Central Provident Fund (CPF)

The Central Provident Fund (CPF) is a mandatory benefits account providing retirement earnings and healthcare for Singaporeans. Contributions to the retirement account originate from both the employee and the employer.

The Central Provident Fund started in 1955 as a way to assure all Singaporeans would have income and financial stability in retirement. CPF was controversial when first introduced with considerable opposition to the concept of a forced retirement program, but it became most popular over the years and has expanded to include healthcare and public housing assistance. Singaporeans can begin drawing from their retirement account at age 55, and similar to the Social Security system in the United States, waiting to take monies until older means more money will be in the account.

The employee and employer each contribute to the CPF account. The funds in the CPF account are conservatively invested to earn around 5 percent per year. In 1968, the CPF expanded to provide housing under the Singapore Public Housing Scheme. In the 1980s, the program expanded again to provide medical coverage for all participants.

Some CPF participants wanted an option for taking on more investment risk to earn a better return than the average 5 percent, so in 1986, a new investment option allowed participants to manage their own accounts. Shortly thereafter, the program added an option to convert the account into a fixed annuity upon retirement. At the present time, participants with a minimum balance of $40,000 in their account at age 55, or $60,000 at age 65, can select a CPF LIFE annuity plan. There is no requirement to convert to the annuity if the plan participant prefers to keep their assets in the current retirement account.

The CPF is a mandatory retirement system unlike the 401(k) plan in the United States, where employees can elect to opt out of a company’s 401(k) plan if they choose. Many company 401(k) plans in the U.S. will auto-enroll a new employee into their retirement plan and deduct 3 percent of their pay on a pre-tax basis unless the employee specifically requests in writing not to participate. The impacts of this choice can be far-reaching for younger workers who opt out given the many years of lost interest compounding. At the heart of the CPF and the 401(k) retirement plan is the wisdom in paying yourself first through an automatic payroll deduction system. These regular contributions are matched up to certain levels by the employer, who is in effect giving the employee extra pay to support them in retirement, so choosing not to participate in the plan means turning down that extra pay.