CPF AND THE RETIREMENT AGE

Abstract

Retirement has become an increasingly important policy concern for Singapore. She has progressed rapidly through its demographic transition from a high to low birth and death rates. This rapid transition suggests two important future trends: slowing labor force growth and aging of the workforce. The Singapore economy will be constrained if the future growth in population and labor force is not sufficient to meet economic growth and labor demand. Older Singaporeans are a pool of labor that can be tapped as the labor shortage problem worsens. In recent empirical studies, the receipt of social security benefits and pensions have been found to be gaining a foothold as the prime reason for increasingly earlier retirement in USA. It is then interesting to ask if the CPF system in Singapore produces such effects. The issue of how the CPF system affects consumption-saving decisions, thereby affecting national wealth has been studied by various authors, but they all fail to allow for an endogenous retirement decision. The concern of this thesis is to provide a theoretical analysis of the different social security systems on retirement age and total savings. Within the framework of an overlapping generations model extended to allow for an endogenous retirement decision, we study the maximization problems at a micro level after which the observations are aggregated to examine the macroeconomic implications. The basic model is extended in the first theory chapter to examine the link between retirement decision and the pay-as-you-go social security or pension scheme. For a fast growing economy propelled by a high rate of technical progress, these schemes induce earlier retirement, and reduce total savings. In the second theory chapter, we will try and see if our current CPF system produces such effects. To achieve this objective, the basic model is modified to take into account some of the institutional features of the CPF and an endogenous retirement decision. A central finding is that the CPF system, unlike an unfunded pension scheme, does not induce earlier retirement. This result is important to policymakers trying to raise retirement age. It can also serve as a benchmark case for countries facing an aging population. The effect on savings is, however, not clear. We thus demonstrate a channel through which retirement decision interacts with the choice of CPF contribution rates to affect total savings, and hence, capital accumulation. An empirical analysis is then carried out to test the robustness of our central result. The results support the model assertion that the CPF system encourages workers to postpone their retirement. The way workers are remunerated can also have a significant impact on retirement age. Our CPF model is further extended in the last theory chapter to incorporate the various wage systems in Singapore. The seniority-based wage system induces earlier retirement for a fast growing economy propelled by high TFP growth. This result is important as we begin to witness the development of the flexible wage system in Singapore after the 1985-86 recession. For the economy to encourage postponement of retirement age, it is crucial that we maintain flexibility in our wages.