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Tinkering with the Central Provident Fund’s parameters won’t be enough to meet Singapore’s social security goals.

THE Singaporean government must stop its implicit taxation of its citizens through the Central Provident Fund (CPF) and give more weight to its fiduciary responsibility to them if Singapore is to sufficiently provide for its aged, says Mukul Asher, professor of public policy at National University of Singapore. He estimates that by 1998, the average balance members could withdraw upon retirement had declined to the equivalent of a mere 10 months’ wages.

The table below illustrates this problem. Asher calculates the average monthly wage for a Singaporean, both including the CPF contribution and without, and the estimated lump sum that members will withdraw from CPF upon retirement. The problem is especially acute for women: Asher’s numbers are a median between the higher salaries of men and the lower salaries of women. Considering Singapore has been a high-growth economy for decades, the numbers are alarming.

CPF funds are invested by the Singapore government through vehicles such as the Singapore Government Investment Corp. (SGIC), Asher believes. The government does not say how CPF funds are invested, on what criteria or what returns they achieve. Although many observers have guessed the government invests CPF funds directly into infrastructure and public housing, Asher says the numbers don’t support this view: it has persistently run large budget surpluses. That has led him to suspect CPF funds are largely invested offshore.

The professor cites anonymous SGIC executives as saying it aims for an inflation-adjusted annual return of 3-4 percent in Singapore dollar terms. He assumes if a 3.5 percent annual return was achieved from 1987 to 1999, when the average actual return to CPF members was 0.88 percent, then Singaporean citizens are being implicitly taxed the remaining 2.62 percent return, or S$2.3 billion ($1.4 billion) – the equivalent of 20.9 percent of corporate and personal income tax revenue in 1999.

Government officials accept the need for change, Asher says. But so far the options they have floated, such as raising contribution rates allowed in accounts with higher interest rates or increasing the withdrawal age, are going to have only a minimum impact. The additional contributions required by individuals to sustain a monthly income in retirement of two-thirds their working salary are so high as to be unrealistic. “Unless [the government] is willing to end the implicit taxation of CPF wealth, and unless it increases the weight given to its fiduciary responsibility to its members, the progress towards providing the adequate replacement rate will be limited,” he says.

He calls for more public accountability for how CPF funds are invested and their returns, and for allowing CPF members to choose among allocations of varying risk. Individual annuity markets or similar options must also be developed. Asher will present his findings in Rayong, Thailand at a seminar sponsored by the World Bank and Thailand’s Ministry of Finance later this month.