Quora Answer: Can a Payroll Tax with Similar Benefits Replace the CPF?

The following is my answer to a Quora question: “What makes compulsory savings, like in Singapore, different from the payroll tax?  Why not just have a payroll tax for CPF benefits?” 

The Central Provident Fund is not a tax.  It is, as you have said, a sort of compulsory savings programme.  The intent of the CPF is manifold, since it is broken up into three accounts per person: Ordinary Account, Special Account, and the Medisave. 

Firstly, It gives people who contribute to the economy, a stake in it.  The funds from the CPF are taken out of income, discretionary spending, and may only be used for buying property or investments.  This helps the long-term growth of the economy, and the gives people a chance to accumulate long-term wealth, so that each successive generation is on better financial standing. 

Secondly, for Singaporeans especially, it is a means to encourage property ownership.  This ties into the first reason. 

Thirdly, the Medisave component is a means to manage healthcare costs, and spread it across the demographic.  Younger people overpay so that older people are subsidised.  The premiums are used to purchase Integrated Shield hospitalisation plans.  The MediShield life component is a form of universal healthcare. 

From a government perspective, the funds in the CPF are a source of cheap funds to borrowed against.  A portion of the returns are passed back into the CPF – 2.5% per annum for the Ordinary Account, and 4% for the Special Account.  The excess return goes into the national coffers. 

A payroll tax is a tax on income earned.  Generally, it disproportionately impacts people on the lower end of the income scale even when it is gradated since it puts a limitation on available income with no immediate gain to the tax payer.  A tax is revenue for the government.  There is no scope for it to be applied in the same manner as the CPF, since the funds do not belong to the tax payer. Any benefits, as per the CPF, is government subsidy, and a cost on the government.  In contrast, CPF monies still belong to the contributor.  The funds are helped in trust, for a specific period, but may be used within a specific scope.