SOCIAL SECURITY: Singapore system starts to creak
By John Burton in Singapore, Financial Times
Published: Mar 14, 2007
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.
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