CHANGES IN POPULATION STRUCTURES AND CPF CONTRIBUTIONS AND WITHDRAWALS : SOME POSSIBLE ECONOMIC IMPLICATIONS

Abstract

The Central Provident Fund in Singapore provides social security for its citizens. Since its inception in 1955 and its evolution over time, the economic effects created have been of interest both to the policy makers and to the public. This Academic Exercise will probe further into the macroeconomic implications in the future. In the past, economic effects arose out of the high rates of contribution. Now this is coupled with effects resulting from increased withdrawals and the liberalisation of withdrawals through the implementation of various new schemes within the CPF. The evolution of the CPF is discussed to provide the background on how it has served as a form of social security for its citizens while at the same time playing a major role in financing national development. The fast changing age structure of the population has substantial effects on the trend of CPF contributions and withdrawals. A declining population and consequently the labour force will mean a reduced number of CPF contributors. However, an ageing population would imply increases in the withdrawals. The crucial question posed is whether such changing population structure will cause a cash flow problem to the Fund. The result of the simulation on CPF contributions and withdrawals suggests the possibility of a cash flow problem in the year 2015. This paper proposes a change in the Board's policy to medium term securities and commercial papers as one way to counter the cash flow problem. An annuity scheme where members after the age of 55 are allowed to withdraw a certain amount annually instead of lump sum withdrawals could be considered. New schemes should be introduced to enable members to invest their savings to earn higher returns. To minimise the possible losses due to uncertainties, the government can limit the amount of withdrawals per person for such investment. With the introduction of the Medisave, members are now made responsible for their own health. But how far should an individual be made responsible for his health since some are job-induced illness? Figures seem to suggest that Singaporeans are unable to sustain through a prolonged depression with their CPF savings alone. Moreover members may then not be able to pay their housing loans promptly, creating instability in the financial sector and thus the whole economy. The CPF has proven itself to be a very flexible tool in the hands of the authorities. Its growth and thus impact on the economy is expected to grow.