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Precautionary Savings And Cpf Contributions In The Presence Of A Borrowing Constraint

Author

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  • CHERN WOON LAM

    (National University of Singapore, Singapore)

  • BASANT K. KAPUR

    (National University of Singapore, Singapore)

Abstract

The neutrality result that total private savings (voluntary and compulsory) are invariant to a change in the employee's CPF contribution rate has been derived by Hoon (1991) and Liew (2000), both of whom assumed perfect capital markets. It was shown by Lim (1994) to hold in a model with borrowing constraints as long as the latter are nonbinding. In this article, we integrate the phenomena of income uncertainty (from Liew) and borrowing constraints (from Lim) in a stochastic, intertemporal optimisation model. We demonstrate the existence of precautionary savings and, contrary to received thinking, the nonneutrality result of total savings to the employee's CPF contribution rate even for workers with positive voluntary savings. The broader implications of this result are also discussed.

Suggested Citation

  • Chern Woon Lam & Basant K. Kapur, 2002. "Precautionary Savings And Cpf Contributions In The Presence Of A Borrowing Constraint," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 47(01), pages 129-152.
    • Handle: RePEc:wsi:serxxx:v:47:y:2002:i:01:n:s0217590802000432
    DOI: 10.1142/S0217590802000432
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