CPF debate must reflect policy realities

IT'S not too difficult, looking at how the Central Provident Fund (CPF) system has evolved over the decades, to conclude that some of the central issues it faces today resulted from past policy-making. That may even be the correct conclusion, too.

What is important, however, is to place those policies in context, and to see them for what they are - responses to the policy questions of their time.

Such perspective is important, if the current debate on the CPF is to be one that is cognisant of the complexity of the present issues.

The CPF is deeply entrenched in the socio-economic fabric of Singapore. That place in the Singapore system means it is both an agent of change, as well as being subject to change.

Legislated in 1955, the CPF was originally designed only to provide post-retirement security. The model chosen was a fully funded compulsory savings scheme where individuals receive benefits directly related to their contributions.

The system is built on the philosophy of self-reliance, a traditional family support system, incentive to work and non-inflationary economic growth. While these core values have remained constant, the CPF itself has undergone major changes.

With the benefit of hindsight, the tendency is to characterise some of these changes - seen as behind today's problems - as policy mistakes. A fairer examination would place those policy decisions in the context in which they were made, and weigh the different outcomes.

One major issue, for example, is the use of CPF savings for housing, which eventually reduced the amount available for retirement. The Public Housing Scheme in 1968 was the first liberalisation in the use of CPF funds. Few would argue against a scheme that helped Singapore families buy subsidised public housing by letting them use their CPF funds, at a time when wages were low in an economy that was still finding its feet. The outcome is a society where most people own their homes, which by most reasonable opinion, is a laudable one.

This is perhaps less clear when it comes to private property. In 1981, the scheme was extended to allow funds to be used for private residential property. Later, funds could be used for investing in non-residential property. An argument could be made against allowing the use of CPF funds for property spending beyond basic housing needs. Still, such liberalisation reflected Singaporeans' aspiration to upgrade. Many took advantage of these changes and benefited from them. The growth of the property sector also contributed to economic growth through construction and other activities.

Against all this is the depletion of CPF savings for retirement. CPF money also contributed to the liquidity that drove asset prices higher, triggering asset inflation, which in turned sucked in more CPF funds. That said, in an open economy, the part played by capital inflows will be as significant as or more so than domestic liquidity.

Without the use of CPF money for property, many more Singaporean families would not have been able to own their homes. Without CPF-provided liquidity, would home prices be more affordable to more people then? That may not be a given, considering the openness of the Singapore economy. And while there will certainly be more savings in the CPF, a lot more of disposable income would be going into servicing mortgages or rentals. The policy cost and benefit is not as clear-cut as often stated.

Such fine balances play across the spectrum of CPF policy decisions - allowing CPF members to use their funds to buy stocks, culminating in the CPF Investment Scheme (CPFIS) in 1997, which allowed investments in gold, shares and approved unit trusts, for instance, and using the CPF as a macroeconomic tool to manage business cost and the economy's competitiveness by cutting CPF contribution rates.

The first led to many CPF investors facing less-than-stellar investment returns - most struggle to best the guaranteed CPF interest rates - but helped spur the development of the financial sector and created jobs in tandem with a wave of privatisations and sector reforms. The second ate into the accumulation of CPF savings, and the government found that restoring contribution rates proved far stickier than cutting them. Cutting the CPF rate, however, helped pull Singapore out of deep recession, thrice.

The picture that emerges is an intricate one of policy costs and benefits, at a particular time and over a period of time - and the answer to the current policy challenge of inadequate retirement savings will have to reflect these complexities.

The CPF is not a system unto its own, but its impact cut across Singapore society and the economy. The seemingly simple quest to raise the returns of CPF investments, for one, carries with it implications of risk, government intervention, the use of reserves and fiscal burden, among other things. What's needed is for the debate to move beyond simple rhetoric; the policy response will necessarily be one of managing a web of policy goals and trade-offs.