Singapore's planned economy has been the envy of many. Simon Pritchard looks at the holes in the pension safety net.

THROUGH much of the 1970s and 80s Singapore was held up as a shining example of how to run an enlightened social security system. While western nations faced spiralling pension liabilities Singapore's Central Provident Fund (CPF) emphasised self reliance with future pay-outs based on what contributors put in.

The system sits at the heart of the city-state's heavily planned economy, providing cheap funds for housing finance, medical care and grand offshore government investment schemes. Unfortunately it will pay out very little for a now retiring generation and, according to one of the world's leading experts on the subject, represents a case study in how not to manage social security.

This comes as Singapore attempts to transform from an up-scale screw-driver assembly centre to a "value-creating, knowledge- intensive economy". This is proving a wrench for a population that for 30 years was told to be professionally competent yet docile and a decade ago was promised a Swiss standard of living by the millennium.

Plenty of countries would gladly trade Singapore's problems for their own. There can be no doubting the broad success of its development path, but cautionary tales are increasingly emerging from what once looked a glittering growth paradigm.

The bottom line is that the average retiree today has enough cash to fund only a few years of living expenses. In a city with minimal welfare provisions only 44 per cent of people in a recent survey thought their state-mandated savings was sufficient for old-age support. Possibly seeing an emerging old-age lobby group, Senior Minister Lee Kuan Yew has mooted electoral changes that would effectively disenfranchise the retired generation.

The impact of low CPF balances could threaten Singapore's carefully constructed social contract between business, workers and the state. It could also hinder government plans for a more entrepreneurial economy that embraces opportunity and risk.

Mukul Asher, professor of public policy at the National University of Singapore, is a sought-after expert in social security systems and says, ironically, the CPF may hinder Singapore's embrace of new industries.

"In the new economy, failure is part of the learning curve. To encourage that risk-taking appetite it may be necessary to have some mechanism, not necessarily very elaborate, that allows society to pool risk and offer a basic safety net," he says.

Ministers are acutely aware of the CPF problem and sensitive to the question of whether it could undermine social harmony. Their refrain is that Singaporeans are "asset rich" since most bought government-built housing with their savings. Ever the social engineers, their answer is for retirees to sell their unnecessarily large flats and buy smaller ones.

Lim Boon Heng, cabinet minister and secretary-general of the National Trade Unions Congress, is at the sharp end of the successful tripartite relationship.

He argues that workers understand the need to restructure and sees no need to soften the blow with direct social security pay-outs.

"The kind of welfare we provide should not destroy the incentive to work. Our welfare has been about enhancing the efforts of Singaporeans. Look at housing. I don't think they've done too badly," he said.

The state-run but individually funded system of housing, medical care and social security has indeed served the population well. The problem is that it has not left much cash to fund the salad days of a rapidly ageing workforce.

In recent years workers have paid 20 per cent of their income, and employers a further 20 per cent, to the CPF. It guarantees a minimum 2.5 per cent interest rate or a weighting based on long- and short- term bank deposit rates. To the chagrin of many, the employers contribution was cut to 10 per cent in 1998 and only recently increased to 12.5 per cent in a bid to make firms more competitive.

Individuals can draw down their accounts to make 20 per cent downpayments on government-built flats and obtain mortgages at a small premium to the floating rate paid on CPF accounts. In addition, sub-accounts are maintained to cover medical needs and other contingencies.

To ensure savings for retirement, a minimum S$55,000 balance must be sustained before holders are eligible to draw cash. That sum is scheduled to rise to S$85,000 by 2003 in tandem with a higher retirement age progressively increasing from 55 to 67. By December 31 last year, account holders held S$89.4 billion.

For those who appreciate elegantly designed systems, they do not come more encompassing than Singapore's. Using their CPF savings about 85 per cent of Singaporeans live in owner-occupier homes. Since 1964 the Housing Development Board (HDB) has sold about 800,000 units of a public stock of 870,000.

HDB chief executive Tan Guong Ching says this was integral to balanced development.

"When we started building rental housing we soon found that tenants do not make good residents. They do not look after their flats . . . [or] their neighbourhoods. We made a conscious decision in 1964 to sell the flats so we began our home ownership scheme, not to any great success. When we made CPF available in 1968 home ownership really took off."

Retirement under-funding has unfolded because of low real returns (estimated to be zero in 1987-97) on CPF balances despite moves to encourage investment in authorised private-sector funds. Mr Asher estimates that the median balance for active contributors at the end of 1997 was S$50,000 to S$60,000. At the average wage, that provides two years of retirement income.

This does not account for the fact that many retirees have far smaller balances than the average. His prime criticism is that such low returns have been achieved despite contributions that in recent years have averaged 40 per cent of income.

Frequent comparisons with Chile's similar system are erroneous, he says, since that country offers a `minimum replacement rate' which the government tops up for the least fortunate.

Singapore faces an acute but hardly unique ageing problem - lower fertility rates and greater life expectancy are producing the same trend in all advanced countries. What makes it special is the role the state plays in administering the funds.

The CPF is an administrative board whose funds are deposited with the Monetary Authority of Singapore, which issues it non-tradeable bonds. That money is then secretly invested by bodies like the Government of Singapore Investment Corp and Temasek Holdings.

The Singapore Democratic Party (SDP) intends to make CPF under- funding a popular issue. Its official newspaper runs glaring headlines rarely seen in Singapore such as "PAP (Peoples Action Party) government wasted savings of its citizens" and "Where is our CPF money?".

The SDP's vice-chairman Gandhi Ambalam says: "We are demanding transparency, accountability and good governance."

The government, of course, has a plan. Mr Lim says Singaporeans `over-consume' housing and the logical move for older couples is to mortgage their house to a bank in return for an annuity or trade down to a smaller unit.

Mr Tan says elderly couples in three-bedroom apartments can trade down to two-bedroom flats and two-bedroom holders to studios. That way they can raise S$80,000 to S$100,000.

"Their children have all grown up so it doesn't make sense for an elderly couple to stay in a two or three-bedroom apartment."

There is, of course, a problem. Within 40 years the number of people over 60 will rise from 9 per cent of the population to 32 per cent. Not only are these wasting leasehold assets in old estates but there is the small point of who will buy them with demographics working against the plan.