Singapore’s social security system starts to creak

March 15, 2007
Singapore Democrats

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John Burton
Financial Times
14 Mar 07

Singapore would appear well-prepared to tackle the problems of an ageing population. Along with Japan and Malaysia, it is one of the few Asian countries that can claim near-universal coverage for its pension scheme. Its medical facilities are excellent and housing for the elderly is available.

Moreover, economists have lauded Singapore for avoiding the pitfalls of erecting an expensive welfare state that diverts government funds from economic development. Social security is largely financed by mandatory savings accounts for each citizen. The requirement that workers must contribute to personal savings accounts has meant that Singapore has among the highest saving and investment rates in the world.

The welfare-light practices of Singapore and Hong Kong are often favourably contrasted with those of Japan,

South Korea and Taiwan, which have fully-fledged social welfare systems. Public spending in these countries is bound to rise as the population ages, putting pressure on government budgets and increasing the tax burden.

But doubts are emerging about whether Singapore can stick to its current policies or be forced to extend the social safety net. The outcome could determine policies in the rest of Asia, including China, which has studied the Singapore model of combining basic state support with private initiatives.

Singapore, along with Hong Kong, South Korea and Japan, will have one of Asia’s oldest populations by 2030, with a quarter of people above 65 years of age. There will be only 2.2 workers to support each elderly person, compared with 10 workers in 2000, the result of a rapidly falling birth rate and increased life expectancy.

The reduced earning power of the elderly is already leading to a growing income gap between rich and poor, with Singapore ranked 105th in the world in terms of income equality, based on

United Nations data. That compares with the 2nd place ranking for Japan and 25th for South Korea with their stronger social safety nets.

Moreover, the mandatory savings programme, the Central Provident Fund (CPF), used to finance pensions and healthcare is showing signs of weakness. The goal of the CPF was to provide 40 per cent of pre-retirement income, with workers and employers each contributing 20 per cent of a person’s salary to the individual accounts. But the employer contribution has gradually been reduced to 13 per cent in an effort to attract more foreign direct investment, although it will be raised to 14.5 per cent this year. In addition, the use of each individual’s CPF account has been extended over the years to include healthcare costs and mortgage payments, mainly for apartments in subsidised public housing projects where 85 per cent of the population lives.

Many of the elderly who contributed to the CPF between the early 1960s and 1970s, when wages were low, are finding it difficult to keep up with the rising cost of living. Many have used their CPF savings, with government encouragement, to buy public housing apartments. But the value of these has fallen by 30 per cent since the mid-1990s, making it difficult for retirees to recoup fully their investment.

Critics say the problems expose a weakness of the Singapore system, which places a disporportionate burden on individuals unlike more developed welfare states where the risks are pooled.

Singapore’s recognition of the challenge it faces has been underscored with the recent creation of a ministerial committee on ageing. The government has signalled that it prefers finding solutions based on market forces. Its only concession to increased public spending is the establishment of a programme, known as Workfare, that provides state subsidies to low-income workers with most of the funds transferred to the CPF instead of being given directly to them to spend immediately.

Workfare is also linked togovernment efforts to encourage the elderly to work longer instead of taking advantage of the current retirement age of 62. Lim Boon Heng, who heads the ageing committee, says Singapore wants to achieve 65 per cent employment for people aged between 55 and 64 in the next five years.

But two-thirds of older workers are now employed in low-paying jobs, as cleaners, clerical workers or machine operators, according to Singapore’s manpower ministry. In addition, Singapore wants to enhance the traditional Asian system of family support. Children are already legally responsible for the support of elderly parents. The government is now looking at providing home support services for families that care for older people at home.

Singapore hopes to reverse the elderly dependency ratio by attracting younger foreign workers, particularly from China and India, with the government predicting that the population could increase from 4.5m to 6.5m in the next 20 years. A recent study bv the

International Monetary Fund suggested that many of Singapore’s policies could be adopted by other Asian countries.

But it also warned that other countries with less rigid regulatory systems may have problems managing state pension funds similar to the CPF because they could be subject to abuse by officials in financing risky investments. Moreover, Singapore’s long tradition of employing large number of foreigners may be difficult to copy in other more conservative and homogeneous Asian societies.