Investment Patterns in Singapore's Central Provident Fund System

38 Pages Posted: 3 Oct 2006

See all articles by Benedict S. Koh

Benedict S. Koh

Singapore Management University - Lee Kong Chian School of Business

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Toto Tanuwidjaja

Singapore Management University

Joelle H. Fong

National University of Singapore

Date Written: May 2007

Abstract

Rising elderly life expectancies imply the need to accumulate sufficient savings for retirement. This paper investigates the role of recent changes in the investment menu in helping workers grow their saving in the Singaporean Central Provident Fund (CPF) system. Our research explores the investment patterns of CPF participants and articulates their implications for policymakers. We find that most investors use their money for housing purchase and default the remainder to the CPF investment pool. The bulk of non-housing saving sits uninvested in bank accounts paying a low return. A fraction of workers does elect outside investment products, with high-income earners and males tending to take more risk than low-income earners and females. Since workers who default their money to the CPF fund receive a guaranteed 2.5% return on the Ordinary Account and 4% on the Special Account, hurdle rates for money market and equity funds are substantial. These high hurdle rates help explain why few CPF account holders invest outside the default government investment pool, though inertia probably explains why many employees let their funds sit in bank accounts earning low interest rates.

Suggested Citation

Koh, Benedict S. and Mitchell, Olivia S. and Tanuwidjaja, Toto and Fong, Joelle H., Investment Patterns in Singapore's Central Provident Fund System (May 2007). Pension Research Council WP2006-12 . Available at SSRN: https://ssrn.com/abstract=933332 or http://dx.doi.org/10.2139/ssrn.933332

Benedict S. Koh (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Toto Tanuwidjaja

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Joelle H. Fong

National University of Singapore ( email )

469C BUKIT TIMAH ROAD, LKYSPP
SINGAPORE, Singapore 259771
Singapore

HOME PAGE: http://https://lkyspp.nus.edu.sg/our-people/faculty/fong-hung-yee-joelle

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