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inflow of funds in the early years. This would gradually diminish over time with the eventual position depending on demographic factors and the rate of increase of money
incomes.
23.
In the early years, the economic effects of a CPF would be dominated by its effect on the behaviour of contributors and the uses to which the accumulated funds were put. It seems unlikely that employee contributions would be financed wholly, or even largely, by a reduction in personal savings. It is therefore likely that there would be a drop in consumption by employees, at least initially, with an adverse effect on consumption-related businesses and levels of employment in such businesses. Once the CP F was operating more nearly in balance, however, this effect might well be reversed because it is likely that beneficiaries, being older and on lower
incomes, would have a higher propensity to consume out of income than contributors.
24.
The introduction of a CP F would have a redistributive effect similar to
to that of an increase in tax, although in this
in this case resources would be reallocated from employers and employees to the Fund rather than to Government. In 1985. the direct earnings of employees, are estimated to have been of the order of $100 billion. On the basis, therefore, of a combined contribution rate of (for example) 10%, and assuming maximum coverage for the scheme, employees and employers would each have contributed some $5 billion to the CPF. This sum is roughly equivalent to the yield of salaries tax and to over 50% of the yield of profits tax.
25.
For the employee, the effect of introducing a CPF with this rate of contribution would thus be the same as a 5 percentage point increase in salaries tax, with extension of the tax to at least a million additional employees. For the employer, the effect would be roughly the same as an increase of 50% in the rate of profits tax. However, given that there is no simple relationship between payroll
payroll and the level of taxable profits, the impact on individual employers would vary widely, placing the heaviest burden upon firms with low profitability and a high payroll. A likely effect of the additional burden u pon employers and employees would be pressure for compensatory reductions in tax rates.
26.
As regards the effects on the economy of the accumulated funds, this would depend on the use to which they were put. If, as discussed earlier, they were regarded as a source of funds enabling the Government run a deficit, the critical question would be how productively the funds were used. If they were used to
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