any other infrastructure. The government consistently has financed all current and capital expenditure from operating revenue, and so has not needed to tap into CPF balances.

Investment options.

Under the EIS, a member may use 80 percent of the CPF balance in excess of S$50,000 cash savings in the Ordinary and Special accounts, or the balance in the Ordinary account, whichever is lower. In addition to investments permitted under the BIS, a member may invest in non-trustee shares, loan stocks of approved non-trustee stock companies, approved unit trusts, bank deposits, endowment policies (similar to annuities), fund management accounts30 and government bonds.31

Since January 1, 1995, members have been allowed to buy foreign stocks and bonds. Initially, they could invest only in foreign securities listed locally or on the stock markets of Hong Kong, Malaysia, South Korea, Thailand and Taiwan. Now they may invest in regional markets through approved CPF managers. Approved CPF unit trusts will be permitted to invest in these markets beginning in 1997. Beginning in 1999, investments in the stock markets of the United States and other Western countries, purchased through approved fund managers or unit trusts, will be permitted.

Investments in foreign assets are currently limited to 20 percent of the market value of a unit trust fund. The percent of foreign investment permitted will be raised to 40 percent in 1997 and 50 percent in 1999.

These moves suggest that the government is prepared to allow individuals to diversify their investments from CPF balances and to position Singapore as a fund management center. By allowing individuals to make more investment decisions, the government also hopes to reduce the political risks of having government manage all of the CPF accumulated balances. Persistently low returns that undermine the real value of people's CPF savings could have adverse political consequences for the ruling party.

"People can direct the investment of their CPF funds, above a minimum amount."

As of December 1993, 308,261 members (12.6 percent of the total members) had directed the investment of more than $7 billion of their CPF savings.32 In 1994 only about one-fifth of the 339,922 people who invested their CPF funds in shares (and other permitted investments) made profits - totaling $236 million.33 Of those who lost money on their outside investments, three-fourths sustained very small losses.

Another investment option is the Share-Ownership Top-Up Scheme (SOTUS). Under it, government provides grants to CPF members so they can purchase shares of enterprises the state is divesting. Shares bought through SOTUS apparently do not confer voting power on the individual shareholders. Thus, the government subsidizes the purchase of such shares without losing control over the divested enterprises.

Insurance options.

"Members may borrow from their accounts to pay expenses for attending or sending a family member to college."

College education expenses.

Top-Up.

Investment Performance of the CPF Board

According to statutory requirements, CPF funds must be invested in government bonds and in advanced deposits with the Monetary Authority of Singapore (MAS), which eventually converts the monies into bonds. In 1993, S$44.6 billion (85.3 percent of the total balances) was invested in government bonds and S$7.7 billion (14.8 percent of the total) in advanced deposits with the MAS.37 Given that the government enjoys budget surpluses, and that amounts borrowed are not used to finance infrastructure, how and where are the CPF balances invested? They are invested by the government through the Singapore Government Investment Corporation and other channels, and most are believed to be invested abroad. However, no information is available on either the investment portfolio or the returns obtained. CPF members' interest is calculated as an average of the 12-month deposit and monthly savings rates of four major local banks, subject to a minimum rate of 2.5 percent.

The rationale for payment of short-term interest rates on long-term funds is not clear. As Table II shows, the real rate of return (the interest rate minus the inflation rate) has been slightly positive or negative since 1986. This contrasts sharply with the return on Medishield funds noted above. To the extent returns on CPF balances invested by the government are higher than what is paid to the members, the difference is an implicit tax on members, although this may be offset by tax subsidies. The implicit tax is likely to be regressive, as those with low balances have a greater proportion of their (forced savings) assets with the CPF.

Assessing the CPF

"Singapore's CPF has provided a solid and sustainable base for financing a competitive and affordable social security system."

Advantages.

• The plan firmly establishes that individuals and families are responsible for providing for their own social security benefits.
• Forced savings under the CPF system helps to develop the savings habit in the population as a whole.
• The pool of savings the plan generates can help stimulate the city-state's economic growth by providing a long-term, predictable and large flow of funds for investment; higher growth rates, in turn, lead to higher income levels which produce more economic security both before and during retirement.
• Defined-contribution plans, such as Singapore's, are by nature fully funded and do not generate the distortions and welfare losses associated with systems that pay benefits to one generation by imposing taxes on another.

Qualifications.

• Without government subsidies, a system such as Singapore's cannot provide social security immediately, since it takes a long time for an individual to reach an adequate level of savings. The transition to a satisfactory result can take decades.38 Successful investment requires competent and sophisticated investment strategies, which nevertheless give high priority to fiduciary responsibilities.39
• Some the benefits of forced savings may be offset by a reduction in other savings by individuals.
• Defined-contribution plans can be adversely affected by inflation and longevity. Unanticipated inflation can affect the real value of accumulated balances. Since contribution rates are usually based on average life expectancy, individuals who live longer may have inadequate resources for their final years.
• As with any other retirement system, the CPF system works best if economic decision-making is insulated from interest group politics

Policy implications.

"Singapore policy makers have shown considerable ingenuity in adapting the CPF system to meet needs met by government in other countries."

One particularly useful move, given the low or negative return on CPF balances, would be to ensure at least a 3 percent real rate of return on CPF balances. This would help to address social adequacy and equity issues and to mitigate incentives for individuals to overinvest in stocks and property.

Lessons for other countries.

Thus, the first lesson Singapore teaches is that each nation's social security system needs to be consistent with its social-political environment and its need to compete economically. While a too-generous system can impinge upon international competitiveness, a too-parsimonious system can create anticompetitive social tensions.

Second, each nation must keep its social security administrative and compliance costs as low as possible. In 1990, operating cost as a percentage of annual contributions was only 0.53 percent in Singapore as compared to 1.99 percent for Malaysia and 15.4 percent for Chile. Its city-state status and high contribution rates give Singapore an advantage in this regard.

A contributory pension system, backed up by policies that place greater responsibility on the individual for financing old age, can create new opportunities for self-discipline in saving.40 This approach can help to increase investment in human capital and in physical assets such as housing. It also can increase the individual's share in financing such services as health care.

"A contributory pension system can create new opportunities for self-discipline in saving."

Countries that practice pay-as-you-go policies - including the United States - would do well to incorporate features of the CPF into their social security systems.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.