BEQUEST MOTIVES AND THE CENTRAL PROVIDENT FUND

Abstract

In recent empirical research, intergenerational transfers have been found to be gaining a foothold as the major determinant of wealth accumulation. These transfers, either inter vivas or bequests, account for a significant proportion of both USA' s and Japan's domestic savings. It is then interesting to ask if such transfers can provide an explanation for the high savings rate in Singapore.

This thesis explores the link between intergenerational transfers - either accidental or intended - and the Central Provident Fund (CPF), a unique social security system in Singapore. The issue of how the social security system affects consumption-saving decisions, thereby affecting national wealth, has been studied by various authors, but they all fail to take into account the role played by intergenerational transfers. By contrast, we study how the interaction between the CPF and bequests affect total savings. A central finding is that various institutional and tax features of the CPF produce differing outcomes from conventional wisdom.

The first theory chapter develops a neoclassical, overlapping generations framework where individuals are selfish, face identical mortality probability and accidental bequests are the only form of transfer. In the absence of annuity markets, the CPF has neutral impact on overall savings. However, when an actuarially fair annuity scheme is available, the CPF has positive effects on total savings which in turn enhance economic growth according to the Solow growth model. This central result is important as we begin to witness the development of the annuity market in Singapore after the encouragement from the CPF Study Group in 1986 and insurance companies have made a first move by offering attractive annuity schemes.

The basic model in the second theory chapter is extended to test the robustness of the central result under various economic settings. Capital income and inheritance tax features are introduced and mixed results are obtained, hut the central result can still hold if an approp1iate tax rate is chosen. Abstracting from the tax features, intended bequest motives and heterogeneity of mortality probabilities arc shown to qualify the key result. Although economic growth is enhanced through higher savings, it may not be desirable especially in the case where the capital stock is greater than the Golden Rule level. Beyond this level, raising total savings does not maximize economic welfare, thus, not pareto-improving. In view of the high the high level of capital stock in Singapore, if the level is indeed greater than the Golden Rule level, it is not advisable to raise CPF contribution rates to stimulate growth.

To provide a check on the strength of the operation of bequests, the wealth elasticity of bequests is estimated in the short empirical chapter. We obtain a fairly strong result that the elasticity exceeds unity. This implies that as the economy grows and real income per capita rises, higher saving and growth rates may be attained.

The Japanese are also well-known for their high savings. It is interesting to compare the reasons for high Japanese savings with Singapore's. Population age structure, high housing and land prices, and high income growth are several explanations for the two countries. However, the social security in Japan has been found to depress total savings. In contrast, the CPF can be seen as an additional factor in boosting domestic savings in Singapore.