SOCIAL POLICY: by Jeffry Babb News Weekly
Singapore's Provident Fund adapts to new realities
, July 31, 2004
Singapore, one of the success stories of modern Asia, has led the way in developing schemes that will both provide for the welfare of its people, and also provide capital for national development. The main means of doing this is the Central Provident Fund (CPF).
Singapore is faced with the same challenges developed nations around the world face - staying competitive in a globalised economy and facing the fact that its people are having fewer children, meaning that fewer young people will support more retirees.
The CPF is a social security savings scheme jointly supported by employees, employers and the Singapore government. Its basic purpose is to help CPF members meet primary needs like shelter, food, clothing and health services in their old age or when they are no longer able to work.Benefits
Benefits offered are to help meet one or more needs of the CPF member in his retirement. They include withdrawals by the member for retirement, permanent disablement, home ownership and health care.
The amounts available depend on how much the member has saved in the CPF. The CPF Board are trustees for the CPF savings of members.
With rising life expectancy, a Singaporean at age 62 can expect to live for another 15 to 20 years. A greying Singapore also means a change in the way Singaporeans support themselves. The facts and figures are very real: the number of Singaporeans 65 or older is now 263,500, but by 2030 - less than 30 years time - the number will be 795,900.
Working Singaporeans and their employers make monthly contributions to the CPF and these contributions go into three accounts - the Ordinary Account, where the savings can be used to buy a home, pay for CPF insurance, investment and education; the Special Account, which is for old age, contingency purposes and investment in retirement-related financial products; and the Medisave Account, where the savings can be used for hospitalization expenses and approved medical insurance.
An individual's CPF savings earn interest. Savings in the Ordinary Account earn a minimum interest rate of 2.5 percent per annum, while savings in the Special and Medisave Accounts earn additional interest of 1.5 percentage points above the prevailing Ordinary Account interest rate.
A spokesman for the Singapore government, commenting on the role the CPF plays in securing retirement income, said for the average Singaporean "It is important to plan the use of one's CPF savings to ensure sufficient savings to see one through your retirement; a property that is fully paid-up when one retires; and sufficient savings to meet one's medical needs in one's old age."
"The CPF will provide the individual with a retirement income to meet one's basic needs in old age. Members are encouraged to supplement their retirement income with their personal savings," the spokesman said.
In 2003, major changes to the CPF scheme were made to maintain Singapore's cost competitiveness. Employer contribution rates were reduced, and the CPF salary ceiling will be brought down in steps.
The salary ceiling will be reduced from Singapore S$6,000 (A$4,860) to S$5,500 (A$4,455) on 1 January 2004. This is to give high-income earners greater flexibility in managing their finances, including their retirement needs.
It also reduces the compulsory savings for this group of workers and lessens the burden on employers. The next change will take effect on 1 January 2005, when the salary ceiling will be further lowered to S$5,000 (A$4,050). From 1 January 2006, it will be lowered to S$4,500 (A$3,645).
This has lightened the burden on employers and made Singapore workers more competitive.
At the same time, the Singapore government is raising the CPF Minimum Sum. The Minimum Sum Scheme enables members to have more income to live on in their retirement, without selling their home.
The Minimum Sum will be raised gradually from S$80,000 (A$64,800) in 2003 until it reaches S$120,000 (A$97,200) in 2013 and will be adjusted yearly for inflation and tightening withdrawal rules at age 55, so that Singaporeans will be better prepared for their retirement needs.
The CPF has provided capital for national development and helped make Singapore's savings rate one of the highest in the developed world.
And Singapore is well and truly a developed nation. However, it hasn't forgotten its roots as an entrepôt port - shipping and making goods in an environment where it must be more efficient than its competitors to survive.
As Singapore becomes a high-wage economy, the CPF contribution levels have put more onus on high income-earners to provide for their old age and health care needs, but the CPF aims for all Singaporeans to have a basic level of security throughout their lifetime.