Taxes, the central provident fund and retirement decisions

Abstract

This paper examines how the choice of employers' and employees' CPF contribution rates interacts with the tax-exemption status of CPF contributions to affect retirement decisions. It is shown that when the intertemporal elasticity of substitution is sufficiently high (greater than or equal to one), the current practice of graduating the employers' and employees' CPF contribution rates - higher rates for young workers and lower rates for old workers - actually induces earlier retirement. This would seem to work against the government's effort to encourage Singaporean workers to remain economically active for a longer time in the workforce.