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ABSTRACT
Asia is rapidly ageing and there is a need for governments to adjust social security expenditures accordingly to facilitate better management of socioeconomic shocks by the individual/household and society as a whole. This article examines the ageing and retirement arrangements in Singapore and argues that they provide a very limited ability for the individual/household to mitigate the effects of an adverse socioeconomic shock. A major contributor to this is the limited social risk pooling resulting from a continued focus on mandatory savings to a defined-contribution scheme for ageing and retirement-financing needs, age and gender biases in existing policy designs, and low real rates of return to mandatory savings balances. More fundamental reforms are needed if Singapore is to be able to better manage the impact of adverse socioeconomic shocks. This includes introducing a budget-financed universal social pension, and a realignment of the mandated returns to the contributions and balances under existing retirement financing arrangements. Otherwise, there is potential for socially-destabilizing and -detrimental outcomes to emerge in the medium- to longer-term.
Acknowledgements
The authors are grateful for comments from the Editor, an anonymous referee, and seminar participants at the University of Hong Kong which improved the clarity and exposition of the article.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 “Social security” and “social protection” are used as synonymous in this article for intuitive ease and simplicity.
2 In a defined-contribution (DC) scheme, the individual, employer, or both make regular contributions to a retirement account and the benefit level which the individual receives following retirement is calculated from the sum of the accumulated balances and investment returns of the balances.
3 The issue of adequacy was previously highlighted in a ministerial report which stated that a large amount of savings in the CPF is “ … not a guarantee of ample resources in extreme old age, even for those who have behaved responsibly … ” (Lee Citation1999, 82). However, this does not appear to have been sufficiently recognized or acknowledged.
4 See “The Singapore Tax System” at the Inland Revenue Authority of Singapore: https://www.iras.gov.sg/IRASHome/About-Us/Taxes-in-Singapore/The-Singapore-Tax-System/.
5 Baldwin (Citation2018) provides an intuitive discussion of the former. On the latter, see “EU governments back retaliatory tariffs on US imports,” Financial Times, June 14, 2018. https://www.ft.com/content/a5aa7e7e-6fea-11e8-852d-d8b934ff5ffa.
6 http://stats.mom.gov.sg/Pages/Labour-Force-Summary-Table.aspx [accessed May 13, 2019].
7 This was popularized by Young (Citation1992) and Krugman (Citation1994) but it was subsequently acknowledged by Singapore's policymakers that the city state relied more on increasing factor inputs than actual technological progress and productivity for growth. See “Singapore's economic model uncovered,” Financial Times, March 24, 2015. https://www.ft.com/content/3fcb2d4c-a807-3bda-a329-6bcf9e3b5ee2.
8 The value of the GINI coefficient ranges from 0 to 1. A higher value indicates greater inequality of distribution.
9 Calculated from Income Components Of GDP At Current Prices, Annual, Department of Statistics Singapore. https://www.singstat.gov.sg/find-data/search-by-theme/economy/national-accounts/latest-data [accessed May 13, 2019].
10 This contrasts with comparable high-income economies, e.g. the United Kingdom (McGuinness and Harari Citation2019), where household surveys typically include all income sources, including from investments, pensions, etc.
11 “Singapore's fling with global stars side-lines local talent,” Times Higher Education, August 17, 2017. https://www.timeshighereducation.com/opinion/singapores-fling-global-stars-sidelines-local-talent.
12 202,254 permanent resident statuses and 57,775 citizenships were granted from 2006 to 2009. This is compared to 207,405 permanent resident statuses and 139,065 citizenships granted between 2010 and 2016 (Strategy Group Citation2017, Chart 13).
13 This may lead to greater savings on aggregate but does not necessarily mean greater adequacy to the individual. The median income per household member was SGD 33,504 in 2018 (Department of Statistics Citation2019), or 38.8% of the corresponding per capita GDP of SGD 86.383. This suggests there is considerable variation in the distribution of wage income. The variation in total income, i.e. including capital income, will be even greater.
14 The ElderShield scheme is proposed to be superseded by a mandatory replacement, CareShield Life, while retaining the current age-based premiums structure See “ElderShield to be renamed CareShield Life with higher, lifetime pay-outs from 2020,” Today, July 01, 2018. https://www.todayonline.com/singapore/eldershield-be-renamed-careshield-life-higher-and-lifetime-payouts-kick-2020.
15 Some attempt has been made to reduce the premium costs with the introduction of the Pioneer Generation Package and the Merdeka Generation Package in the 2014 and 2019 budgets which provided subsidies of MediShield Life premiums from 5% to 60% depending on the age cohort of the individual. However, coverage only applies to citizens born prior to 1960, and not all retirees.
16 In 2016, the average life expectancy for women at age 65 in Singapore is 22.4 and 19.0 years for men.
17 “Ageing in institutions: Choices and challenges,” Channel NewsAsia, December 01, 2016. https://www.channelnewsasia.com/news/singapore/ageing-in-institutions-choices-and-challenges-7709112.
18 “Singapore Budget 2018: Does Singapore care about its caregivers?” Commentary, February 26, 2018. https://www.aware.org.sg/2018/02/singapore-budget-2018-does-singapore-care-about-its-caregivers/.
19 https://data.gov.sg/dataset/births-and-fertility-annual?resource_id=f63d5535-f094-42d0-b7ff-dbcbccb97928 [Accessed May 13, 2019].
20 “CPFIS system ‘hasn't worked out’: DPM Tharman,” The Edge Singapore, September 14, 2017. https://www.theedgesingapore.com/article/cpfis-system-%E2%80%98hasn%E2%80%99t-worked-out%E2%80%99-dpm-tharman.
21 More recent data for 2009–2016 suggests annual real returns to be about 1.7% a year – a doubling period still of over 40 years.
22 The public sector's justification of this is the need to prevent overconsumption, particularly of healthcare. See “5% co-payment for new Integrated Shield Plan riders to help address over-consumption of medical services,” Channel NewsAsia, March 07, 2018. https://www.channelnewsasia.com/news/singapore/5-per-cent-co-payment-new-integrated-shield-riders-10021398.
23 An income supplementary scheme, the Silver Support Scheme, was introduced in the 2016 budget for the elderly who have low CPF balances. While welcome, the contribution of the scheme towards better risk management is likely to be token as only the lowest 3 income deciles of elderly are eligible.
24 An impending increase of the Goods and Services Tax (GST) has been announced in the 2018 Singapore Budget on the basis that it is needed to finance increasing social expenditures as a result of population ageing. This is notwithstanding that the GST is inherently regressive and increases will accentuate existing income and wealth inequalities. “Looming GST hike a ‘prudent and responsible long-term approach’: PM Lee,” Channel NewsAsia, March 04, 2018. https://www.channelnewsasia.com/news/singapore/looming-gst-hike-a-prudent-and-responsible-long-term-approach-pm-10012092.
25 The trend has continued with the 2019 Singapore Budget announcing the realized surplus for 2017 to be SGD 10.9 billion, or 2.3% of GDP. Adjusting the budget balance as per Kwan, Bali, and Asher (Citation2016, 416), the fiscal surplus is nearer 6% of GDP.
26 The difference between the CPF guaranteed, i.e. risk-free, nominal rate of return and the return that the public sector obtains from its use of CPF balances may be interpreted as the risk premium, or “value,” required by the public sector for the guarantee (Lachance and Mitchell Citation2003). The key issue pertains to the size of the risk premium that is extracted. A strong case can be made for the argument that a role of the government in managing the CPF is to cushion macroeconomic shocks for the individual, implying that the public sector's premium should be very low. A further discussion of this is beyond the current scope of this article but, presently, GIC's return of 3.7% from its management of CPF balances and the return of around 1.7% that is credited to members suggests that the risk premium extracted is likely too high.
27 The introduction of a budget-financed social pension while also benchmarking CPF returns against commercial portfolios may seem contradictory as part of the investment returns by GIC Private Limited using CPF balances are included into the budget. However, these are more likely complementary as greater accumulation in members’ balances potentially reduces the size (and fiscal burden) of the social pension whose main intention is for poverty alleviation and relief.
Additional information
Notes on contributors
Chang Yee Kwan
Chang Yee Kwan is an Assistant Professor in Economics at the School of Economics and Management, Xiamen University Malaysia, and Non-Resident Fellow at the Center for Southeast Asian Studies, National Chengchi University.
Mukul G. Asher
Mukul G. Asher is an Independent Consultant in Public Financial Management and Social Security Reforms in Singapore.