Singapore’s CPF Policy (Part 2): The Big Picture(s)

Part 1 has explored CPF policy largely from as a historical overview of a social policy. Even then, we have seen glimpses of the relationship between CPF and colonialism (Part 1.1), housing policy and economic development (Part 1.2), electoral politics and resistance (Part 1.3), and the trade-offs between liberty and paternalism (Part 1.4).

Part 2 will explore these and other big picture themes directly. Part 2.1 will explore the usage of CPF policy as a macroeconomic lever. Part 2.2 will look at the intersection between CPF and financial policy.

2.1 CPF as a Macroeconomic Lever

CPF contributions are divided into contribution by the worker and contribution by the employer. At its inception in 1955, the contribution rates for both were set at 5%. Since then, the government has regularly revised the two rates, which reached its peak of 25% for both the worker and employer in 1985, before subsequently coming down.

From a high-modernist perspective, CPF contribution rates thus present a neat variable for tweaking the macro-economy, an opportunity understandably seized upon by the Singapore government.

In the years leading up to 1985, on top of the abovementioned “magic trick” of recycling high levels of savings into purchase of public housing, the government also hoped that increasing CPF rates would increase labor cost and incentivize employers to boost labor-saving investment.1

However, when Singapore experienced in first recession in 1985, the employer’s contribution were cut from 25% to 10%, lowering total CPF contribution for the first time. The technocratic thinking behind such a measure is worth elaborating upon. Under a Keynesian macro-economic framework, unemployment rises during recessions because nominal wage rates tend to be inflexible downward. As such, rather than responding to a fall in aggregate demand by paying workers less, firms choose to fire workers instead. By cutting CPF contribution rates across the board, the government hopes to mitigate unemployment by effectively reducing wage costs for employers. As most workers do not consider CPF contributions as part of their wages, reducing CPF contributions do not affect their take-home pay, thus leaving the morale of the workforce intact and minimizing the impact on aggregate demand.

CPF contribution rates continued to be tinkered with, such as in the aftermath of the Asian Financial Crisis in 1999 and in 2003, when resident unemployment rose to the highest level since the 1985 recession.2 Similarly, in 1988, to combat the lower employment rates of older workers, the government lowered CPF rates for older workers (aged above 55) in 1988. This effectively reduced the price of labor, thus incentivizing both older workers and employers to stay on.

There are powerful arguments against such a top-down technocratic policy. Not all firms are equally affected by the recession, but under this policy, all firms have reduced wages for all CPF members to the same extent. Firms that rely on foreign workers to differing extents would also be affected differently, as foreign workers who do not contribute to CPF. Perhaps firing workers and subsequently hiring new ones constitute an important aspect of long-term economic dynamism. The uncertainty caused by a government that has proved its propensity to adjust wages across the economy is counterproductive to long-term planning by entrepreneurs. After all, such rates will almost certainly increase in due time, when the economy “recovers”. Most of all, such tweaks to CPF policies come at the expense of retirement adequacy.

This example shows the additional complexity created by using CPF policy, whose original goal is retirement adequacy, for macro-economic policy. I believe simplicity is an underrated virtue and, as a rule of thumb, one policy should be used to achieve one goal. To be fair, the government has since tried to mitigate the downward elasticity of wages by enacting a “flexi-wage policy” in 1988, which divides wages into a basic and a variable component. From 2007, it introduced the Workfare Income Supplement (WIS) by topping up the wages offered by the employers through cash payments. During the 2008 financial crisis, the government responded by drawing down past reserves to fund Jobs Credit Scheme, a temporary wage subsidy program, marking the first time it did not cut CPF rates to cope with the economic downturn.3

2.2 CPF and Managing Singapore’s Finances

It must first be explained why it is that the Singapore government, with its massive fiscal surpluses and foreign reserves, has public debt exceeding 100% of GDP. The official position is the Singapore government issues Singapore government securities (SGSs) and special Singapore government securities (SSGSs) for slightly different purposes. The SGSs are issued to develop the domestic bond markets “by providing a risk-free benchmark against which other risky market instruments are priced”. The SGSSs are “non-tradable bonds issued specifically to meet the investment needs of the CPF”. CPF monies are invested in these special securities which are guaranteed by the government and earn a coupon rate that is pegged to the CPF interest rates received by CPF members.4

In the aftermath of the abovementioned Roy Ngerng incident, the Ministry of Finance issued a series of clarifiers on its website. It states that “[t]he proceeds from SSGS issuance are invested by the Government via [the Monetary Authority of Singapore] and GIC [Singapore’s sovereign wealth fund], just as it invests the proceeds from the market-based Singapore Government Securities (SGS)”. It further clarified that “[t]he SSGS proceeds have not been passed to Temasek for management. Temasek hence does not manage any CPF monies.”5

Fairly or not, there is a perception that the neither GIC nor Temasek is sufficiently transparent about their investments, rates of return, remuneration structure and so on, a perception that is compounded by the fact that the CEO of Temasek Holdings, Ho Ching, is the wife of Prime Minister Lee Hsien Loong.

There are deep and complicated questions of finance and politics raised by these issues that are beyond the scope of this essay. For a flavor:

  • How should budget surpluses be dealt with? Might it be better to spend these surpluses or to return them in the form of tax cuts?
  • How should Singapore’s strategy of borrowing at a risk-free rate and investing through its central bank and sovereign wealth funds be evaluated? How about the strategy of investing CPF monies alongisde other sources of government funding?
  • What is the proper role of intergenerational equity? (Assuming continued economic growth, future generations of Singaporeans on average be significantly better off than previous generations.)

These questions raise difficult trade-offs and allow for reasonable disagreement. While policymakers should be driven by these technocratic considerations, at a practical level, perception trumps reality. The perception that the status quo and the justifications thereof are shrouded with secrecy is politically explosive when combined with the paternalism and complexity of CPF policy, to be explored in Parts 3 and 4.

  1. Lee, Kok Fatt. Singapore’s Fiscal Strategies for Growth: A Journey of Self-Reliance. World Scientific Publishing Company Pte. Limited, 2018, p.32[]
  2. ibid p.116-118[]
  3. ibid p.119-120[]
  4. ibid p.64[]
  5. Ministry of Finance, Singapore, ‘Section IV: Is our CPF money safe? Can the Government pay all its debt obligations?’,’s-reserves/Section-IV-Is-our-CPF-money-safe-Can-the-Government-pay-all-its-debt-obligations](’s-reserves/Section-IV-Is-our-CPF-money-safe-Can-the-Government-pay-all-its-debt-obligations[]