Here's how improved CPF system could bode well for government's fiscal position

Fiscal surplus to steady at 1% of GDP from 2016-2019.

Ongoing efforts to improve Singapore's CPF system highlight the government's continued efforts to minimise its welfare spending as the population ages and this will be positive for the government's fiscal position, said BMI Research.

The research firm forecasts the government to maintain a small fiscal surplus averaging 1.0% of GDP from 2016-2019.

The PAP government has stated that it will review the CPFIS in a bid to ensure a higher rate of return for investors. Being set up to offer Central Provident Fund (CPF) members a way to earn higher returns on their savings by investing in various financial instruments, Deputy Prime Minister Tharman Shanmugaratnam noted that the CPFIS had failed to achieve its primary objective as members would have been better off leaving their money in the Ordinary Account, which earns a guaranteed 2.5% each year.

It was observed that the CPFIS had not worked out due to high fees and behavioural biases, where investors were quick to withdraw their funds from the CPFIS if they were able to obtain higher returns elsewhere.

Established in 1953, CPF is a compulsory savings plan to enable working Singaporeans and permanent residents to fund their retirement, healthcare, and housing needs. It is an employment-based savings scheme, with employers and employees contributing a mandated amount to the Fund and often functions as the main form of retirement savings for many Singaporeans

"In our view, the government's willingness to address and tweak the issues with CPF in order to enable the scheme to continue achieving its objectives are positive for the Singapore government's fiscal position, and indicate that the government remains committed to ensuring the best for its citizens," said BMI.

In response to the feedback from an advisory panel, the government has stated that it will look into how best to introduce a simple, aggregated, low-cost investment option, and will announce its findings in 12 months. This should include incentives for individuals to keep their money in one account for the longterm (instead of switching from one investment to another) since this is how superior long-term returns are earned.

At the same time, the Ministry of Manpower (MOM) will be reviewing the CPFIS system to enable it to achieve its purpose while keeping fees low.

As such, BMI noted that these efforts to ensure that the majority of the population has a basic level of savings required for retirement will enable the government to keep a tight grip on welfare spending even as the population ages rapidly.

"The government's spending on welfare and retirement remains small, coming in at approximately 7% of total expenditure in 2014 (latest available data from Singstat) and we expect this to remain fairly constant, keeping in line with the government's prudent policy. Therefore, we expect the changes to the CPF system to be positive for the government's fiscal position, and forecast the fiscal account to remain in surplus through the end of our forecast period in 2025," it explained.