Singapore’s Vaunted CPF under Fire

Singapore’s famed Central Provident Fund (CPF), emblematic of state planning at its responsible and creative best under the People’s Action Party (PAP), has become a political headache for Prime Minister Lee Hsien Loong.

The retirement scheme, which currently takes a hefty 20 percent of employees’ income and 16 percent of employer contributions off the top, has for decades assumed a central role in PAP social and economic development strategies. Compulsory contributions from employees and employers helped provide investment funds for vital infrastructure to fuel the economy, at the same time building retirement nest-eggs for Singaporeans.

However, as actual and prospective retirees experience or ponder life on their savings, concern has been rising. A recent survey revealed that just 21 percent of respondents expressed confidence in the sufficiency of their CPF savings. Consequently, Prime Minister Lee Hsien Loong declared in his August National Day Rally Speech that “more assurance in retirement” would be a key issue for his government, announcing new measures targeting lower-income Singaporeans.

CPF reforms must be viewed against a broader background of heightened material and social inequalities, leading many Singaporeans to question whether government policies are easing or contributing to such outcomes. The PAP is eager therefore to demonstrate its commitment to making Singapore a fairer society. But what does it mean by this and how far is it prepared to reform key institutions, such as the CPF?

We should expect reforms to be tempered by PAP resistance to any claims of social citizenship rights to demand that government ensure reasonable standards of economic and social welfare; and protect technocratic elites’ discretionary powers. Singapore’s model of state capitalism must not be diminished by policy changes towards what government leaders refer to as a “compassionate meritocracy.”

Singapore’s economic globalization has been accompanied by a deepening of state capitalism. Consequently, direct or indirect dependence on the state for access to economic and social resources – including housing, employment, business contracts and, indeed, personal savings – is widespread. Moreover, the proliferation of government-linked companies and the Government of Singapore Investment Corporation (GIC) sovereign wealth fund has enhanced the power and resources at the disposal of Singapore’s technocratic elites.

Significantly, the government makes no routine retirement fund contributions, yet the PAP state controls access to funds and how they are invested. In the 1980s the combined employer/employee contributions were around 44 percent. CPF holders thus expected economic security in retirement.

However, as Singapore’s highly globalised economy intensified, the income gap, as measured by the Gini coefficient, rose from 0.422 in 2000 to 0.478 in 2012 to make it the developed world’s second-most unequal economy. The government failed to contain markets’ uneven social and economic effects. PAP apprehension about social welfare and other forms of redistribution, though, is not rooted in a belief in liberal markets, but a preference for political paternalism.

Lee Kuan Yew contended that the PAP government “chose to redistribute wealth by asset-enhancement, not by subsidies for consumption.” The CPF has been pivotal to this policy, Singaporeans purchasing Housing Development Board (HDB) flats by drawing on their retirement savings. Over time, the government opened up access to CPF accounts to finance the upgrading of housing, educational purposes and healthcare insurance. Such policies were meant to encourage self-sufficiency, obviating the need for significant government outlays on social spending.

Yet CPF returns are low, just 2.5 percent annually on Ordinary Account savings. This was below inflation in 2011 and 2012. CPF withdrawals for non-retirement purposes have also invariably eroded savings for low-income Singaporeans in particular. And the appreciation of HDB flats to indirectly boost savings has not worked as planned.

Singapore also has a rapidly aging native population with one of Asia’s lowest fertility rate, which the government’s recent push for high rates of immigration may have taken into account. Large numbers of new permanent residents contributing to, rather than drawing on, savings expands the pool of CPF funds increasingly drawn on.

In any case, repairs to the system are projected. Under the Lease Buyback Scheme, elderly HDB flat owners can, from April 2015, sell part of their leases back to the government for retirement income. New rules will also facilitate greater flexibility to make lump sum withdrawals for pressing needs.

However, reverse mortgaging can help avoid penury in old age, but also compounds the wealth gap. Wealthier families with no need for the scheme can pass on the family home to their children. For others, such inheritances may diminish or disappear. Instead of forced asset sales or liberalized withdrawals, the government could directly support the needy.

A Silver Support scheme will from next year also disburse annual government payouts for people 65 years and over who have not accumulated adequate CPF savings and do not have an HDB flat or family support. More details are to follow approaching next year’s budget. These payouts would need to be substantial and widely available to address the problem.

Meanwhile, critics are calling for more radical reforms, including abolition of compulsory contributions, leaving Singaporeans to make private choices as to whether they should invest in superannuation and how. But like the current CPF, this would not fundamentally address problems of social and economic inequality. Singapore’s technocratic elites surrendering control over such vast funds is also inconceivable.

An alternative pitch is for the CPF to revert to purely a retirement fund. Under this scenario, the government would have to accept far greater responsibility for social outcomes and allocate spending accordingly, or merely condemn many Singaporeans to similar “self-sufficiency” as currently exists. However, the paternalistic PAP is wary about the potential for citizens internalizing the right to demand such a role by government.

Paternalism is already part of the contention over the CPF, notably via the campaign to “Return Our CPF” headed by blogger Roy Ngerng, who questioned the interest levels returned to CPF accounts, only to end up being sued for defamation for inferences of misappropriation of funds. Ngerng attempted to decipher from official websites what was going on, concluding that the GIC and Temasek Holdings appeared to earn high interest from investing CPF funds.

Finance Minister Tharman Shanmugaratnam responded that neither GIC nor Temasek receive CPF funds as separate assets and that returns on CPF accounts are “fair” and “safe”. “The Real Singapore” blog site reported that the official online sources Ngerng drew on have been edited so Ngerng’s calculations are no longer possible.

However, CPF accounts show its largest assets are holdings of special issues of Singapore government securities, and the government acknowledges that CPF money is turned over through this mechanism. The terms on which the GIC gets the funds though are not disclosed. Moreover, as the government itself does not need to borrow, this invites speculation that funds are invested in the equity of, or loaned to, government entities in expectations of higher rates of return than those offered to CPF holders. If so, then forced savings of the public would constitute a subsidy for state capitalism.

The significance of the campaign by Ngerng and others, then, rests not just on whether claims about interest rates are correct, but also that it demands information of technocratic elites that they are reluctant to provide. Government reassurances about robust internal governance processes and professional expertise have not thus far extinguished this demand.

The inadequacy of CPF retirement savings has thus generated political contention that the PAP is yet to contain. Little wonder Prime Minister Lee has nominated improving the CPF a top priority over the next year.

Garry Rodan is an Australian Research Council Professorial Fellow at the Asia Research Centre, Murdoch University.