Singapore’s Central Provident Fund Scheme - An Overview and A Comparison with the U.S. Social Security System


Social security is broadly defined as provisions against economic and social distress caused by stoppage or substantial inadvertent losses of earnings resulting from sickness, maternity, employment injury, invalidity, old age and death. Due to the potential impact of social security on each individual’s life, the running and maintenance of social security programs are naturally matters of grave concern to governments around the world. Most countries finance their social security system on a pay-as-you-go basis, Singapore finances its social security system through a publicly managed, mandatory program of private saving. The vehicle through which this is accomplished is the Central Provident Fund (CPF).

The Central Provident Fund was set up in 1955 to provide financial security for workers in their retirement or when they are no longer able to work. Over the years, it has evolved into a comprehensive social security savings scheme, which not only takes care of members’ retirement, home ownership, healthcare needs and their children’s education, but also provides financial protection to members and their families through its insurance schemes. Recently, efforts have been made to increase the range of investment options open to members to help them retire with greater financial assets.

This paper traces the development of the CPF scheme, from its inception under the colonial government to the present day. The first section provides an overview of the evolution of the scheme over the last four decades. The second section explains the mechanics of the scheme, as well as the principles behind various policies. The third section describes the schemes that are currently offered by the Fund. The fourth section compares and contrasts the CPF scheme with the U.S Social Security system. The fifth section concludes the paper.

The History of the CPF Scheme

How the CPF scheme was started by the colonial government

By far the most significant measure ever introduced by the colonial government was the Central Provident Fund, legislated in 1953 and put into force July 1, 1955. It is viewed as the most important advance in social welfare. Ordinance assured retirement benefits for all employed persons. This was, and today still is, a retirement fund based on contributions by employers as well as employees, and has been compared to a savings bank "with compulsory membership and compulsory accumulation of deposits at interest". It was a simple old-age savings scheme to give low-income workers some security in their old age. It is enlightening to look at the ideas and assumptions behind these social security measures. British rule was essentially laissez—faire. It was tradition in Singapore for the worker to look to his employer and not to the state to provide him with medical care and other benefits. The state felt no obligation to protect workers in this sense, and its way of dealing with unemployment and destitution was to repatriate workers and restrict immigration until good times returned, when once again new arrivals would be welcomed.

It began as a self-funding provident fund or a save-as-you-earn (SAYE) rather than a pay-as-you-go (PAYG) system. The self-funding model was similar to ones the British had used in its colonies in Africa and Malaya in 1951, for a good reason: it ensured that British funds would not be drained to look after the social security needs of its colonies. The provident fund scheme turned out to be a valuable bequest when the People’s Action Party (PAP) government took over in 1965. This scheme in the PAP’s hands will prove to be one of the most effective instrument of savings devised anywhere in the world.


How the CPF scheme evolved when the PAP took over

Following independence in 1965, the scheme remained intact as it conformed to the government’s development strategy, which relied on high levels of savings and investment. However, the PAP government also made gradual and innovative changes to the scheme.

From its inception, the emphasis of the CPF scheme was on providing for old age. Despite calls from unions to allow workers to withdraw their savings should they fall ill or become unemployed, the CPF Board adhered to the rule that CPF savings could only be withdrawn upon retirement. This stand prevailed for over a decade until the government came to adopt the view that financial security could take many forms, and need not be restricted to a monetary payoff each month. When Lee Kuan Yew was the Prime Minister, it was revealed that the government was studying ways to see if CPF savings could help members to buy Housing & Development Board (HDB) flats. The first move towards liberalization came in September 1968, when the home ownership scheme was introduced to allow members to finance the purchase of HDB flats with their CPF savings.

Since then, the CPF has been slowly liberalized to meet the changing needs of an increasingly sophisticated and educated people, and give them a stake in the nation. Today, members can use their CPF savings for a host of schemes, including those for retirement, home ownership, investments, health care, insurance or college loans. But the most salient features of the scheme have not changed since 1955: it is compulsory, its basic principle is thrift and self help; and the contributions made by each member are earmarked for the benefit of the individual, with no redistribution among members.

In addition, the government has also adjusted CPF contribution rates in line with its macroeconomic objectives. (Exhibit 1) From 1968, contribution rates for employees and employers were gradually increased to a peak of 25 percent each, for a total of 50 percent, in 1984. The objective was to boost saving by households to finance investment. In the early to mid-1980s, high contributions also coincided with the government’s goal of increasing the cost of labor and accelerating the pace of labor-saving investment (Carling and Oestriecher). The economic downturn in 1985-1986, however, led the government to reduce employer contribution as a temporary measure to stimulate the economy. In1986, there was a revision of the employer’s CPF contribution from the original 25 per cent to 10 per cent. Even when the economy subsequently recovered from the recession this rate was increased by only 2 per cent to 12 percent in 1988. The serious economic recession of 1985 – 86 proved to be a good test of the relationship. Therefore, instead of cuts in take-home pay, employees had their CPF contribution rates reduced, thereby making wage restraints relatively painless. A later review showed that the contribution rate of 50 percent in 1984 was higher than needed to meet long-term needs. As a result, a target rate of 40 percent was set and reached by 1991, while the principle of equal contributions by employees and employers was restored in 1994.

It is no coincidence that the nation’s socio-economic priorities go hand in hand with those of the nation. Public policies and the direction of the fund have developed in tandem for the good of the people. Because of the scale of the fund and the variety of the benefits and services, it was imperative that the funds be administered efficiently in order to keep the wheels moving without being stuck in red tape. The CPF’s adaptability is its greatest strength. The CPF has also been an effective tool in the management of the nation’s wage policies and the economy as a whole.

The government’s choice of CPF contribution rates as a fine-tuner of the economy is again evident from a recent decision. Since January 1999, in response to the economic downturn caused by the Asian economic crisis, employer contribution rates were lowered to 10 percent (while employee contribution rates remained at 20 percent) as part of an overall package to stimulate the economy.