|Strains in the pension fund hint at broader problems
August 23, 2014
EVERY year, soon after Singapore’s national day on August 9th, Singapore’s prime minister gives a state-of-the-nation address. On August 17th Lee Hsien Loong, the prime minister and son of modern Singapore’s founding father, Lee Kuan Yew, delivered his 11th such speech in his genial, if slightly mawkish, style. As usual, he offered plenty of crowd-pleasing goodies: gardens and a science centre for western Singapore; a new government department to co-ordinate public services; praise for Singapore’s “pioneer generation”. But Mr Lee also unveiled two significant changes in pensions policy that hint at some deeper systemic problems.
The first is a “Silver Support Scheme”, under which government will top up some payouts from Singapore’s retirement scheme. From the time they start working, Singaporeans and their employers are obliged to contribute a share of their monthly salary (starting at 20% for employees and 16% for employers) to the Central Provident Fund (CPF). Money in the CPF is intended to cover part of Singaporeans’ health-care, housing and retirement needs. As Mr Lee noted, the CPF rewards personal responsibility: “The more you work, the more you have in retirement,” he said. “Your retirement savings are for you, not someone else.” There is, in other words, no redistribution among Singaporeans paying into the fund.
In an economy with full employment and a favourable ratio of working-age to elderly people, a provident fund works well. But as life expectancy and living costs in Singapore have both risen, so has income inequality. The CPF has begun to look inadequate for many Singaporeans. A survey released shortly before Mr Lee gave his speech found that nearly half those questioned believed that their CPF contributions would be insufficient to tide them over during their retirement. The Silver Support Scheme—along with a broadening of Singapore’s Lease Buyback Scheme, under which the government buys back the remaining years of leases on flats—amounts to a tacit acknowledgment that a CPF which involves no redistribution at all no longer works for a sizeable minority of its citizens.
The CPF has also come under scrutiny on two other fronts: transparency in how funds are invested; and restrictions on how contributors draw on their funds. Mr Lee said people will be able to withdraw a lump sum of their savings after the age of 65. It remains unclear, though, how much money the Silver Support Scheme will contribute and to whom. Beyond the details, Asia’s richest country is acknowledging that its social compact poorly serves the lowest earners. Officials used to dictating to citizens are working out how to respond to public pressure.