CPF REFORM AND ITS IMPLICATIONS: SAVINGS FOR HOUSING CONSUMPTION

Abstract

This dissertation studies the latest CPF reform announced in 2007 and its impact on housing consumption. One of the biggest impacts is the transfer of medisave overflow into the Special Account instead of the Ordinary Account. It is found that lower household income group of $2,000 will not be directly affected by the reform as medisave overflow only occurs in the later years at age 58. The middle quintile group of $3,000 household income is likely to be affected in the final few years of their mortgage payments. The medisave overflow could have help finance their mortgage payments. The household income group most affected is 4th Quintile group of $5,000 as medisave overflow occurs the earliest in this group. This group also has the most medisave overflow amount. Should households consume more than the savings in the Ordinary Account, example $250,000 loan, they would have to finance the mortgage payments with savings in the Ordinary Account and cash after the reform. Before the reform, households could have financed the mortgage payments solely with savings in Ordinary Account in the last 10 years of the loan period.

The mechanism of the reform is effective in ensuring that Singaporeans save for retirement without affecting the financial abilities of lower income group to finance housing consumption. At the same time, it ensures that higher income group do not consume housing goods excessively.