The Central Provident Fund:
Income Security and Maintenance for Old Age in Singapore


Singapore is "a" welfare state in its own right because of the "government-made" developmental state, which had enabled its transition from third world to first in some three decades. The authoritarian and paternalistic style of the People's Action Party (PAP) has been in continuous power since 1959. Its socialist predilection was at least, in distribution policies via education, health and housing, leaving the economy largely capitalist and market-driven. Embedding social goals in the political economy ensured stakeholdership in housing and other assets among a migrant stock of people.

A 1955 legacy from British colonial rule, the Central Provident Fund (CPF) has gone over and beyond old-age social security. Policymakers have to maintain a competitive economy while an ageing demography needs stronger pillars of social security and welfare protection. Hence, the CPF model has to be reinvented and reengineered. Real and unaccustomed issues like episodal unemployment, unemployability, job insecurity and inequity with the digital divide have surfaced and added to the concerns implied by an fast aging society.

Literature is extant on Singapore's transition from third world to first. In its holistic approach to transform an entrepot economy to a high technology, high skilled and high value added manufacturing-service hub, the People's Action Party government has been unapologetic about the way it commandeered resources. It acquired land cheaply for infrastructure including public housing via the Land Acquisition Act, reshaped demography, equipped labor via continuous education and training and mobilized domestic capital via Central Provident Fund saving and other forms of public sector surpluses beside attracting direct foreign investment.

What distinguished Singapore from other developmental states was its strict resistance to growth-compromising demand from special interest groups. Ironically, its lack of natural resources and options after its separation from Malaysia in 1965 forced it to solve its economic and socio-political ethnic problems through outward-oriented competitive strategies rather than insular, protective ones. With imminent independence, the British inducted self-financing, fully funded provident scheme for its colonies, simple save-as-you-work for old-age income security and maintenance.

The PAP government innovated extensively and aggressively the Central Provident Fund for the purpose of housing a healthy, educated and wealthy nation. The current rate of 30% of salaries for employees below 35 years (20% and 10%, employees and employers respectively) is paid into three accounts. The Ordinary Account takes 24% for housing, approved investments, CPF insurance, tertiary education and topping-up of parents' Retirement Accounts. For members below 35 years, 6% is put in Medisave, rising for older workers. The third Special Account, which used to absorb 4%, was suspended when the 40% CPF rate was cut to 30% in January 1999. At age 55, members may withdraw saving from Ordinary and Special Accounts after setting aside the mandated Minimum Sum of S$60,000 (minimum S$20,000 cash, rest pledged with a property).

The Minimum Sum will rise gradually by S$5,000 a year to S$80,000 by 2003. Members are encouraged to buy approved life annuities with this Minimum Sum, deposit with approved banks or leave in CPF.

Medisave effective January 2001

Age	Contribution rate (percentage points)
35 and below	6
35-45	7
45-60	8
over 60	8.5

Special Account effective January 2001

Age	Contribution rate (percentage points)
35 and below	4
35-55	6
over 55	0

To encourage employment of older workers to alleviate labor shortage, keep senior citizens active and save more with longer life span, employees above 55 to 60 years and their employers contribute 12.5% and 4% respectively (total 16.5%). For those aged 60 to 65 years, the rates are 7.5% and 2% (total 9.5%), falling to 5% and 2% (total 7%) for those above 65 years. For those 65 and above, the whole 7% goes into Medisave. The maximum monthly contribution for all age groups is based on a monthly salary ceiling of S$6,000 for tax exemption purpose.

The Retirement Account kicks in under the Minimum Sum Scheme for those over 55 years and have left their saving with CPF. Since July 1998, CPF members below 55 can transfer up to S$40,000 from Ordinary to Special Accounts. Both Special and Retirement Accounts earn 1.5% in addition to the minimum guaranteed 2.5%. From 1 July 1999, instead of a six-monthly adjustment, CPF interest rates are revised quarterly bringing them closer to prevailing market interest rates together with a new formula which gives 80% weightage to fixed deposit and 20% to saving deposit given the long-term nature of CPF saving.

The de facto state guarantee of CPF through an explicit guaranteed low minimum of 2.5% interest constitutes an implicit taxation on CPF members. The de facto state guarantee arises when CPF is mandated to invest its balances in government securities, which earn a guaranteed 2.5%. The implicit taxation occurs because the Government of Singapore Investment Corporation (GIC) which takes care of investment of all state funds can usually earn a higher than 2.5% rate. To be fair, CPF members also enjoy cost-free fund management via GIC, tax-exempt status of CPF contributions and interest dividends. Nonetheless, the implicit taxation and the nature of all public sector comingled funds through GIC is what makes accountability and transparency an issue.

CPF members are further none the wiser with across-the-board intransparent GIC investment strategies. There is no accountability of individual fund strategy and performance. All these political economy features make any analysis or assessment of CPF hard, almost like challenging motherhood statements like government-knows-best and "in PAP we (Singaporeans) trust," both as a matter of habit and fact. The CPF's greatest challenge is how to preserve old age security, take members' interests as its top priority rather than serve state interests first and members only as a directed outcome.

The record of the CPF so far had been impeccable in contrast to systems elsewhere in the region. Neither is it conceivable that the PAP regime, which innovated and patented CPF so arduously and diligently would let it fail just when postwar baby boomers are due for retirement. A generation of CPF policies and schemes are about to be tested and pay off and CPF is too big to falter, lest fail.

by Linda Low (National University of Singapore)