How the Fund Works
The mechanics of the Fund
The CPF is a social security savings scheme jointly supported by employees, employers, and the Government. CPF members are employees who are Singaporean Citizens and permanent residents, self-employed person in Singapore. The CPF Board is the trustee of members CPF savings. They protect and preserve the value of the savings. They provide fair market returns at minimal risk, while opening avenues for members to seek higher returns on their own after carefully considering the risk involved. The guiding principle is prudence. The government helps by exempting CPF earnings from tax and guaranteeing payment of CPF savings. The Boards part is to make the assets and services available to help meet Singapores social and economic objectives, thereby improving the quality of life of all Singaporeans and CPF members.
Unlike most social security systems in some other countries, the CPF is fully funded: members accumulate assets in their individual accounts, which they later draw upon. Contribution to the CPF is compulsory for all employed Singaporeans and permanent residents. Both the employer and employee make monthly contributions to the Fund. Currently, the total contribution rate for workers up to 55 years old is 30 percent for employees up to 55 years, with contributions of 10 percent from the employer and 20 percent from the employee.1 The percentage changes with age, regardless of the income level. Monthly contribution is subject to a maximum $600 for the employer and $1,200 for the employee, based on a salary ceiling of $6,000 a month. Other rates are16.5 percent for those in the "above 55 to 60 years" age group, 9.5 per cent for those in the "above 60 to 65 years" age group, and 7 percent for those above 65 years old. Besides providing for CPF members needs, these rates also encourage the continued employment of older workers.
The CPF contribution rates are as follows:
Age group Employer's Employees Total Ordinary Special Medisave
contribution contribution Contribution Account Account Account
(% of salary) (% of salary) (% of salary)
35 years & below 10 20 30 24 0 6
Above 35 to 45 years 10 20 30 23 0 7
Above 45 to 55 years 10 20 30 22 0 8
Above 55 to 60 years 4 12.5 16.5 8.5 0 8
Above 60 to 65years 2 7.5 9.5 1.5 0 8
Above 65 years 2 5 7 0 0 7
Of the total 30%, 24 percentage points will be retained in the members Ordinary Account, 6 percentage points in his Medisave account. (Exhibit 2) Since January 1, 1999, the contribution into the Special account has been reduced from 4% to 0%.
The savings and interest earned, which are tax-free upon deposit and withdrawal, go into three accounts:
The Ordinary Account, which can be used for retirement, buying a home, buying CPF insurance, investment and education.
The Medisave Account, which can be used to pay hospital bills and approved medical insurance.
The Special Account, which is reserved for old age and contingencies.
The self-employed are required to contribute 6% of their annual net trade income to their Medisave Accounts on a monthly basis. Although contributions to the Ordinary Account are not mandatory for the self-employed, many do contribute, enjoying the tax break and the benefit of putting something aside for their old age.
Each members CPF savings earn a market-related interest rate, which is based on the 12-month fixed deposit and month-end savings rates of the four major local banks and revised every three months. The CPF Act guarantees members a minimum interest rate of 2.5 percent. Savings in the Special and Retirement Accounts earn an additional
1.5 percentage points above the normal CPF interest since they are for retirement and longer-term purposes. (Exhibit 3)
CPF savings may be used for various approved schemes as long as members can meet certain requirements to safeguard their savings. Apart from this, members can only withdraw their CPF savings when they reach 55, provided that they have aside a Minimum Sum in their Retirement Account. If they continue working, members can make further CPF withdrawals every three years, at ages 58, 61, 64 and so on. Members can also withdraw their funds if they become permanently incapacitated or leave Singapore and West Malaysia permanently. If a member dies before the age of 55, the money is bequeathed to his nominees or passed on to his estate if he has not made a nomination.
In response to increasing life expectancy and inflation, the Minimum Sum Scheme was introduced in 1987 to ensure that retirees will have savings that can stretch over a longer period of time. Members can withdraw their CPF savings at 55 after setting aside a Minimum Sum. Starting from $30,000, it will be raised gradually by $5,000 a year until it reaches $80,000 in 2003. The increase is to provide retirees with a basic retirement income, adjusted annually for inflation.2
CPF members have three options to invest their Minimum Sum:
- Leave it in their CPF Retirement Account. The Board will pay a fixed monthly amount to the member from his Retirement Account beginning at age 60 and continuing until the account is exhausted.
- Buy a life annuity from an approved insurance company. This ensures the member of an annuity until he dies.
- Deposit the funds with an approved bank. Under this option the bank will receive instructions from the CPF to release only a certain amount on a regular basis until the account is exhausted.
Members also have the option of topping up their parents and spouses Retirement Accounts through cash deposits or transfer of savings from their accounts to their parents.
In 1998, CPF membership rose by 0.8% to 2,803,405. This includes 1,18,155 active members and 219,659 self-employed persons who made contributions under the Medisave for the Self-Employed scheme. (Exhibit 4)
The total members balances grew by 7.1% up from 79,6574 million in 1997 to 85,276.8 million by the end of 1998. (Exhibit 5)
Contributions amounting to 15,999.8 million were collected and credited into members accounts during 1998. (Exhibit 6) Withdrawals from members balances totalled 13,609.8 million in 1998 compared to 11,456.5 million in the previous year.
The principles behind CPF policies
Over the years, the success of the CPF scheme has depended on values such as self-reliance, good work ethos and family support. Besides encouraging self-reliance, the various schemes underscore the members responsibilities as parents, children and breadwinners. The values that the CPF both promote and rely upon include: Standing on ones own two feet. Every CPF member is encouraged to work, even beyond his retirement age. The CPF savings will guarantee him a comfortable retirement. Even those with modest savings will have enough for basic needs. This self-reliancefunding ones own retirement instead of relying on the future generationis a vital element of the scheme.
Looking out for each other. Most CPF schemes cover three generations, allowing members to care for themselves, their spouses, children, parents and even siblings. CPF schemes for home ownership, medical expenses and education enable family members to help one another instead of relying on the government.
Providing social insurance. Outside the immediate family, the CPF has also helped the community at large through nation-wide insurance scheme. By pooling resources, individual premiums are kept affordable even for the most needy so that as many as possible will be covered. Indirectly, these insurance schemes enable the better off to help others in need.