Crystal Wong (15013155)

ECON317 Paper

Efficiency of Singapores Central Provident Fund

There are many ways in which social programmes are funded around the

world. A more traditional model would be those that are provided through government

tax revenue or through social security contributions, as found in most Western

industrialised nations such as the United States. An alternative approach is a

contribution endowment scheme, where it is provided either by the private investment

firm or by the government. Under this scheme, the contributor receives a lump-sum

reward based on the capital gain and income returns from the investment from his or

her contributions over the year and the contributor may then invest or spend it

according to their needs and preferences.

The adoption of the latter scheme by the Singaporean government forms the

basis of Singapores Central Provident Fund (CPF) and allows the ruling Peoples

Action Party (PAP) to allocate resources in the areas of education, health, housing and

pensions whilst leaving the economy mostly market-driven. This compulsory savings

plan for working Singaporeans and permanent residents, funded by both employers

and employees, is used primarily to support their retirement, healthcare and housing

needs in the country (Ministry of Manpower, 2016).

Employed Singaporeans and their employers contribute to the CPF that go into

four accounts: Ordinary Account (OA) for housing, CPF insurance, investment and

education, a Special Account (SA) for old age and retirement-related financial

products, Medisave Account (MA) for medical insurance, and the Retirement

Account (RA) to meet basic needs during old age. The age at which these

1 | Page
cumulated savings can be withdrawn is 55 years, after which most account holders

will be able to spend or invest the money as they wish (Ministry of Manpower, 2016).

Such a scheme has numerous benefits. Firstly, since the funds for retirement

have already been accumulated out of the past earnings of the account holder, they

need not be derived from the current tax revenue of the government. This prevents an

undue drain upon the public budget, allowing a greater portion of public expenditure

to be channelled into other essential government programmes such as education,

infrastructure development and other services. It further enables taxation to remain as

a smaller proportion of GDP, so creating greater incentive for private sector growth.

In addition, it attempts to increase self-reliance as the public needs to depend on their

own available resources to meet these compulsory payments and are given incentives

to improve themselves through education, skills acquisition, hard work and career

advancement.

Loke and Craner (2009) note that the impact of the CPF on Singaporean

society is noticeable and has made a difference to the socioeconomic development of

the country, in terms of healthcare provision and poverty reduction. The CPF forms

an integral part of the Singaporean healthcare system by keeping basic healthcare

affordable through Medisave to pay for qualified medical expenses such as

hospitalization, day surgery and certain outpatient treatment expenses. The concern

for this scheme is that Singapores Medisave is not entirely fair and rising healthcare

costs above the rate of inflation is particularly burdensome to low-income groups

(Asher and Nandy, 2006).

Although it is not intended for poverty reduction, the CPF plays an important

role in helping Singapores residents to build their household assets. However, many

2 | Page
have noted that the CPF is only applicable to those who are employed and beyond

that, Singapores current public assistance schemes are limited. Asher and Nandy

(2007) comments that less than 5% of low-income households have benefitted from

the state-funded systems and only 0.07% of the population received public assistance

in 2004.

Is this program efficient? It can be argued that this CPF program creates a

more efficient allocation of resources, based on each individuals ability to pay

relative to taxes as well as incentivize each person to advance their careers. The

Singaporean CPF has resulted in a society where majority of the population are equal,

with the exception, of course, the gap between the affluent and the rest of society

(Ramesh, 2004; Zhang, 2003, Mendes, 2007). However, this equality has been

achieved through mandatory payments that force Singaporean residents to earn 2.5%

real rate of return on 37% of their savings (Seng, 2015).

It should be noted that the CPF is not intended to redistribute income and does

not involve interclass transfer of wealth. (Tremewan, 1998). Rather, it amplifies the

inequalities because the employees only receive what have been contributed to their

accounts. While it provides those in the middle class with opportunities to improve

their socioeconomic status, those in the working class would be caught in a poverty

trap that allows them minimal savings to draw on when they need it most in

retirement. Whats more, the contribution rate is not progressive as 20% contribution

rate by employees, as of 2016 (Ministry of Manpower, 2015), at a lower income level

would be more important, since at that level, any additional wages would go to

necessities before it is spent as disposable income. Thus, the main beneficiaries of the

programme are the affluent and the better-paid workers (Tang, 2000: p.38). This

instrument of social policy in Singapore promotes the idea of self-help, individual

3 | Page
responsibility, social discipline and work ethic. Ultimately, this minimalist

interventionist social policy in income redistribution results in the great income

disparity in the Singaporean economy (Tang, 2000: p.54).

It is significant to mention that the PAP leadership believed in intellectual

aristocracy, those with expert knowledge and in order to create a good society the

government should invest in the creation of the intellectual aristocracy. In fact, the

former deputy Prime Minister Rajaratnam, stated the Singaporean was built on a

political meritocracy, consisting of the best and brightest citizens (Low & Aw,

1997:11).

Based on the context of Singaporean society and CPF model, the two main

moral criticism of the Singapore model are as follows:

1. The CPF limits personal autonomy and the question raised is whether this

is an acceptable way of achieving just distribution or whether it is more

important to have am ore mobile, but less egalitarian society.

2. The CPF fails to provide adequate public housing and medical support for

the working poor, the unemployed, the disabled, and the poor elderly

(Ramesh, 2004; Zhang, 2003; Mendes, 2007).

Robert Nozicks 1974 book Anarchy, State and Utopia and John Rawls 1971 book

Theory of Justice provides valuable insights on these two criticisms.

The first main criticism of the CPF stems from Nozick and his Entitlement

Theroy. This model of distributive justice according to Robert Nozick is based

fundamentally around the idea of liberty. Nozick argues that there are three sets of

rules of justice that defines the acquisition, transference and rectification of property

rights. Liberty is a prime feature of a just society and exchanges that are made fraud

4 | Page
or theft or restricting someones access to voluntary exchange are therefore not just.

(Nozick, 1974)

The implications of Nozicks argument suggest that any redistributive action

by the government is unjust. Therefore, according to Nozick, taking a proportion of

earnings is like making a person work a proportion of his working time for anothers

benefit. Thus, it is unjust to force a person to work for anothers benefit as

government-funded social programs is essentially taking away an individuals

entitlement. Furthermore, this Entitlement Theory is derived from Lockes argument

and emphasizes the idea of the night-watchman state; the idea of a minimalist

government whose only role is to keep the peace and enforce contracts. Such

government is selected by people because the peoples state nature recognizes that

each person cannot be an impartial judge and contracts will be unenforceable.

It is interesting to note that the Singaporean government recognizes property

rights as a part of a citizens identity. Under the CPF, an individual is allowed to

purchase whatever healthcare they want, in contrast with countries with universal

health care system such as in Canada. However, the CPF is not consistent with a

libertarian perspective. Under Nozicks theory of justice, an individual is allowed to

do as they please as long as the rights of others are not infringed upon. Certain civil

liberties are restricted and mandatory payments are required in order to pay for

services in the CPF to which they have not agreed.

Nozick regard the state as an institution whose sole duty is to only enforce

contracts and protect the property rights of its citizens. However, the State, according

to former Prime Minister Lee Kuan Yew, could not be the Nightwatchman state as

described by Nozick and cannot leave individuals and their families to fend entirely

5 | Page
for themselves (Han, Fernandez and Tan, 1998: 165). Although competition and

performance was the best way for society to level up, the less well-off should not feel

they have been discarded, for that could threaten social cohesion. The Singaporean

government claims a much broader compass of authorities and treats the state as

though it were a community.

This brings us to the second main criticism of the CPF system. The

communitarian argument is that what is considered just depends on cultural context

and the ways of life of societies. This is in contrast with Rawls Difference Principle

as well as Nozicks Theory of Entitlement. While the communitarian argument is that

justice depends on the sociocultural environment where the citizens live in (Benhabib,

1992; Macintyre, 1978; Sandel,1998), Rawls argues for a veil of ignorance, where

fairness or equality is achieved through the maximising the utility of the least

advantaged.

Rawls argues that justice can be achieved through adapting the two principles

of justice that guarantee a just and morally acceptable society. The first principle,

known as the Principle of Equal Liberty, is that it is the right of every individual to

have basic liberty that is compatible with the liberty of others. The second principle,

the Difference Principle, is that social and economic inequalities should benefit the

least-advantaged people (maxi-min) and that there should be equality of opportunity

for all.

Rawls also proposes that the structure of society is determined by individuals

in what is known as the Original Position, where they do not know their abilities,

social position, preferences. Once they step out from behind the so-called Veil of

6 | Page
Ignorance, the rational self-interested person would choose a system which has the

most egalitarian distribution of rights, position and resources in the society.

This is not, however, reflected in the CPF system. Provisions in housing,

health, education provided through the CPF and generous income transfers through

pro-family incentives have discriminated in favour of the achieving population in

Singapore, while low-income families, until recently, have been overlooked. The

consequence is a welfare regime that discriminates between the underclass and the

middle class: a significant underclass that has little or no CPF savings to fall back on

and at the mercy of charitable relatives or organisations, residual provision for relief

of destitution, and, more recently, targeted assistance through community initiatives,

and a middle class, that is dependent on CPF provisions, supplemented by private

insurance for those who can afford it.

Secondly, Lee Kuan Kew describes all societies as a population diamond

(Han, Fernandez and Tan, 1998). Those with average intellect and abilities occupy

the middle of the diamond. At the top, IQ and competence levels were considered the

best and brightest of society. The opposite is also true towards the bottom of the

population diamond. Lee argues that it is the role of society to encourage and reward

those with talent and ability. He also adheres to the viewpoint that liberal values result

in erosion of social responsibilities and does not produce any benefits. According to

Lee, the invisible hand of unregulated free-market capitalism undermines the family

and disrupts local communities leading to an increasingly fragmented life for citizens.

Rawls rejects this concept. While meritocracy advocates fair equality of

opportunity, which is also the first part of difference principle, Rawls argues that

talent and effort are morally arbitrary. The meritocratic system in Singapore is a

7 | Page
criticism of Rawls difference principle which is biased against giving credit to one's

talent. Rawls argues that talent and work ethics are not within the scope of free will.

In his words, A just scheme answers to what men are entitled to; it satisfies their

legitimate expectations as founded upon social institutions... But what they are

entitled is neither proportional to nor dependent upon their intrinsic worth. (Rawls,

1971)

According to Rawls, while talent is morally arbitrary, entitlement is what he

considers a primary resource, one that all people expected to have and value behind

the Veil. Rawls argues that those who are talented should be entitled to values like

respect and property from society, but must apply their talents in a way to benefit

those who do not have the same talents the least advantaged in society. Since

individuals in a society start from behind the veil of ignorance, no one has any

knowledge about their individual conditions after stepping out from behind the veil,

any self-interested rational individual would agree to a society that would maximises

the least advantaged. (Sandel, 2009)

In terms of talent, it is easy to argue that it is morally arbitrary. But treating

one's effort as fully moral arbitrary is not so convincing. Alternatively, if effort is, to

certain extent, motivated by free will, Rawls argues that effort is still credited since

there is restricted and justified inequality. Under Singapores CPF scheme, the effort

is not credited, but the contribution to society, due to the impossibility to measure

effort and because effort is externalized as contribution. Furthermore, it is inefficient

to credit effort instead of contribution, because a diligent person may not benefit the

least advantaged as much as a talented person does.

8 | Page
 This essay has considered two main criticisms against the CPF scheme in

Singapore. The arguments raised against this system are similar to the criticisms

placed against other welfare distribution systems that there is lack of individual

autonomy and fails to provide those least advantaged in society. If we were to claim

that the CPF system is unjust, as indicated by Rawls and Nozicks theories of justice

because of the idea of self-help that is implicit in the Singaporean society that leads to

lower-class citizens to contribute the CPF, we must demonstrate how these types of

citizens must have a right to access government welfare programs for free. However,

this does not mean that these criticisms should be dismissed but to analyse these

criticism from the viewpoint of the above mentioned philosophers. This paper

therefore shows that there will always be doubt about the justification of making such

moral judgments.

9 | Page
Bibliography

Asher, Mukul G. and Amarendu Nandy. An Assessment of Singapores

Policy Responses to Ageing, Inequality, and Poverty. 9-10 February
2007.

. "Health Financing in Singapore: A Case for Systemic Reforms."

International Social Security Review 10 January 2006: 75-92. 5
October 2016.

Benhabib, Seyla. Situating the self: Gender, community and

postmodernism in contemporary. Routledge: Psychology Press,
1992.

Han, Fook Kwang, Warren Fernandez and Sumiko Tan. Lee Kuan Yew: The
Man and His Ideas. Singapore: Times Edition, 1998.

Loke, Vernon and Reid Cramer. "Singapore's Central Provident Fund: A

National Policy of Lifelong Asset Accounts." New America
Foundation Working Paper (2009).

Low, L. and T.C. Aw. Housing a Healthy, Educated and Wealthy Nation
through the CPF. Singapore: The Institute of Policy Studies & Times
Academic Press, 1997.

Macintyre, Alasdair. Against the Self-Images of the Age. Notre Dame:

University of Notre Dame Press, 1978.

Mendes, Philip. "An Australian Perspective on Singaporean Welfare Policy."

Social Work and Society 5.1 (2007): 33-45.

Ministry of Manpower. "CPF Contribution and Allocation Rates from 1

January 2016." 9 November 2015. Central Provident Fund Board
Singapore. 3 October 2016.
<https://www.cpf.gov.sg/Assets/Members/Documents/Jan2016_Con_
Rate_Page.pdf>.

. CPF Schemes. 3 October 2016. 5 October 2016.

<https://www.cpf.gov.sg/Members/Schemes>.

Ramesh, M. Social Policy in East and SouthEast Asia. London: Routledge,

2004.

Rawls, John A. A theory of justice. Cambridge, MA: Harvard University

Press, 1971.

Sandel, Michael J. Justice: What's the right thing to do? New York: Farrar,
Straus and Giroux, 2009.

. Liberalism and the Limits of Justice. Cambridge: Cambridge University

Press, 1998.

10 | P a g e
Seng, Lim Tin. Central Provident Fund (CPF). 5 January 2005. 4 October
2016.
<http://eresources.nlb.gov.sg/infopedia/articles/SIP_573_2005-01-
05.html?s=cpf>.

Tang, Kwong-leung. Social Welfare Developement in East Asia. Houndmills:

Palgrave Macmillan, 2000.

Tremewan, Christopher. "Welfare and Governance: Public Housing Under

Singapore's Party-state." The East Asian Welfare Model: Welfare
Orientalism and the State (1998): 84-87. Document. 5 October
2016.

Walzer, Michael. Spheres of Justice: A Defense of Pluralism and Equality.

Oxford: Blackwell Press, 1983.

Zhang, Y. Pacific Asia: The politics of development. London: Routledge,

2003.

11 | P a g e