Uniquely Singapore, Uniquely CPF

ETHOS Issue 15, June 2016

Background on the Singapore System

Singapore’s social security system has co-evolved with its historical development. Given our unique position as a small and open economy with no natural resources, we have adopted a model, premised on self-reliance, that is more fiscally sustainable and conducive to economic competitiveness. This, however, does not mean that we adopt a laissez-faire stance towards social policy. Instead, the Government takes an activist approach, consciously designing social spending and subsidies in ways that reinforce both individual responsibility and collective responsibility, as part of a shared social compact.

"This is not about leaving things to self-reliance, or about leaving families to face uncertainties on their own. It is a strategy of government support for efforts by individuals to learn and strive to achieve their aspirations, to own a home by working and paying down a loan, and to save for their retirement needs. It may be a paradox, but this paradox of active government support for self-reliance has to run through all our social policies."

—Deputy Prime Minister and then-Finance Minister Tharman Shanmugaratnam¹

While the Central Provident Fund (CPF)² provides for Singaporeans’ basic retirement needs, our social policy adopts a holistic approach that extends beyond social security to also encompass social investment and social assistance (see box story on “Key Features of Singapore’s Social Policy Framework”).

Key Features of Singapore's Social Policy Framework

Social security: The key pillars of Singapore’s social security system are: Home Ownership, the Central Provident Fund system (consisting of individual savings accounts under a fully-funded, defined contribution system), Healthcare Assurance, Workfare (income supplement for low-wage workers), and the recently introduced Silver Support Scheme (income supplement for the bottom 20% to 30% of elderly Singaporeans). Through the CPF, Singaporeans build up savings for their retirement and healthcare needs as well as housing purchases.

Social investment: The Government invests heavily in education and training (most recently with the introduction of SkillsFuture³) to ensure that Singaporeans are employable and can earn an income for themselves. Initiatives such as Workfare⁴ and Special Employment Credits⁵ are targeted to encourage the employment of low-wage workers and older workers respectively. The Government has also implemented an extensive public housing programme, enabling the great majority of Singaporeans, including low-income households, to own their homes. Home ownership promotes self-reliance, social mobility and financial security.

Social assistance: Targeted assistance reaches the needy and disadvantaged while minimising disincentives to work. Only those who cannot work and have no other financial means receive long-term aid, through the Public Assistance scheme. ComCare programmes help individuals get back on their feet in the short- to medium-term. Lower-income households also receive substantial healthcare subsidies, and can fall back on Medifund⁶ as a last resort if they cannot afford their medical bills. The permanent GST Voucher scheme provides cash, Medisave top-ups and utilities rebates for lower and middle-income Singaporeans on a regular basis.

A key guiding principle when designing and reviewing social programmes is fiscal sustainability. This issue has become particularly salient in recent years, given the number of pension schemes worldwide that are struggling to honour their pension obligations in the face of demographic pressures or poor investment returns.

In Singapore, modest levels of fiscal spending enable taxes to be kept low for the broad majority of Singaporeans while maintaining a progressive system of taxes and transfers. This also maintains the incentive for individuals to work and upgrade their skills, save for their retirement and other needs, and to take responsibility for their own families. This has not come at the expense of the well-being of Singaporeans. Our approach of social investment, social security and targeted social assistance has enabled Singapore to achieve positive social outcomes while keeping government expenditure and taxes relatively low. These positive outcomes include low unemployment, high home ownership rates and healthcare outcomes that are superior to those in many advanced countries.⁷

What Makes Singapore’s Approach (and the CPF) Unique?

Started in 1955, Singapore’s Central Provident Fund is a defined contribution system that is fully funded by contributions from employers and employees. Contributions are held in three separate accounts — the Ordinary, Medisave and Special Accounts — which support Singaporeans’ home-ownership, healthcare and retirement needs.

While CPF is a defined contribution scheme in substance, it differs from many other defined contribution schemes in design, coverage and risk sharing. So what makes Singapore’s approach unique?

CPF Is Asset-based

Singapore complements the accumulation of cash savings for retirement with asset-based policies. A key component of this approach is allowing the use of CPF savings for housing purchases, with the Government also providing subsidised public housing and substantial housing grants to enable Singaporeans to own their own homes. This strategy has resulted in a home ownership rate of around 90%, with even lower- income households having substantial housing equity in their properties. Home ownership eliminates the need to worry about rental costs during one’s retirement years; and housing assets can be monetised, if necessary, to supplement retirement income. This asset-based approach — as opposed to providing cash benefits to those in need — is consistent with the principle of self-reliance, with subsidies going towards asset development rather than consumption.⁸

CPF Is an Integrated Social Security System

CPF integrates several aspects of social security: retirement savings, healthcare financing, home ownership. Together with government schemes like Workfare and Silver Support, an individual can look forward to peace of mind in old age. There is also flexibility within the CPF system to allow a member to optimise the use of his savings. For example, the portion of CPF savings that is invested in property may be monetised when needed to enhance retirement income, while the monthly income that a CPF member receives in retirement will also help him to meet his out-of-pocket medical expenses in old age. CPF members can also transfer their CPF savings among family members to better support each other’s retirement needs.

CPF integrates several aspects of social security: retirement savings, healthcare financing, home ownership.

CPF Helps Individuals to Manage Retirement Risks

Although CPF is a defined contribution (DC) scheme at heart, it has incorporated elements of risk pooling that are more common to defined benefit (DB) systems, resulting in an approach that is eclectic yet meets the retirement needs of Singaporeans. In particular, the way that the CPF addresses the two key risks of investment and longevity is unusual among DC schemes.

In a typical DC scheme, the retirement savings built up in individual accounts is a function of the contributions received and the investment returns that these monies earn. Poor investment performance can severely affect the amount of savings available to the individual at retirement: in the aftermath of the 2008 global financial crisis, many DC participants saw the value of their retirement savings shrink dramatically due to investment losses. Furthermore, as life expectancies continue to rise and with many individuals underestimating their own life expectancy, DC participants also run the risk of exhausting their retirement monies while they are still alive — a phenomenon known as longevity risk.

In contrast, we carefully manage CPF members’ exposure to investment and longevity risks:

1. CPF monies, by default, are invested in special non-tradable government bonds known as Special Singapore Government Securities (SSGS). These bonds are issued by the Singapore Government, which has a triple-A credit rating. With Extra Interest for lower CPF balances and for older members, CPF members can earn up to 6% interest per annum on their CPF savings.⁹ CPF retirement savings currently earn a floor rate of 4% per annum which protects CPF members when market returns are low.¹⁰ CPF monies are safeguarded because the SSGS are issued and guaranteed by the Singapore Government.

2. To address longevity risk, a national annuity scheme called CPF LIFE was introduced in 2009. Previously, CPF members would receive an income stream for about 20 years from the CPF savings accumulated during one’s working life. With increasing life expectancies, members faced the risk of outliving their savings. CPF members with at least $60,000 at age 65 in their Retirement Account¹¹ will be automatically enrolled¹² in CPF LIFE, ensuring that members receive monthly payouts for as long as they live. The other feature of CPF LIFE is that payouts are commensurate with the amount of CPF savings committed to the scheme, which preserves the principle of individual responsibility.

CPF Has Redistributive and Progressive Features

While CPF is premised on self-reliance and individual savings, it includes redistributive and progressive features that benefit less well-off members. These include CPF housing grants and the Extra Interest on CPF savings introduced in 2008. In addition, the Workfare Income Supplement Scheme (WIS) encourages low-wage workers to stay employed by providing a government transfer that supplements up to 30% of annual income for low-wage workers. The cash component of the WIS supplements their income, while the CPF component helps them build up their retirement savings. Under the WIS, more than $670 million was disbursed as at end 2015 for work done in 2014, benefitting about 439,000 Singaporeans.

Since 2008, the Government has been providing a 1% additional interest on the first $60,000 of a CPF member’s balances. Since 2016, an additional 1% extra interest is paid on the first $30,000 of CPF balances for members aged 55 and above. These measures help to boost members’ monthly retirement payouts, especially for those with lower balances.

These features make the CPF an exception to the typical defined contribution scheme. It embodies both individual responsibility, as it is still first and foremost based on individuals saving for themselves, as well as collective responsibility, with its progressive elements and collective pooling of risk.

How Does Singapore’s CPF Compare with Other Countries’ Retirement Systems?

International comparisons typically apply a common set of evaluation criteria in order to ensure comparability and facilitate benchmarking. Such studies can illustrate the strengths and weaknesses of different systems, but are less useful for appreciating how the unique features of each system have evolved to suit their respective contexts.

While CPF is premised on self-reliance and individual savings, it includes redistributive and progressive features that benefit less well-off members.

International comparisons of retirement income systems tend to focus on adequacy and sustainability. Adequacy refers to the level of benefits that the systems provide for old age needs, while sustainability refers to their ability to continue providing these benefits in the long term. While these are useful parameters in assessing the effectiveness of a retirement income system, the way in which each parameter is defined and applied will affect evaluations significantly.

For example, while sustainability indicators typically include the level of pension assets and public debt relative to GDP as well as demographic factors,¹³ it would not be meaningful to apply these parameters across the board. These metrics were originally designed for traditional pay-as-you-go DB systems that tend to be susceptible to demographic pressures (whereby contributions from a shrinking workforce are insufficient to fund the pension payouts of a growing elderly population). Such metrics are less applicable for a fully-funded DC system such as the CPF, in which each member can only withdraw what he has set aside in his account.

International studies that focus only on cash savings for retirement would also underestimate the level of adequacy that the CPF provides, since it includes unique provisions for housing and healthcare that go beyond pure retirement needs alone. For instance, such studies tend to assume the need to incur expenditure on housing rental, which Singaporean retirees, who mostly own their homes, do not require. Indeed, many studies overlook the fact that many Singaporeans hold substantial housing equity (instead of liability) that they could potentially unlock in order to increase their retirement adequacy.

Singapore’s approach to helping the needy is often not fully appreciated in international studies. While some countries provide generous welfare benefits to the elderly poor, there has been increasing concern over fiscal deficits and public debt levels, calling into question the sustainability of such schemes. In contrast, Singapore provides support for lower-income Singaporeans whilst maintaining a fiscal balance through schemes such as Workfare, substantial housing grants, healthcare and education subsidies, and GST Vouchers.¹⁴ This has been recently bolstered by the introduction of the Silver Support Scheme in 2016, which complements Workfare as part of the fourth pillar of social security in Singapore. The Silver Support Scheme supplements the retirement incomes of the bottom 20% to 30% of older Singaporeans, just as Workfare supplements the incomes of the bottom 20% to 30% of working Singaporeans. As Singapore’s approach is atypical, its social safety net may consequently be perceived by conventional measures to be less robust or sustainable than it actually is over the long term.

What’s Next for Singapore’s Social Security System and CPF?

The CPF is a uniquely Singaporean social security system, whose features have evolved over more than half a century to meet our particular context and values. It should continue to be refined to stay relevant and meet the current and future needs of Singaporeans.

While the main objective of the CPF remains to ensure that Singaporeans can meet their basic retirement needs, there is scope for the CPF to provide more options to cater to varying retirement needs of Singaporeans. In September 2014, the Government appointed a CPF Advisory Panel to study possible enhancements for CPF members. The Panel released the first part of its recommendations in February 2015, which included giving members the flexibility to withdraw more as a lump sum upon retirement, deferring the starting age for their retirement payouts, and providing clearer choices over their desired level of retirement payouts and corresponding retirement sums to set aside. The Panel is in the process of studying how to provide an option for CPF members who prefer retirement payouts that start off lower but increase over time to help with rising costs of living, and how to provide options for CPF members who wish to take on some investment risk in order to seek higher returns on their CPF savings.

To build a more inclusive and resilient society, the Government has signalled its commitment to enhance the CPF system and reinforce Singapore’s social safety nets. These efforts will create a broader and more flexible social security system that protects Singaporeans over their lifetimes

ABOUT THE AUTHOR

Heidi Chan is Principal Research Analyst with the Policy Research Department at the Central Provident Fund Board.

Eng Soon Khai is Group Director of the Policy, Statistics and Research Group at the Central Provident Fund Board.

Laura Lim is Lead Research Analyst with the Policy Research Department at the Central Provident Fund Board.

NOTES

1. Speech by Mr Tharman Shanmugaratnam, Deputy Prime Minister and then-Minister for Finance at the Academy of Medicine, August 23, 2013.

2. For a brief history of the CPF, see https://www.cpf.gov.sg/Members/AboutUs/about-us-info/history-of-cpf.

3. SkillsFuture is a national movement to enable all Singaporeans to develop their skills throughout life. It includes the SkillsFuture Credit, which can be used to offset the fees for a wide range of skills-related courses, the SkillsFuture Study Awards, and the SkillsFuture Mid-Career Enhanced Subsidy.

4. Workfare comprises the Workfare Income Supplement Scheme (WIS), which provides more income and CPF savings to older, low- income Singaporean workers when they stay employed, and the Workfare Training Support Scheme, which encourages these workers to attend training to improve their skills.

5. Under the Special Employment Credit (SEC) scheme, for Singaporean employees earning up to $4,000 a month, the Government will cover up to 8% of the monthly wage of those above age 50, and up to 11% of the monthly wage for those aged 65 and above. The Government has also announced an extension of the Temporary Employment Credit up to 2017, which offsets up to 1% of wages (capped at the CPF salary ceiling), to alleviate the rise in business costs due to the increases in CPF contribution rates and CPF salary ceiling.

6. Medifund is an endowment fund set up by the Government in 1993, as a safety net to help needy Singaporeans who cannot afford to pay for their medical expenses, despite substantial bill subsidies. The other components of healthcare financing in Singapore are Medisave, where Singaporeans set aside a portion of their CPF savings for medical needs, and MediShield Life, a basic health insurance plan that covers all Singapore Citizens and Permanent Residents for life, and which helps to pay for large hospital bills and selected costly outpatient treatments.

7. Singapore’s unemployment is low and the annual average overall unemployment rate has been around 2.5% for the past 10 years. Singapore enjoys a high home ownership rate of about 90%. Singapore’s healthcare outcomes have won accolades, see for example, Bryan R. Lawrence, “To Fix Medicare and Social Security, Look to Singapore”, The Washington Post, August 17, 2012.

8. Citing Singapore’s approach in his 2011 Sir Robert Menzies Lecture, Noel Pearson argues that “...\[Singapore\] redistributed money to promote wealth and asset development, not consumption. The lesson here is subsidising consumption is fatal. By doing so you neutralise the most important incentive to strive and work.” Noel Pearson, “Proof of Welfare’s Multiple Failings”, The Australian, March 5, 2011.

9. CPF members earn up to 5% per annum on their Special, Medisave and Retirement Account monies, inclusive of an extra 1% interest paid on the first $60,000 of a member’s combined balances (with up to $20,000 from the Ordinary Account). From January 2016, CPF members aged 55 and above also earn an additional 1% extra interest on the first $30,000 of their combined balances (with up to $20,000 from the Ordinary Account). As a result, CPF members aged 55 and above will earn up to 6% interest per year on their retirement balances.

10. There is currently an interest rate floor of 4% per annum on CPF savings for healthcare and retirement, while an interest rate guarantee of 2.5% per annum is in place for all CPF savings.

11. The Retirement Account is created for members when they reach age 55; savings from their Special and Ordinary Accounts would be transferred to the Retirement Account to form the Retirement Sum.

12. Members turning 55 from 2013 onwards are automatically enrolled in CPF LIFE, and are eligible to start their retirement payouts at age 65. Older members who turned 55 before 2013 can choose to opt into CPF LIFE.

13. Such demographic factors would include old- age dependency ratios and fertility rates.

14. The GST Voucher was introduced in Budget 2012. It is a permanent transfer scheme to help lower and middle-income households with their expenses, in particular, what they pay in Goods-and-Services Tax (GST). There are three components to the GST Voucher: Cash, Medisave and Utility-Save (or U-Save).

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