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CPF In The Context Of Social Welfare: History, Contributions And Uses (Pt. 1)

Updated: Aug 9, 2023


Image: Credits to Today Online

Introduction

Social welfare is commonly deemed as a ‘safety net’ in the West, to ensure that all citizens attain basic support from the government when faced with issues such as the lack of housing, unemployment and poor health.


Although social welfare is similarly available in Singapore, its implementation is vastly different. Currently, the nation spends around 17% of its GDP on social welfare,¹ a far cry from the conventional 35% spent by numerous European counterparts (although broadly consistent with East Asian counterparts, who spend around 10-20% of their GDP on social welfare). ²


This is primarily due to its advocacy of a core social policy principle – self-reliance.³ As former Senior Minister Tharman Shanmugaratnam captured, through this principle, Singapore’s welfare system supports personal responsibility by encouraging individuals to work and save for their own future — essentially creating a trampoline to allow citizens to independently bounce back on their own two feet in the face of adversity.⁴


The Central Provident Fund (CPF) is the bedrock of Singapore’s welfare system and perfectly encapsulates the principle of self-reliance. With over one in four Singaporeans projected to be over 65 years of age by 2030,⁵ understanding of the CPF within Singapore’s social welfare system has grown increasingly important.


Owing to the complexities of CPF, we will be breaking this topic into a 2-part series of Policy Explainers. In this piece, we will talk about the history of CPF, how contributions and allocations work, as well as its uses pertaining to social welfare. In our next piece, we will talk about its role for healthcare and housing, as well as discussion on its pros and cons.


History of CPF

The CPF scheme is a compulsory national pension system for Singaporeans and Singapore Permanent Residents (collectively known as ‘members’) administered by the Central Provident Fund Board (CPFB), a statutory board under the Ministry of Manpower.


CPF was originally enacted in 1955 under the colonial British government to assist workers in the labour force who had insufficient personal savings to support themselves following retirement.⁶


Although a social welfare ‘safety net’ was originally discussed, it was eventually deemed too costly as it would “take available capital resources from other even more pressing needs”.⁷ As a result, the CPF scheme required both employers and employees alike to contribute a portion of their wage in support of their retirement fund, placing the nation’s social welfare principle of self-reliance at the forefront.


Along with its original purpose of assisting one’s retirement, the CPF has gradually expanded to fulfil members’ investment, housing, healthcare, and educational needs.⁸ Despite these changes, the CPF continues to tap on three core strengths: (1) personal responsibility, (2) ownership, and (3) lifelong income, actively reinforcing the national philosophy that social welfare is an individual and family responsibility.⁹


CPF Contribution and Allocations

In Singapore, as an individual works, they and their employer will make monthly CPF contributions which vary depending on their age. Before turning 55, up to 37% of one’s wage will be contributed to CPF, with this reducing as they age (see Figure 1).

Figure 1: Employer and Employee Contribution Rates¹⁰

CPF savings will then be divided into four different accounts with varying functions (see Figure 2).


Figure 2: CPF Account Structure¹¹

As each account is purposed for different functions, overall allocations change as a person ages and their priorities gradually shift (see Figure 3).


Figure 3: CPF Allocation Rates¹²

Hence, at a young age, an individual’s CPF contribution will be much higher, with a majority of the contributions allocated to the Ordinary Account primarily to fund housing and investments. However, as one ages, their CPF contributions gradually reduce along with a greater allocation toward the MediSave Account to fund more frequent healthcare issues.


Use of CPF Savings

Members may tap on the CPF scheme for various uses. These include (1) growing their savings, (2) obtaining post-retirement income, (3) enabling home ownership and (4) financing public healthcare expenses. In this Policy Explainer, we will focus on the first two features.


1. Growing Their Savings

CPF contributions received by the CPFB are invested into Special Singapore Government Securities – non-tradable bonds guaranteed by the state. As such, the CPFB can assure that CPF savings are safe and will continue to grow regardless of the financial market. The interest received differs for each account, and is further varied based on the amount of savings in each account (see Figure 4).


However, CPF interest rates are not fixed, with different calculations required for each of the four accounts. How are these interest rates determined?


For the Ordinary Account, interest rates are updated quarterly by taking the three-month average of interest rates from local banks. Likewise, the Special and Medisave Accounts are reviewed quarterly but are instead based on the twelve-month average yield of the 10-year Singapore Government Securities with the addition of 1%. Lastly, the Retirement Account interest rate is reassessed annually based on the average interest rate from investments made using savings from the Retirement Account.¹³

Figure 4: July 2023 CPF Interest Rates¹⁴

2. Post-Retirement Income

Primarily working as a pension fund system, members may either receive monthly payouts or make lump-sum withdrawals of their savings from their CPF account.


CPF LIFE Monthly Payouts

The CPF LIFE scheme provides members with monthly payouts for life even if savings in their Retirement Account are depleted. The payout amount each person receives is calculated based on the sum they have in their Retirement Account when they reach the age of 55.


As identified in Figure 2, when an individual reaches 55, a Retirement Account will open with savings transferred in from both their Ordinary and Special Accounts. Following this, they will earn monthly payouts based on fulfilment of the Basic Retirement Sum (BRS), Full Retirement Sum (FRS) or Enhanced Retirement Sum (ERS) shown in Figure 5.


Figure 5: CPF Retirement Sums¹⁵

For example, through CPF LIFE, an individual that turns 55 in 2023 with $150,000 in their newly created Retirement Account satisfies the BRS and will be able to gain a monthly payout of $870 for life. If this same individual has $300,000 in their Retirement Account, they will satisfy the ERS and receive a $2,370 monthly payout. This differs from the last iteration of CPF disbursements, where monthly payouts terminate once the Retirement Account has emptied.


Now some might be wondering, why do the Retirement Sums needed increase as each year goes by?


This is due to the calculation method of each of these Retirement Sums. The BRS is calculated based on the projected average expenditure by a person from a lower-middle retiree household, which is obtained from the Household Expenditure Survey. The FRS and ERS are then calculated by doubling and tripling the BRS respectively.¹⁶


However, not all members are eligible for CPF LIFE. and will continue in the original CPF system whereby monthly payouts will terminate when savings run out. These members include those:

  1. Born before 1958;

  2. Born in or after 1958 and have less than $60,000 in their Retirement Account; and

  3. Non-Singaporeans and non-Permanent Residents.¹⁷


Members may also opt out of CPF LIFE if they have a pension or private annuity plan which provides the same or higher monthly payouts for life. Such members may choose to withdraw all your CPF retirement savings.¹⁸


Lump-Sum Withdrawals

Along with monthly payouts, members can also withdraw CPF savings in a lump-sum. Members that meet one of the following criteria will be able to make these lump-sum withdrawals:


  1. Members who have more than the FRS. Those who have accumulated more than the FRS sum required in their Retirement Account may withdraw savings up to the FRS amount.

  2. Members who own property. If a member owns property with a lease that reaches up till they are 95 years old or older, they may withdraw CPF sum up to the BRS amount.¹⁹

  3. Members who have not met the FRS. They may make unconditional withdrawals, subject to limits based on their birth year and age (see Figure 6).

Figure 6: Unconditional Withdrawal Conditions²⁰

Conclusion

Singapore’s humble beginnings brought about its need to promote self-reliance as a fundamental welfare principle. This led to the formulation of the CPF system which enables members to attain lifelong income through personal responsibility.


In this Policy Explainer, we have broken down the intricacies of CPF contributions, along with how one can grow their savings and attain post-retirement income through CPF. The next PE in this series will focus on CPF usage for healthcare and housing, while also diving into its overall pros and cons.


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¹ Ron, Haskins, “Social Policy in Singapore: A Crucible of Individual Responsibility,” Brookings, June 1, 2011, https://www.brookings.edu/articles/social-policy-in-singapore-a-crucible-of-individual-responsibility/.
² Soon, Suetgiin, Chelsea C. Chou, and Shih‐Jiunn Shi, “Withstanding the Plague: Institutional Resilience of the East Asian Welfare State,” Social Policy & Administration 55, no. 2 (2021): 374–87. https://doi.org/10.1111/spol.12713.
³ Ibid.
⁴ Chua, Mui Hoong, “Tharman's trampoline and the productivity puzzle,” The Straits Times, May 24, 2015, https://www.straitstimes.com/opinion/tharmans-trampoline-and-the-productivity-puzzle.
⁵ Lee, Hsien Loong, “Speech by Prime Minister Lee Hsien Loong at the book launch of ‘Singapore Ageing: Issues and Challenges Ahead’ on 11 April 2023,” Prime Minister’s Office Singapore, April 11, 2023. https://www.pmo.gov.sg/Newsroom/PM-Lee-Hsien-Loong-at-the-Singapore-Ageing-Issues-and-Challenges-Ahead-Book.
⁶ “Central Provident Fund Is Introduced”, History SG, July 1, 1955, https://eresources.nlb.gov.sg/history/events/c2330166-bd07-4266-a073-11e8d8efa4e8.
⁷ Ng, Edward, “Central Provident Fund in Singapore: A Capital Market Boost or a Drag?”, National University of Singapore, 56, https://aric.adb.org/pdf/aem/external/financial_market/Sound_Practices/sing_cpf.pdf.
⁸ “The CPF story”, CPFB, Accessed June 30, 2023, https://www.cpf.gov.sg/member/who-we-are/the-cpf-story.
⁹ Ibid.
¹⁰ “How CPF Works”, CPFB, Accessed June 30, 2023, https://www.cpf.gov.sg/member/cpf-overview.
¹¹ Ibid.
¹² “CPF Allocation Rates”, CPFB, Accessed June 30, 2023, https://www.cpf.gov.sg/content/dam/web/employer/employer-obligations/documents/CPF%20allocation%20rates%20from%201%20January%202023.pdf.
¹³ "FAQs”, CPFB, Accessed June 30, 2023, https://www.cpf.gov.sg/member/faq/growing-your-savings/cpf-interest-rates/how-are-cpf-interest-rates-determined.
¹⁴ “CPF Interest Rates”, CPFB, Accessed June 30, 2023, https://www.cpf.gov.sg/member/growing-your-savings/earning-higher-returns/earning-attractive-interest.
¹⁵ “ANNEX E-3: BASIC RETIREMENT SUMS FOR CPF MEMBERS REACHING AGE 55 FROM 2023 TO 2027”, CPFB, Accessed June 30, 2023, https://www.mof.gov.sg/docs/librariesprovider3/budget2022/download/pdf/annexe3.pdf.
¹⁶ “FAQs”, CPFB.
¹⁷ “Receive monthly payouts which will stop when your savings run out”, CPFB, Accessed June 30, 2023, https://www.cpf.gov.sg/member/retirement-income/monthly-payouts/non-cpf-life.
¹⁸ Ibid.
¹⁹ “Withdrawing For Immediate Needs”. CPFB. Accessed June 30, 2023. https://www.cpf.gov.sg/member/retirement-income/retirement-withdrawals/withdrawing-for-immediate-retirement-needs.
²⁰ “Unconditional Withdrawal Based on Birth Year”, CPFB, Accessed June 30, 2023, https://www.cpf.gov.sg/content/dam/web/member/retirement/documents/Withdrawalrulestable.pdf.


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