The central provident fund scheme in Singapore: Challenges and reform

Abstract

The article explains the features and evolution of the Central Provident Fund (CPF) scheme in Singapore and the reforms it has undergone in the face of recent challenges. At its inception, it was designed as an exclusively state managed savings scheme to meet the retirement needs of its members. Over the years, it has been gradually liberalised, allowing account holders to use their savings for additional purposes. In recent years two key challenges have arisen. One has been the problems arising out of liberalisation itself, which has left too many CPF members with insufficient savings for their retirement as a result of mistaken or imprudent choices in committing their savings to the additional options available. In response, the Singapore government has tempered or reversed the process of liberalisation, imposing or maintaining constraints on the use of CPF savings so as to ensure sufficient savings to meet retirement needs. The second challenge is the need to restructure the Singapore economy in the face of regional and global competition so as to sustain the profitability of the business sector and enhance employability of the older workers. The response of the government has been to allow the CPF contribution rates of employers to be adjusted and the CPF salary ceiling to be lowered so as to reduce business costs and increase the chances of employment of older workers. However, using the CPF scheme as a macroeconomic tool by reducing employers’ contribution rates may lead to less scope for CPF members to accumulate sufficient savings for their retirement. This would mean that the response to the second challenge would be at odds with the response to the first challenge.