Academic warns Singapore must overhaul CPF

September 6, 2000

    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.


Singapore: Average Balances Per Member*and Average Monthly Earnings, 1987-98

(1)

(2)

(3)

(4)

(5)=(4)/(2)

(6)=(4)/(3)

Year

Average Monthly
Earnings
(excluding Employer’s
CPF Contributions) a
($)

Average Monthly
Earnings
(including Employer’s
CPF Contribution)b
($)

Average Balance
Per Member
($)

Average Balance Per
Member/Average
Monthly Earnings
(excluding employer’s
contribution)

Average Balance Per
Member/Average
Monthly Earnings
(including employer’s
contribution)

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1176

1273

1398

1528

1669

1804

1918

2086

2219

2347

2480

2549

1335

1426

1608

1773

1969

2129

2282

2503

2663

2816

2976

3059

15458

15790

16313

18504

20421

22191

21361

23059

24640

29503

28633

30419c

13.1

12.4

11.7

12.1

12.2

12.3

11.1

11.1

11.1

12.6

11.5

11.9

11.6

11.1

10.1

10.4

10.3

10.4

9.4

9.2

9.3

10.5

9.6

9.9

    Notes:

    a: inclusive all remuneration received before deduction of the employee's CPF contributions and individual income tax. They include basic wage, overtime payments, commissions, allowances and other monetary payments, annual wage supplement, and variable bonus.

    b: this is calculated as amount in column (2) + Employer's CPF contribution (Amount in column (2)). This is only an approximation and is biased upwards due to wage ceiling for employer's contribution.

    c For males, average balance in 1998 was $ 33,765, for females, $ 26,846.

    Source: Average Monthly Earnings From Republic of Singapore, Ministry of Manpower, Singapore Year Book of Manpower Statistics, 1997, Table 2.2, p.18. Average Balance per Member from data in Tables 1 and 5 of this paper.

    * Note that anyone who contributed to CPF at one time or the other is a member. Hence , the number of members in any given year does not refer strictly to all those stationed in Singapore. Some who are not citizens and permanent residents may not come back to Singapore to spend their retirement. Those who are permanent residents may be working abroad and hence are not active contributors. In general, the "members" are a fluid pool and strict comparability of the annual data on members is not expected.

    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.