Investment Performance of the CPF BoardA distinction needs to be made between members' funds left in the CPF and the insurance funds35 that are managed by institutional fund managers and invested in fixed interest-bearing deposits, negotiable certificates of deposit, equities and bonds. Although the insurance funds are of relatively minor importance, in 1993 the implicit rate of return36 on the Medishield fund was 6.7 percent - considerably higher than the 2.5 percent rate of return the CPF pays on members' funds.
According to statutory requirements, CPF funds must be invested in government bonds and in advanced deposits with the Monetary Authority of Singapore (MAS), which eventually converts the monies into bonds. In 1993, S$44.6 billion (85.3 percent of the total balances) was invested in government bonds and S$7.7 billion (14.8 percent of the total) in advanced deposits with the MAS.37 Given that the government enjoys budget surpluses, and that amounts borrowed are not used to finance infrastructure, how and where are the CPF balances invested? They are invested by the government through the Singapore Government Investment Corporation and other channels, and most are believed to be invested abroad. However, no information is available on either the investment portfolio or the returns obtained. CPF members' interest is calculated as an average of the 12-month deposit and monthly savings rates of four major local banks, subject to a minimum rate of 2.5 percent.
The rationale for payment of short-term interest rates on long-term funds is not clear. As Table II shows, the real rate of return (the interest rate minus the inflation rate) has been slightly positive or negative since 1986. This contrasts sharply with the return on Medishield funds noted above. To the extent returns on CPF balances invested by the government are higher than what is paid to the members, the difference is an implicit tax on members, although this may be offset by tax subsidies. The implicit tax is likely to be regressive, as those with low balances have a greater proportion of their (forced savings) assets with the CPF.
16 Most social security systems tend to be somewhat progressive, paying a higher rate of return on payroll tax contributions, the lower a person’s income. By contrast, the Singapore system is slightly regressive in three ways. First, people get back exactly what they put in, plus any buildup. Second, although the practice of not taxing social security contributions (at least the employee’s share) is common throughout the world, this practice also favors those in higher tax brackets. Finally, the investment options discussed in the text favor higher-income earners. back