PRECAUTIONARY SAVINGS AND CPF CONTRIBUTIONS UNDER UNCERTAINTY

Abstract

The Central Provident Fund is a fully-funded social security scheme requiring contributions from both the employee and the employer, of a certain percentage of the employee's monthly salary, to the employee's account with the Fund. Although many theoretical studies have been done on the CPF system, the studies have alluded the uncertainty aspect of the worker's future earning and its possible effects on saving-consumption decisions in a model that incorporates the CPF system. Using a three-period stylized model, this thesis demonstrates analytically, in the presence of income uncertainty, private voluntary savings will always be higher in the first period as compared to the case when income is certain. The thesis also demonstrates that Boon's (1991) neutrality result (pertaining to a change in the employee's CPF contribution that induces an equal offsetting change in his voluntary savings leaving the total private savings unchanged) is still shown to hold even when future earnings are uncertain. The results derived in this thesis are based on the assumption of perfect capital markets, in particular the absence of borrowing constraints. As a final note, the thesis provides some conjectures on the likely outcomes of the neutrality proposition when borrowing constraints are introduced