US to learn from our CPF system?

Michael A. Lev
Chicago Tribune
2 March 2005,1,675994.story?coll=chi-newsnationworld-hed&ctrack=2&cset=true

At first blush, the social security system in this wealthy, modern country appears to be something of a model for the reforms being considered in the United States.

The Singapore government’s plan for retirees uses individual savings accounts–to which employee and employer contribute–with the emphasis placed on personal responsibility. Workers can access their accounts at any time to buy a house, which most do, or to pay for education. They also have the option of directing their money into a wide array of investments, from gold to stocks to mutual funds, and there is a lot more talk these days of giving workers even more options to invest for retirement as they see fit.

President Bush is proposing to add an element of personal choice to the Social Security system, though only a portion of the payroll tax could be used for a carefully selected menu of private investments, and people would not have access to that money until they retire.

Singapore’s system, the Central Provident Fund, became a major creator of wealth for Singaporeans in initial incarnations decades ago, contributing to one of the highest rates of home ownership in the world.

But ask Quek Soo Beng, a 63-year-old bus driver, how he expects to pay for his golden years and he’ll tell you the CPF will play a very small role.

“My children will support us,” said Quek, who has two daughters and a son. “My wife and I will use CPF money to travel.”

This is not an unusual situation.

Many retired Singaporeans–perhaps the majority in the working class–accept help from their children, often in the form of a monthly payment of roughly $500 to $750. Singaporean values are heavily influenced by Chinese culture, which places the burden on children to care for their parents. In fact, there is a law in Singapore requiring that families take care of their own, but it seldom needs to be invoked.

And so it becomes obvious fairly quickly that the Singaporean system is not about to be exported wholesale to the U.S.

But there are some interesting lessons to be learned from studying it, as well as looking at some other countries–such as Chile–that have chosen a different path from the American-style pay-as-you-go system.

`No ideal system’

“There is no ideal system; each country has to look at where it is,” said Mukul Asher of the National University of Singapore, an authority on pension systems who writes frequently on the CPF and is a critic of it as a social security system.

“It’s actually an example of what not to do,” he said. “The first thing you need to understand is that it’s not a social security scheme. It’s a mandatory savings scheme.”

Under the plan, employees must contribute about 20 percent of their salary to their account, with employers putting in another 13 percent. The government guarantees a 2.5 percent annual return, though participants who opt to manage their investments may make much more. The main wealth-building component is that contributors can borrow from their accounts to buy a house.

The financially savvy government gets a major boost too. While guaranteeing a modest 2.5 percent, it can turn around and invest CPF funds not earmarked by workers wherever it sees fit. Most likely it earns fat returns off the deposits of employees and employers, but the government is not required to disclose where the money goes.

That all worked through Singapore’s high-growth years, as salaries and housing prices increased. Workers invested mainly in government condominiums–the state benefiting once again–and often traded up several times, and at retirement they either had a house that was paid for or one they could trade down from and pocket the equity. Meanwhile, the country got rich.

But now, some critics warn, there may be a problem with the Singaporean system. For one thing, the country is very small, and its changing demographics do not bode well for the CPF in the long term. The population is graying–as in the U.S.–and families are having fewer children. So what happens when today’s workers grow old and don’t have three or four children to support them? Or what happens to the wealth of Singaporeans if housing prices collapse?

“Overinvestment in real estate is a concern,” said Aw Tar Choon, a Singaporean doctor and co-author of a book about social security.

There also is a recognition that CPF does not provide nearly enough, particularly if a participant uses the money to buy a house and doesn’t plan to sell.

So Singapore is thinking about retooling its system.

There is talk of raising the retirement age from 62 to 67, and the government also is studying whether to let people invest more aggressively on their own behalf.

New incentives

Already, about 10 percent of Singaporeans’ retirement money is invested individually in stocks and insurance. The government hopes to encourage those types of investments by approving the creation of privately run mutual funds specifically for CPF money. The goal is to make such investments easy and to lower brokerage fees through mass participation.

That starts to sound like the system used in Chile over the past 25 years, in which participants deposit money into personal accounts and then invest in stocks and mutual funds.

Experts say the system has helped develop the capital markets and has generated good returns, but they point to several major shortcomings. The investment process has been burdened by high fees. And the government decided it needed to also guarantee a minimum pension for those whose plans failed, and that has cost billions of dollars.

In Singapore, the shortcomings have been glossed over because a powerful, paternalistic government faces little opposition.

That motivated Asher to point out what sounded like a of warning to Americans watching the proposed reforms take shape: “The economics of pensions is a very subtle thing, and very, very complex. There are probably only 100 people in the world who understand it.”

Private accounts a fixture in some countries

While the United States grapples with whether to add private investment to Social Security, other countries that already offer personal retirement accounts may serve as examples.


Population: 15.2 million

% age 65 and older: 7.2

Current system began: 1981

Worker contribution: 10 percent of pay

Employer contribution: none

Government contribution: Cost of a guaranteed minimum pension

Retirement age: 65 for men, 60 for women

How it works:

– All of the worker’s contribution goes to a private account.

– Benefits are determined by how much the worker has contributed plus interest and may be withdrawn periodically, paid as an annuity or a combination of both.


Population: 8.8 million

% age 65 and older: 17.4

Current system began: 1999

Worker contribution: 7 percent of pay

Employer contribution: 10.2 percent of pay

Government contribution: Cost of a guaranteed minimum pension

Retirement age: As early as 61

How it works:

– The system consists of a national pension plan along with mandatory private accounts.

– Pension plan funds are allocated using a complicated formula. Private accounts are funded through worker and employer contributions totaling 2.5 percent of pay.

– Accounts are made up of mutual funds and are converted to annuities at retirement.


Population: 38.6 million

% age 65 and older: 12.1

Current system began: 1999

Worker contribution: 9.8 percent of pay

Employer contribution: 9.8 percent of pay

Government contribution: Cost of a guaranteed minimum pension

Retirement age: 65 for men, 60 for women

How it works:

– The first part is a pension determined by the amount a worker has contributed to the plan divided by the average life expectancy at retirement age.

– The second part is a mandatory individual retirement account that is converted to an annuity at retirement.


Population: 4 million

% age 65 and older: 7.2

Current system began: 1991

Worker contribution: 20 percent of pay

Employer contribution: 13 percent of pay

Government contribution: none

Retirement age: 62

How it works:

– A worker gets a lumpsum payment equal to the total worker and employer contributions plus at least 2.5 percent in compound interest.

– At age 55, workers must put about $42,000 in a retirement account to ensure income after age 62.

– Workers also can tap funds to pay for a child’s education, medical expenses or purchase of a home.

Note: Worker and employer contribution rates are portions paid for retirement benefits only except in the case of Singapore, where the contribution rates cited also help fund education, medical and housing costs.

Sources: Social Security Administration, news reports

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