Singapore’s CPF Policy (Part 1): Historical Overview

To understand the history of CPF policy, it is important to have a sense of the larger political backdrop against which the policy was developed. The modern history of many Southeast Asian countries is characterized by their interactions with Western colonial powers and Singapore is no exception. Singapore had been under British colonial rule beginning in 1819. This was interrupted during the Second World War, when British colonial rule was interrupted by three years of Japanese Occupation from 1942 to 1945. The British returned to power after the war and, to simplify a complicated period in history, increasingly granted self-governance to Singapore.

1955 was a significant milestone, marking the first general election in which the majority of the seats was were to be elected rather than appointed. On August 1958, the State of Singapore Act was passed in the United Kingdom Parliament providing for the establishment of the State of Singapore. On 30 May 1959, the People’s Action Party (PAP) helmed by Lee Kuan Yew won a landslide victory with 43 out of 51 seats in the first general election in which the Legislative Assembly was fully elected. On 9 July 1963, the leaders of Singapore, Malaya, North Borneo and Sarawak signed the Malaysia Agreement to establish the Federation of Malaysia, which took effect on 16 September 1963. Escalating tensions between PAP and the United Malays National Organisation (UMNO), the ruling party in the rest of Malaysia, ultimately led to the expulsion of Singapore from the Federation of Malaysia on August 1965.

1.1 Beginnings of CPF Policy

It is during this tumultuous political era that the original CPF policy was introduced by the colonial government. In 1951, the colonial government appointed the McFadzean Commission to look into the “desirability and practicality of ensuring the payments to wage earners the benefits of retirement”. The Commission considered the pros and cons of a provident fund and a social pension and ultimately favored the latter. The proposed pension system would be contributory, with flat monthly lump sum contributions independent of wages. The colonial government rejected the proposal and adopted the provident framework instead.

The cited reason was to maintain consistency with the provident fund schemes that had been implemented by the colonial government for other colonies. Chia argued that “[t]his reflected the budgetary constraints of the colonial government, as a provident fund would not compete for scarce public revenues used for social services” and a new pension system “would entail immediate pension payouts to then-pensioners”, which would result in expenditures that would have to be borne by the colonial government.1

The CPF was established under the CPF Ordinance in 1953 and became operational on 1 July 1955. Contemporary news accounts revealed that the law was passed in a disorderly process. The Bill was “rushed through the Assembly on a certificate of urgency” and the stakeholders affected by the legislation were unable to study it closely and were “in the dark about its details”.2

It is noteworthy that many of the familiar trade-offs contemplated by CPF policy throughout its subsequent evolution surfaced during these early days. By reducing the take-home salary of employees, lawmakers realized that such a provident fund would be perceived as a tax and, in so doing, foment resentment, especially among low-income earners. As early as in 1951, an exemption for workers earning less than $100 monthly was considered,3 but this was subsequently increased to $500 when the Ordinance was passed in 1953 and then lowered to $200 in an amendment in July 1955.4 (In contrast, the equivalent amount today is $50 a month, i.e. there is effectively no exemption today.)

The tension between CPF and other social welfare policies and similar private arrangements was also apparent in these early days. As employers were obligated to contribute to their employees’ provident fund, early CPF policy contemplated exemptions for employers that already provide similar private schemes for their employees, such as monthly contributions that gave life insurance cover in addition to interest on the workers’ savings. However, the colonial government decided to restrict such exemptions, “invalidating at least 2000 private schemes, involving monthly contributions of at least $200,000”.5 The government argued that the purpose of saving for retirement ought to be distinguished from insurance and other social purposes. Also, it argued that allowing too many such private schemes will reduce the amount of money under government’s management, thus preventing the government from spreading the fixed costs of management and increasing the government’s cost of supervising private schemes.

This early history of CPF illustrates the mixed legacy of colonialism. Ngiam Tong Dow, a civil servant from the founding generation of Singapore, described the colonial government’s policy in more dramatic terms.6 He claimed that the colonial government chose to adopt a provident framework because it did not want to have additional pension obligations towards civil servants in the colonies on top of those the British government already had towards British civil servants. But instead of characterizing this as a downside of colonial rule, Ngiam thought this policy “instilled strict discipline on the colonies” and was “to [Singapore’s] overall benefit”. He argued the British had imposed good colonial policies that it lacked the self-discipline to implement back in the UK, which had itself gone down the path of expanding its social welfare system after the Second World War. (He used the currency board as another example of such a policy.)

Furthermore, CPF’s early history shows that Singapore’s high modernist approach towards policymaking – here, a top-down approach towards ensuring retirement adequacy that was hurriedly pass and potentially crowded out private initiative – in fact pre-dates the PAP government. There is probably something about the political economy of a small, densely populated island that lends itself more easily to centralized, technocratic control. (On this point, another possible comparison is between British colonial rule of Hong Kong and that of India.)

It is noteworthy that while the long-term trend toward decolonization was unmistakable, the British colonial government nonetheless had powerful interests to ensure that Singapore did not become Communist and thus had an incentive to implement sensible social policies in Singapore. After the initial CPF Ordinance was passed, concerns quickly arose that CPF was not sufficiently comprehensive as it excluded casual workers and self-employed workers, as well as those who were unemployed. In 1957, the colonial government appointed the Caine Committee to study the desirability and feasibility of measures to establish a “minimum standard of livelihood for the people of Singapore”. The Committee unanimously recommended an integrated social security system to provide pension payments for all workers, including the self-employed, as well as a Public Assistance Scheme to provide social protection to the unemployed, needy and vulnerable. This was subsequently followed by a study by G J Brocklehurst, an International Labour Organization expert, who concluded that the provident fund system was inadequate and recommended that it be terminated with a compulsory contributory insurance scheme with a redistributive defined benefit structure. Both reports were positively received by the colonial government and, by early 1959, legislation for the new social insurance scheme was drafted and ready for approval.

However, these plans were ultimately abandoned by the new PAP government that took office in June 1959, as it considered unemployment and economic development as more pressing priorities for fiscal resources. Lee Kuan Yew subsequently commented in his memoirs that he considered Western countries’ welfare state a failed experiment that resulted in a “crutch mentality” and thus wanted to chart a different path.7 It is somewhat interesting to speculate that, had political events turned out differently (e.g. independence was granted later, Lee Kuan Yew did not win the elections etc.), Singapore could well have a very different system of ensuring retirement adequacy.

1.2 CPF and Housing

The confluence of CPF and housing policy illustrated how a different path might look like. The next significant shift in CPF policy came in the 1968 amendment of the CPF Act. The PAP government essentially walked back the colonial government’s characterization of CPF as exclusively aimed at retirement adequacy by introducing the Public Housing Scheme, which allowed CPF members (i.e. people subject to CPF’s compulsory saving policy) to use CPF monies to pay for the mortgages of their HDB flats or to leave it for retirement. This was implemented after previous measures to boost home ownership rates, such as the Home Ownership Scheme for the People in 1964 that incentivized tenants in public housing to purchase their flats, were unsuccessful. Subsequently, in 1981, this scheme was extended to private residential property under the Residential Properties Scheme.

In retrospect, allowing CPF to be used for housing is both a success and, increasingly, a victim of its own success.

First, it certainly achieved the desired goals of housing policy, namely, to foster a sense of belonging and rootedness in the newly-formed country by ensuring Singaporeans have a stake and to unlock a source of financing for the public housing that was being built by the government. By converting Singapore from a property-renting population to a property-owning one, Singaporeans would have greater skin in the game. Thus, middle-class Singaporeans could share in the wealth being created through rapid industrialization and, at the same time, would become more conservative to protect their newfound wealth. This likely translated to electoral benefits for the incumbent government. From a developmental economics perspective, such a policy of transferring land to an emerging middle class is of a piece with other East Asian land reform policies that arguably distinguished their sustained economic development from other Asian economies.8

Second, CPF policy was a key enabler of what Goh Keng Swee, one of the key economic architects of Singapore, called the “magic trick” that drove the early economy. On the one hand, the government could keep taxes low to attract foreign direct investments and create jobs. On the other hand, the government could nominally increase CPF rates while the money in fact flowed towards much-needed public housing and further created jobs in the construction sector. From the perspective of public financing, CPF in its early days was a form of financial repression to provide cheap loans to the government. As Lee noted, CPF allowed the Singaporean government to “reduce reliance on external loans for Singapore’s developmental needs” by raising “domestic savings through CPF scheme” and deploying these savings “towards financing of infrastructure projects enabled the large-scale development projects to be implemented without inflation”. The interest rate differential is significant: “from 1965 to 1970, the prime lending rate among banks was 8%”, whereas “by utilizing the CPF savings, the government only had to pay a spread over the 2.5% that the CPF [Board] had to pay to the CPF members on the savings accounts”.9 As the fiscal position of the government improved, the need to borrow for funding of development expenditure diminished.

To be sure, there is a link between home ownership and saving for retirement that ostensibly justified the decision to allow Singaporeans to use CPF monies for housing: home ownership would obviate the need for retirees to pay rental fees, which typically comprised a huge portion of daily expenditures. However, with the benefit of hindsight, this has created its own problems: as housing prices appreciated at a higher rate than CPF interest rates, Singaporeans have been incentivized to spend as much of their CPF savings on housing as possible. There is not enough space to outline the intricacies of Singapore’s managed housing market, but it suffices to note that Singapore is a very small, land-scarce country and the Singapore government is the largest landowner, supplies housing both directly (i.e. the public housing program) and indirectly (i.e. selling land to property developers), controls the demand for housing through a variety of measures (e.g. setting the inflow of foreign workers, tweaking rules surrounding financing of housing mortgages, whether via CPF, bank loans, stamp duty fees and so on) and sets land use policies. Politically, there is a long-standing, if vague, promise to Singaporeans that property values will appreciate over the long-term, most notably under the Goh Chok Tong government in the 1990s, which sought to boost the value of the home through the Assets Enhancement Programme. With this complex set of interests, the real wonder is why is Singapore’s housing market (more-or-less) functional (look at Hong Kong for an example of dysfunction!) and whether this arrangement is sustainable. These questions need not detain us, except insofar to note that CPF monies are a powerful force in this context.

Returning to CPF policy, retirement adequacy and capital appreciation are goals that are loosely aligned at best. This tension between housing as an asset and as a basic need can be illustrated on multiple levels.

First, the demand for housing is not constant throughout one’s life: a stereotypical married couple with children would have ‘an excessive supply of housing’ once their children are old enough to move out. As housing is an illiquid asset, it is not easy to monetize this varying level of excess supply. To be sure, one can rent out specific rooms in an apartment or “downgrade” one’s apartment for a smaller apartment. But these are high-friction transactions fraught with endowment effect and hence not easily undertaken. Thus, it is widely recognized that the 1968 decision to allow CPF monies to be spent on housing has, a generation later, created a class of retirees who are asset-rich, cash-poor. Subsequent policies to help this group of people unlock the value of their property have been implemented, such as the Silver Housing Bonus and Lease Buyback scheme.

Notwithstanding the stylistic account above, in truth, adapting CPF policy to Singapore’s changing demographics has been a politically difficult task. In 1984, the Committee on the Problems of the Aged chaired by then Minister for Health Howe Yoon Chong released a report, which, among other things, argued for the CPF withdrawal age to be raised from 55 to 60 years. This so-called Howe Yoon Chong Report sparked widespread anger towards PAP. In the upcoming general election, the PAP subsequently lost 12% of the overall votes as well as the electoral ward in which Howe previously contested, both of which were arguably attributed to this report.

In response, the government has nominally stuck to a withdrawal age of 55 while introducing the Minimum Sum Scheme in 1987. To gradually phase in this change, the early Minimum Sum could be pledged entirely in the form of property, thus allowing CPF members turning 55 to cash out their CPF savings. In 1995, the CPF Board began to decree that a specific amount of the Minimum Sum must be set aside in cash, beginning at 10% and subsequently plateauing at 50% in 2003. In 2001, the Economic Review Committee reviewed CPF policy has part of its general review. The government subsequently took up its recommendations to increase the Minimum Sum over a period of 10 years. While this increase has been described as “gradual” on CPF’s official website,10 in nominal terms, the Minimum Sum was increased from $80,000 in 2003 to $155,000 in 2014.11 In 2013, the annuity scheme CPF LIFE was made compulsory for those born in 1958 turning 55.

These measures to limit direct withdrawal of and ultimately to annuitize CPF savings understandably resulted in resentment, as there was a perception that the government “would be taking away what was rightfully due to the people and breaking the promise to pay back what was rightfully theirs”. In fairness, the government probably could have phased in the proposed changes more gradually, i.e. for the current cohort of CPF members to receive their CPF as expected while only affecting subsequent cohorts of CPF members. Nonetheless, it illustrates the very real tension between individual responsibility and paternalism, which will be explored in greater detail in Part 3. Giving CPF members the choice of three CPF LIFE plans with differing pay-out structure is a welcome development that alleviates the paradox of paternalism and self-reliance somewhat.

Perhaps uncoincidentally, CPF policy once again became political football beginning in 2014, when activist Roy Ngerng published a blog post alleging improprieties over how CPF monies are handled and organized multiple Return Our CPF protests with blogger Han Hui Hui and Hong Lim Park, demanding greater transparency and accountability for CPF monies. Wikipedia provides much more details. For our purposes, it suffices to note the very real tension between a top-down well-intentioned retirement policy and a bottom-up resentment against paternalism.

1.4 Liberalizing CPF Usage for Investments

In response to criticisms of CPF account’s low interest rates, in 1986, the CPF Board introduced the Approved Investment Scheme (AIS), allowing CPF members to use excess funds in their Ordinary Account (after setting aside the Minimum Sum) for investment in approved stocks, unit trusts and gold. The goal was to increase share ownership among the public, creating a nation of shareholders on top of being a nation of homeowners. The scheme underwent a series of refinements, ultimately resulting in the CPF Investment Scheme (CPFIS). CPF monies could only be invested in a list of government-approved financial products, which in turn has been consistently tweaked to ensure investment costs were low and risks were not excessive.

Notwithstanding these protective measures, by 2005, it was clear that “almost three-quarters of the members who invested under CPFIS from 1993 to 2004 would have been better off leaving their savings with the Board”.12 Chia’s calculations from reports on CPFIS profits and losses showed that between 2004 and 2013, 46.6% made losses on their CPF investments and 81.9% earned less than the Ordinary Account’s capital protected rate of return of at least 2.5%. She concluded that “most would have been better off leaving their CPF monies with the CPF board”. Notably, only about a quarter of CPF members have used their CPF monies for investments, while the remaining three-quarters stuck with the default option of leaving their monies with the Board, illustrating the power of default in choice architecture.

On the one hand, liberalizing CPF for investments appears to be a move towards greater individual responsibility, by allowing CPF members greater choice on how to deploy at least a portion of their savings. Indeed, an understandable source of resentment is that CPF’s 2.5% rate of return is significantly lower than, say, the historical average return of stock markets of 6%-7% and low enough to facilitate financial repression in the 1960s and 1970s. On the other hand, even 2.5% is quite high in light of today’s low or even negative interest rate climate. More importantly, CPF members are largely retail investors and their investment performance reflects this fact.

  1. Chia, Ngee Soon. Singapore Chronicles: Central Provident Fund, Singapore: Straits Times Press, 2016.[]
  2. ‘It’s law now – but still a riddle’, The Straits Times, 1 July 1955, p.7.[]
  3. ‘Provident fund for all employees’, The Singapore Free Press, 16 January 1951, p.5.[]
  4. ‘Provident fund gets a big welcome’, The Singapore Free Press, p.12[]
  5. ‘Death could mock the law’, The Straits Times, 6 July 1955, p.4.[]
  6. He was the youngest ever Permanent Secretary, has been the chairman of key statutory boards, such as Economic Development Board, Central Provident Fund Board and Housing Development Board, and worked closely with founding political leaders. See Ngiam, Tong Dow. A Mandarin and the Making Of Public Policy: Reflections by Ngiam Tong Dow / Introduced and edited by Simon S. C. Tay. Singapore: NUS Press, 2006.[]
  7. Lee, Kuan Yew. The Wit and Wisdom of Lee Kuan Yew. US: Editions Didier Millet, 2013.[]
  8. ‘For Asia, the path to prosperity starts with land reform’, The Economist, 12 October 2017. https://www.economist.com/asia/2017/10/12/for-asia-the-path-to-prosperity-starts-with-land-reform[]
  9. Lee, Kok Fatt. Singapore’s Fiscal Strategies for Growth: A Journey of Self-Reliance. World Scientific Publishing Company Pte. Limited, 2018, p.15-16.[]
  10. ‘History of CPF’, Central Provident Fund Board, https://www.cpf.gov.sg/Members/AboutUs/about-us-info/history-of-cpf[]
  11. Hui, Weng Tat, ‘CPF issues can be resolved’, The Straits Times, 6 June 2014.[]
  12. Lee, Hsien Loong, ‘Looking at the CPF Board’, 25 September 2005. https://web.archive.org/web/20090719210511/http://mycpf.cpf.gov.sg/CPF/News/News-Release/NR_25Sept2005.htm[]