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Singapore's pension scheme

Manila Times.March 14, 2000.

PERSPECTIVE By Edwin S. Pineda. Economist, University of Asia and the Pacific

THE pension system of Singapore is centered on the Central Provident Fund (CPF), a public institution that collects contributions, maintains records, pays out benefits, invests funds, and administer the system. The contribution rate is 20 percent each for both employer and employee, not exceeding S$6,000 a month. The self-employed contribute six to eight percent to health care. The growth rate of contributions has been gradually increasing since the system's inception in1955. It reached its apex in 1984 when it hit 50 percent, resulting in negative employment creation in the recession of 1985-86.

The CPF manages three basic accounts: Ordinary, Special, and Medisave which are differentiated according to the type of permissible withdrawals by the members. Since 1987, members are required to maintain a minimum sum in their accounts upon reaching age 55 equivalent to S$50,000, but gradually increasing by S$5,000 per year until it climbs in the year 2003 to S$80,000 This is mandated by the CPF to enable the member to buy a minimum life annuity upon reaching 60 years of age equivalent to at least 20 percent to as much as 40 percent of average earnings.

The CPF started out as a defined-contribution (DC) system, with a purely savings-orientation (ie, no intentional redistribution). The primary objective is to enforce savings for future pensions. Over time, it expanded the scope of benefits to include spending on "merit goods" (health, housing, education, investments).

The CPF is by no means the only public agency involved in social security. It co-exists with the Ministry of Community Development for unemployment assistance. It complements the Ministry of Health which provides free or subsidized healthcare for the indigents. The CPF is under the Ministry of Labor which administers the workmen's compensation act where disability benefits are paid.

CPS's management of its investments portfolio. According to Mukul G. Asher, an economist of the National University of Singapore (NUS), the CPF manages three major pools of investible funds. The first and largest are members' balances with the CPF Board, corresponding to the ordinary and medisave accounts. As of year-end 1997, these were equivalent to S$79.7 billion (55.7 percent of gross domestic product). By law, these funds must be invested in government bonds through the Monetary Authority of Singapore, MAS.

The bonds are floating rate bonds issued primarily to the CPF. There are no quoted market prices for these bonds because the bonds are not marketable beyond the initial buyers (There is little or no secondary market for these bonds). The floating rate is the simple average of the 12-month deposit and month-end savings rate of the four top domestic banks subject to a minimum nominal rate of 2.5 percent.

On the other hand, the special and retirement accounts are paid 1.25 percent above normal CPF interest rates for the period (This has been raised to 1.50 percent in 1998).

How satisfactory are these bond coupon rates paid to CPF members? According to Mr Asher, when inflation in Singapore is deducted (i.e., GDP deflator) the real return averaged "zero percent with negative returns during five of the past eleven years."

There is a widely held perception that CPF funds have been used by the Singapore government to finance infrastructure and public housing. Since there is no transparency, disclosure, or public accounting of these funds, no one knows whether these widely held beliefs are indeed correct.

If the government of Singapore were incurring large budgetary deficits, there might be some justification for these beliefs. However, as Mr Asher points out, the government of Singapore has been "running large budgetary surpluses over many years together with a large internal public debt amounting to S$102.4 billion as of end-1997 (equivalent to 71.6 percent of GDP)."

If large budgetary surpluses co-exist with large interval, public debts in Singapore, where are the CPF funds invested:

Many believe that these are almost entirely invested abroad. There might be an official (albeit unannounced) policy to accumulate foreign exchange reserves or foreign assets for the "future needs of an economy that is otherwise without natural resources." The asset side of the CPF balance sheet as of Dec 31, 1996. Approximately 70 percent are invested in Singapore government (treasury) bonds. Next, 28 percent are invested in the Monetary Authority of Singapore (MAS) for potential foreign investment through the Government of Singapore Investment Corporation (GSIC).

It is alleged that very high real returns have been earned on foreign investments through the GSIC, which performs a service similar to the Kuwait Investment Office (KIO). But since no public accounting is given, these claims cannot be corroborated.

If the government earns high real rates on its foreign investments but pays only a fraction to its CPF members, then the difference constitutes an implicit tax on its people. Mr Asher quotes a statement in parliament in March 1996 by the Singapore finance minister. The minister claims that investment returns on Singapore's reserves have averaged five percent in Singapore dollar terms in the last 10 years (no official data is published). Subtracting the nominal rate paid to CPF in1996 of 3.7 percent from the five percent yields 1.3 percent.

Multiply this differential by the average balances that year equivalent to S$69.3 billion yields the implicit tax on CPF members of S$900.9 million, roughly 6.2 percent of systemcontributions. The complete lack of disclosure on the status of these investments makes one suspect that the implicit public pension taxes are much higher than these estimates.

The second category of CPF investible funds consists of insurance monies of approximately S$1.5 billion (as of 1996), earning roughly 4.2 percent (Asher 1998). These are placed in equities, bonds, negotiable certificates of deposits, and fixed deposits.

The third category consists of members own investments arising from pre-retirement withdrawal under the CPF investment scheme (CPFIS). In this arrangement, a member can withdraw as much as 80 percent of balances in excess of the prescribed minimum (currently $S50,000 but becomes S$80,000 by 2003).

The member can invest these funds by themselves in CPF approved stocks, mutual funds (called unit trusts), gold, endowment policies, bank deposits, Singapore government bonds, and fund management accounts.

Increasingly, individuals are availing of this facility to invest on their own. Partly as a response to this trend, the authorities in Singapore have significantly relaxed the rules governing the choice of mutual funds and the type of permissible investments therein. For example, previous ceilings of 40 percent for non-trustee stocks, 50 percent ceiling for foreign-currency denominated placements, and country restrictions have been recently removed.

The Singapore authorities thus recognize the need to encourage greater efficiencies in investment allocation but admit that more needs to be done.

Nevertheless, market risks can outweigh the best of intentions. It has been reported that during the first 10 months of 1997, more than half of 174 CPF-approved trustee stocks performed lower than the main index of the Singaporean Stock Exchange (The Straits Times Industrial Index).

There is apparently a widespread perception in Singapore that the present system no longer serves the majority. Asher reports a recent survey of 4000 Singaporeans aged 60 years and above indicating that seven out of ten rely on children for financial support and that less than one percent relies primarily on their CPF pensions. The CPF has built-up over 40 years of progressively increasing contributions but now seems unlikely to give average benefits ranging from 20 percent to 40 percent of average wage. The principal drawback seems to be negativereal rates of return on investments by a centralized agency that is non-accountable to its members (Although it is accountableto the national leadership).

Other complications exist. There is no tax-financed first pillar for minimum levels of protection, no inflation-indexing, no longevity adjustment, and a recent decision not to cover those above 75 years of age even under the quite restricted health insurance (Medishield plan).

This latter decision not to cover the seniors 75 years and above is especially curious inasmuch as other media reports indicate that the Singaporean population is rapidly aging. One would think that Singaporean Senior citizens would be given additional benefits because they compromise an influential bloc of the citizenry. This again reflects the weaknesses of a system which is not publicly accountable. The next section discusses an important economic concept that will prove useful in clarifying the processes at work in the Singaporean system.


A nation's government can finance a budgetary deficit by borrowing from the nation's central bank, its commercial banks, or from its non-bank private sector. Economists generally describe this process as seigniorage, a term borrowed from the European feudal ages. In those days, financially strapped overlords who had the sole power to issue coinage in their realm financed their debts by shaving off (diluting) the gold content of their coinage. In other words, the overlords acquired goods and services by debasing the currency. In its modern incarnation, the process starts with the nation's treasury (or finance department) issuing short-term debt-papers (T-bills) or selling longer-term bonds to either its central bank, the commercial banks, or to the public. We shall be able to more clearly see the changes on these respective institutions when budget deficits are financed.

The nation's central bank can elect to buy the treasury's debt papers so that the asset account on its balance sheet, Claims on government, increases. On the liability side, the central bank can match the increase in assets by either increasing commercial bank reserves (i.e., increase mandatory reserve ratios) or it can directly print money in order to increase the other liability account: Bank Notes held by Non-banks. This second approach of outright printing of money is called monetization of the budget deficit. To the extent that real goods and services in the economy are unchanged (as is likely in the short term), monetization tends to create inflation (i.e., more money chasing after fewer real assets in the economy).

On the other hand, the first approach, which is increasing mandatory reserves in the banking system, has its own well-known negative consequences. It has the effect of contracting loans and securities in the asset side of the commercial banks matched on the liability side by contracting the level of deposits of the private sector. This approach dampens real economic activity in the private sector. This is known as government "crowding-out" the private sector. Thus, both approaches carry serious risks as a means of financing budget deficits or creating wealth.

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