Is now the time to review the Central Provident Fund?

There are ways for the Central Provident Fund to evolve to address concerns over retirement adequacy and the rising cost of living.

In brief

• The Central Provident Fund (CPF) is not a social security welfare model as it encourages self-reliance.
• Raising the wage ceiling in CPF contributions could be more viable than increasing CPF contribution rates, which may negatively impact low-income earners.
• Reviewing the avenues for using the funds can also identify ways to further support certain objectives.

The Central Provident Fund (CPF) is a key pillar of Singapore’s social security system and serves to meet the retirement, housing and health care needs of Singaporeans. The COVID-19 pandemic has prompted discussions on whether the CPF model should be reviewed to provide increased support, with some comparing it with all-encompassing social security schemes in other countries that provide a social safety net.

However, many tend to forget that the CPF is really a savings scheme — you receive back what you put in with interest. The intention of the CPF model, as opposed to the social security welfare model, is to encourage self-reliance. The Singapore government has long advocated active government support for personal responsibility, rather than active government support to take over personal responsibility.

The government plays a supporting role to achieve guaranteed returns in the CPF.  The interest rates of 2.5% per annum on monies in the Ordinary Account and 4% per annum for monies in the Special Account for those under 55 years old were much higher than the average bank interest available for many years until the recent interest rate hike. The government has also implemented schemes to incentivize voluntary contributions to the CPF, encouraging people to proactively build their CPF savings. 

For all intents and purposes, the monies in the CPF are to be kept until the age of 55 except under specific circumstances, such as home ownership, medical insurance and treatment costs, and tertiary education, subject to meeting stipulated conditions.

For the average Singaporean, the CPF will likely be the main support through key life milestones, such as purchasing a home, growing and supporting a family, and retiring. The employee’s CPF contribution, together with the employer’s contribution, helps the average Singaporean worker build a safety net that may not be otherwise achievable.

Yet, the CPF scheme is not without criticisms.

Those who are younger or have a higher risk appetite may argue that one could potentially obtain a higher rate of return by investing on their own. There are also those with immediate needs who cannot access their money in the CPF. This can be a major frustration, as seen during the pandemic when individuals lost their jobs and needed funds for daily necessities.

The government has tried to address some of these concerns through various ways, such as the CPF investment scheme. Having said that, higher rates of return come with higher risk, and not everyone is willing or able to take that risk. The government also introduced the Temporary Relief Fund and the COVID-19 Support Grant to specifically help people who lost their jobs during the pandemic. 

Evolving the CPF scheme

The government regularly assesses and adjusts the CPF parameters, considering increasing costs of living, economic forecasts and changing social needs. For example, an increase in contribution rates for the age group of 55 to 70 was announced in 2019, directly impacting the individual’s disposable income and the employer’s cost.

Additionally, the CPF Board conducts a retirement and health study every two years to identify the population’s needs to implement changes and improvements to its policies and services. A recent update is MediShield Life, which was launched in 2015 to address concerns about access to medical care. Another one is CareShield Life, which was introduced in 2020 to provide financial support should an individual require long-term care due to disability or chronic conditions. The Workfare Income Supplement was also introduced in 2015 and enhanced in 2022 to help low-income earners build their CPF savings and meet immediate needs.

With the cost of living rising in tandem with the increase in wages, an increase in CPF contributions may be timely. There are two possible ways: increase the CPF contribution rate or increase the CPF wage ceiling. Increasing CPF contribution rates would impact everyone, which may be detrimental to low-income earners as the cost of living rises. It may also result in people delaying certain life milestones, such as pursuing further education, getting married or purchasing a home.

Raising the wage ceiling in CPF contributions could be a more viable alternative. An increase in the Ordinary Wage (OW) ceiling will only impact those earning over S$6,000 a month and will not impact lower-income earners.

Historically, the OW cap reflects the salary of individuals in the 80th percentile of income. In 2011, the OW cap was increased from S$4,500 to S$5,000, followed by a further increase to S$6,000 in 2016. Now, more than six years later, an increase in the OW cap looks timely. For an individual who draws a monthly salary of S$7,000 or more from the age of 35 to retirement at 65, this would equate to an additional S$133,200 of contributions without calculating the compounding interest benefit. This additional contribution could be allocated in part or in full to the Special Account for retirement. This would build up the individual’s prospective retirement sum, resulting in a higher payout through CPF LIFE at retirement.

The CPF Board can also consider reviewing the avenues for using the funds. For example, the education scheme may be extended to cover overseas education, perhaps for certain areas of study to build specific knowledge and skills that are in demand or strategically important to the Singapore workforce.

Arguably, an increase in CPF contribution is a matter of when, not if. As the world recovers from the pandemic’s impact amid risks of recession and inflation, Singapore needs to be agile in adapting its policies. Yet, the country cannot lose focus on the fact that the CPF is an intentional savings scheme so that individuals can meet their retirement needs. Balancing current and future needs is a long-term commitment — prudent adjustments or concessions now will help everyone to be more prepared for retirement and old age without compromising the principles of self-reliance and personal responsibility.