Should We Save Like the Singaporeans Do?
By Reid Cramer
In recent years, policymakers around the world have begun exploring the potential of asset-based welfare policy. There is a growing recognition that while income facilitates immediate consumption, people move up the economic ladder and become economically secure when they are able to build up a pool of assets that they can deploy productively. The experience of Singapore and their Central Provident Fund (CPF) provides an instructive case study for the potential of this approach. Although it was initially designed as a mandatory savings scheme to facilitate retirement security while minimizing welfare payments, it has evolved into a comprehensive social security savings plan with various pre-retirement uses such as financing healthcare, child development, post-secondary education, home ownership, and asset building.
As an account-based social policy system, the CPF offers instructive lessons for any country, particularly when we begin to break down why it has worked so well. One feature that makes it particularly effective is that everybody is automatically enrolled – so taking initiative or having special knowledge of investments and savings isn’t required. Contributions to the fund are not optional, but the resources that accrue can eventually be accessed by the account holder. And there are incentives to increase participation among those with lower incomes, introducing a degree of progressivity to the program.
One of the innovations of the CPF was the recognition that account resources could be leveraged at key points in time to promote other policy objectives. Account holders don’t have to wait until retirement to take advantage of their funds. They can, for example, use their savings as a down payment on a home, which explains the country’s extremely high homeownership rate. Additionally, the integration of the CPF with other policy efforts, such as those aimed at child development, has actually created a unified system of life-long asset accounts. Parents can begin saving for their children soon after their birth in accounts that can be accessed to support child care and early learning and eventually tapped to pay for post-secondary education. Unused balances are seamlessly rolled over until they are deposited in the young adult’s own CPF account. In this respect, the CPF is regarded as one of the key pillars of the country’s social policy system and, for the majority of households it may be the most important funding mechanism to support social welfare and development over the life course.
Could such a system work in the U.S.? There would seem to be large advantages to making sure everyone has access to an account in a savings plan structure that spans the life course. Regardless of any future changes to Social Security, most people will benefit from having a supplemental source of resources that they can draw upon. Many states are already pursuing policy reforms that will create a mechanism to cover the half of the workforce that isn’t participating in 401(k)-type plans. Other states and localities are acknowledging the advantages of starting as early in life as possible and have begun to consider creating a system of children’s savings accounts, opened as early as birth. With greater lead time, we may be able to create a resource that can be accessed or leveraged at key moments in the life course, such as paying for college or buying a home. This may be a better approach than the option many families face when they need access to capital, which is to leverage or draw down on their home equity. That’s an approach that didn’t work out too well for most families in the wake of the Great Recession.
About the Author
Reid CramerAsset Building Program Director
Reid Cramer is director of the Asset Building Program at New America, which aims to promote policies and ideas that significantly broaden access to economic resources through increased savings and asset ownership, especially among lower-income families.
By Reid Cramer
In recent years, policymakers around the world have begun exploring the potential of asset-based welfare policy. There is a growing recognition that while income facilitates immediate consumption, people move up the economic ladder and become economically secure when they are able to build up a pool of assets that they can deploy productively. The experience of Singapore and their Central Provident Fund (CPF) provides an instructive case study for the potential of this approach. Although it was initially designed as a mandatory savings scheme to facilitate retirement security while minimizing welfare payments, it has evolved into a comprehensive social security savings plan with various pre-retirement uses such as financing healthcare, child development, post-secondary education, home ownership, and asset building.
As an account-based social policy system, the CPF offers instructive lessons for any country, particularly when we begin to break down why it has worked so well. One feature that makes it particularly effective is that everybody is automatically enrolled – so taking initiative or having special knowledge of investments and savings isn’t required. Contributions to the fund are not optional, but the resources that accrue can eventually be accessed by the account holder. And there are incentives to increase participation among those with lower incomes, introducing a degree of progressivity to the program.
One of the innovations of the CPF was the recognition that account resources could be leveraged at key points in time to promote other policy objectives. Account holders don’t have to wait until retirement to take advantage of their funds. They can, for example, use their savings as a down payment on a home, which explains the country’s extremely high homeownership rate. Additionally, the integration of the CPF with other policy efforts, such as those aimed at child development, has actually created a unified system of life-long asset accounts. Parents can begin saving for their children soon after their birth in accounts that can be accessed to support child care and early learning and eventually tapped to pay for post-secondary education. Unused balances are seamlessly rolled over until they are deposited in the young adult’s own CPF account. In this respect, the CPF is regarded as one of the key pillars of the country’s social policy system and, for the majority of households it may be the most important funding mechanism to support social welfare and development over the life course.
Could such a system work in the U.S.? There would seem to be large advantages to making sure everyone has access to an account in a savings plan structure that spans the life course. Regardless of any future changes to Social Security, most people will benefit from having a supplemental source of resources that they can draw upon. Many states are already pursuing policy reforms that will create a mechanism to cover the half of the workforce that isn’t participating in 401(k)-type plans. Other states and localities are acknowledging the advantages of starting as early in life as possible and have begun to consider creating a system of children’s savings accounts, opened as early as birth. With greater lead time, we may be able to create a resource that can be accessed or leveraged at key moments in the life course, such as paying for college or buying a home. This may be a better approach than the option many families face when they need access to capital, which is to leverage or draw down on their home equity. That’s an approach that didn’t work out too well for most families in the wake of the Great Recession.
About the Author
Reid CramerAsset Building Program Director
Reid Cramer is director of the Asset Building Program at New America, which aims to promote policies and ideas that significantly broaden access to economic resources through increased savings and asset ownership, especially among lower-income families.
