Over-burdening the CPF system
The Central Provident Fund (CPF) was founded in 1955 to meet the retirement needs of Singaporeans. Today, the CPF has become more complex. The CPF is now also a comprehensive social security system to meet the needs for home ownership, healthcare and education.
We may have over-burdened the CPF system. To help meet so many needs, employers and employees contribute significantly to the CPF funds – 20% of income for each of them. In comparison, Hong Kong’s Mandatory Provident Fund has a 5% contribution rate. The CPF is, in effect, a tax on business and has made Singaporeans uncompetitive in terms of being hired over non-Singaporeans.
Even though Singapore sees some of the highest retirement fund contribution rates in the world, Singaporeans see some of the world’s lowest investment returns. Singaporeans have voiced out that they have insufficient retirement savings despite having high contribution rates.
The CPF is far from being a simple policy. In the early stages of Singapore’s economic development, high CPF contribution rates were a source of stability. The CPF provided the government with capital for developmental projects, allowing the government to be an investor in many sectors of our economy.
But we question whether these objectives are valid today. We also question if high CPF contribution rates are an obstacle to the employment of Singaporeans, in the increasingly competitive job market.
The problem with the government’s home ownership mode
For political reasons, the government wants CPF contribution rates to be high to help Singaporeans own homes. Home ownership is a political tool to ensure Singaporeans remain loyal to the country and the ruling party’s economic growth model.
However, high home ownership in Singapore has come with significant costs, because a large part of national savings goes into housing development. And since Singaporeans cannot withdraw their CPF savings, Singaporeans have every incentive to buy houses.
Singaporeans will also continue to upgrade their homes to a larger property to ensure they can maximise their CPF savings. In other words, the CPF system has been fuelling the property bubble in Singapore. The mathematical benefits as presented to them are simple –property generates better returns for them than the CPF’s paltry interest rate of 2.5%.
We must therefore also review the home ownership model. It is important to ensure everyone lives in a sheltered home, but only to the extent that the price – and affordability – of the property commensurates with one’s income.
Strip the CPF to meet basic retirement needs
The CPF should be designed to only meet the most basic retirement needs of Singaporeans. We must also strip the CPF system of its other objectives. When it comes to the management of retirement savings, simplicity in policy design must be ensured: -
- The costs of retirement needs should be pegged to the 50% income percentile of Singaporeans. That is to sufficient to ensure Singaporeans can retire with an average quality of lifestyle;
- Housing needs, as apportioned from CPF accounts, can be pegged to that of a basic three-room HDB flat.
We can allow Singaporeans to withdraw excess funds from their CPF accounts after covering of these needs. We would like to see CPF contribution rates substantially reduced and for capital to be freed up, and for employers to contribute lesser to enhance employability of Singaporeans. This implies that we can heavily reduce the contribution rates from employers and employees.
Summary
- The CPF is a complex piece of policy today. This state of complexity is detrimental to our economy and to Singaporeans.
- Simplifying the CPF system to provide for basic retirement and housing needs must be a matter of priority.
- Ensuring that we have a higher rates of return from the CPF and a lower CPF contribution requirement will help mitigate the risk of a housing bubble developing.Redesigning the CPF, stripping it down to the basics
By Loke Hoe Yeong and Hans Solo
*Article first appeared on http://sgnewpolicythinking.tumblr.com/post/90054258768/redesigning-the-c...