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Yuen Chung Kwong

What you need to know about Singapore's compulsory saving scheme

BY YUEN CHUNG KWONG

CPF stands for Central Provident Fund. As one of the numerous acronyms used in Singapore, CPF is among the best known internationally. (You could compare by searching on Google with others like GIC, DBS, PIE, SIA - I think the big winners for search engine prominence are HDB and NUS; NTU produces National Taiwan University first and MAS Malaysian Airlines first; PSC/GLC do not even come close).

CPF was actually started under the British colonial regime in 1955, as a simple compulsory savings scheme under which every employee in Singapore is required to maintain a CPF account into which he deposits a percentage of his salary, with the employer making a matching contribution.

The accumulated saving, with interest, may be withdrawn at the age of 55, or when the account owner leaves Singapore permanently, with the exception of leaving for Malaysia because of historical association. Post independence Singapore took over the idea, but modified it in many ways.

Until 1985 the rates were steadily increased, topping out at 25% on each side (employer + employee) so that the CPF savings amounted to 50% of a person's nominal salary. Taking away the income tax, the take home pay of an average emplyee was not much more than the amount going into his CPF account.

This constituted an unusually high national savings rate, especially in comparison to the high debt orientation of USA consumers. This and other factors also provided an unusually high level of financial resource control in the hands of the government.

At the time this high CPF rate requirement was part of a deliberate high wage policy, with the justification that high manpower cost would encourage employers to adopt productivity increase measures and lead to upgrading of the economic system.

CPF cost played some part in triggering the 1985 economic recessions when a 2% increase (on each side) was put in place; the rates were then reduced as part of a set of recession fighting measures, with promise of reversal after economic recovery.

There have been many ups and downs since then, with variations depending on age added in to reduce the cost of hiring people above 55 and other considerations; currently the contribution rate tops out at 36%.

The CPF account constitutes a large portion of a person's total savings; with this amount of money tied up in the CPF account, he may have little savings left for such needs as purchasing a home, children's education, or alternative investments. So throughout the history of CPF there have been a steady stream of schemes worked up to "borrow" from CPF the money in his account.

It started in 1968 with purchasing HDB apartments, later extended for use with other properties; in 1978 for purchasing shares of Singapore Bus Company which went IPO at the time; later this scheme was extended to other share purchases.

To limit the total amount that can be "withdrawn", separation of a non-withdrawable portion into a "special account" was introduced, but as investment possibilities proliferated with unit trusts, life insurance, even gold, being added to the scheme, numerous rules were formulated to govern withdrawals from the "ordinary account".

Next, ways to use some of the savings for medical expenses and health insurance were also added, with a portion of the savings separated into the Medisave account.

Through computerization and network linkup, hospitals and government clinics can access online each patient's medisave information, allowing both medical/hospital payments and insurance claims to be processed through the Medisave data system in a streamlined manner.

Because CPF membership is compulsory by government decree, it is not an ordinary investment house, but also an instrument of social policy. The CPF contribution rates for employees and employers have been used as an instrument for the macromanagement of Singapore economy.

During economic recessions, cutting the CPF contribution rate to reduce (slightly as it might be) the cost of manpower to help employers, was often the first thought. When the issue of an aging society became prominent in the early 80s, a long process of how to deal with the problem using CPF was initiated.

In fact, as soon as the idea of delaying the withdrawal of CPF money was raised for the first time during the 1984 election, the issue simmered; the topic was touchy because of the emotionalism of "the government took my money and doesnt want give it back".

The reaction might look small scale, but in tightly controlled Singapore, any open grumbling is serious, and some grumblings are more serious than others, so that measured steps were taken to deal with them, eventually resulting in the annuity scheme which I have discussed in a previous article

Another long standing CPF issue relates to Malaysians who go home. There was a time when the two governments tried to negotiate a package of agreements tying together the supply of low cost water to Singapore with Malaysians taking money out of CPF, but these discussions bogged down repeatedly, including a remarkable twist concerning Malaysia's desire to replace the Johor-Singapore causeway by a new bridge to facilitate shipping to the then new Johor port and the issue of returning land used for the Malaysian railway in exchange for land elsewhere.

In the mean time Singapore has added to its water source by going for waste water recycling and sea water desallination in a big way.


One would think that, if my saving each month is comparable to my take home pay, then I am putting a side a big sum for my retirement and the final result should be more than adequate. However, the situation is not so simple.

In particular, when CPF savings are withdrawn to buy property, the initial withdrawal is normally followed by monthly withdrawals to repay the bank housing loan, with interest, so that the amount "owed" to CPF increases, meaning that at age 55 there might be little in the ordinary account available for withdrawal as a lump sum, leaving just the sum in the special account for retirement income.


Where is My Money? It is not much of an exaggeration to say that the above question is constantly on the mind of Singaporeans with respect to CPF, despite access to their own funds by various means.

By collecting money from a large number of small subscribers and investing it in aggregate, CPF acts like a mutual fund, but it does not provide a mutual fund's freedom to cash out when you want, nor does it publish accounts on what investments it current holds and what profit/loss it may have incurred.

Lack of information in such situations usually causes two opposite suspicions: (a) the money managers made huge profits but dont want to share them with me (b) they lost huge sums in bad investments but want to keep quiet about it.

I would guess CPF by its nature would invest mostly in safe but rather low yield instruments, while mutual funds could, at least in part, be more daring. Whereas both Temasek and GIC invested overseas, and Temasek deliberately sets out to be a trail blazer in various domains like technology and financial innovation, CPF's scope of operation has to ensure regular fund accumulation in order to guarantee the principle and interest due to its account holders.

It is believed in the past CPF lended most of its money to HDB to build low cost housing for the public. This does not appear to be the case today, first because HDB now sells most of its apartments to their occupants, so that it would have enough cashflow to plough into new constructions without having to borrow, second because now banks, not HDB itself, provides loans for purchases from HDB, so that the cashflow is generated quickly rather than over the life of an HDB loan.

Today most of the CPF funds are probably invested in government bonds.

But then, what does the government do with the raised from selling bonds? Some must have gone into capital investments that produce assets which may be sold to GLCs or floated on the stock market; either way, they become part of the assets under the control of Temasek.

The capital assets also provide income and enlarge the budget surpluses, which are then invested by GIC. So indirectly, CPF money does play a part in the generation of sovereign wealth.

The large amount of money controlled by the Singapore sovereign wealth funds makes them heavyweights in the international financial scene, well out of proportion to the size of the country, which, in this as well as other domains like research and diplomacy, has often been described as "punching above its weight class", an image it works hard to maintain.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.

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Yuen Chung Kwong

Yuen Chung Kwong

Yuen Chung Kwong received his PhD degree in Computer Science in 1972 from Sydney University, Australia, and worked at Australian National University, University of Tasmania, University of Hong Kong, before joining Department of Computer Science, National University of Singapore in 1983; he was department head from 1985 to 1993 and retired in 2007.

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