Oct 30, 2006
Time to weave a stronger net
We need to do two things: redistribute economic gains better, and
put in place a form of social insurance
By For The Straits Times, Eddie Lee
THE tragic suicide of Mr Tan Jee Suan, 46, and subsequent
revelations of his family's plight prompted their Member of
Parliament Ho Geok Choo to ask: 'The Government has all these
(social assistance) packages in place, but why are people missing
out on them?'
There are 51 schemes available to help Singaporeans in need. But
overall, social transfers, including public health expenditure,
amount to just about 2 per cent of gross domestic product.
This compares with about 13 per cent in the US and an average of 25
per cent in Scandinavian countries.
Welfarism is a dirty word in Singapore. Why we have adopted such a
harsh approach rests on the belief that welfarism breeds dependency
and requires such a high rate of taxation that it would ultimately
undermine a country's economic competitiveness.
But just how unmotivated will our workforce become if we build a
better social safety net? How uncompetitive our economy? These
cannot be determined by ideology. They are empirical issues.
So what is the evidence?
Consider the Scandinavian countries. They spend more than any other
region in the world on welfare and, as a result, have top marginal
personal income tax rates that rise to as high as 50 per
cent.
Still, the latest 2006 World Economic Forum's global
competitiveness survey ranks three Scandinavian economies -
Finland, Sweden and Denmark - as more competitive than
Singapore.
How can that be?
Mr Augusto Lopez-Claros, chief economist and director of the World
Economic Forum's global competitiveness programme, argues that, in
terms of competitiveness, what matters is how well government
revenue is spent rather than the overall tax burden itself.
The Scandinavian countries, he contends, have 'high levels of
government tax revenue (that) deliver world-class educational
establishments, an extensive safety net and a highly motivated and
skilled labour force'.
The most remarkable feature of their economies is the low rate of
poverty. Using the common measure of poverty as less than 50 per
cent of median household income, the poor in Sweden and Finland
account for around 6 per cent of households, compared with 25 per
cent of Singaporean households living on less than half the median
income.
The Nordic countries are not without their faults, of course. They
have higher unemployment rates (averaging 5.5 per cent) than we do
(3.1 per cent). And their super-generous welfare systems are
probably too costly to carry in the long run, given their ageing
populations.
This seems to be the message in Sweden, where a centre-right
alliance led by Moderate Party leader Fredrik Reinfeldt recently
edged out 12 years of Social Democrat rule.
Still, Mr Reinfeldt's plan to stimulate job growth is through
fine-tuning, not dismantling, the welfare system. He argues that
changes are necessary now to preserve the welfare state for the
future.
So while the Nordic experience points to the limits of providing an
excessive welfare state, it also suggests that we can build a
better social safety net without sinking our economic
competitiveness.
This is particularly urgent, as our ageing population will face
more hazards ahead.
A recent US study gives some clues. Labour economist Richard
Johnson, of the Urban Institute in Washington, found that seven in
10 adults aged 51 to 61 in 1992 developed a health problem, lost a
spouse to death or divorce or became unemployed during the 10 years
ending in 2002.
Note that all these took place even as the United States enjoyed
its longest economic expansion in history.
With our baby boomer cohort hitting a median age of 50 this year,
and only one in four working Singaporeans able to meet the CPF
minimum sum requirement at age 55, it is not just the bottom-rung
workers who are at risk, but the average Singaporean too.
These sobering statistics should ring an alarm bell - our
philosophy of self-reliance based on individual savings accounts
and family support is simply inadequate for many households to
withstand an economic crisis.
Mr Tan Jee Suan and his wife have a total of 18 siblings, but the
fact of the matter is, poor families tend to have poor relatives.
What of future generations with reduced family network?
We need to do two things better. First, we need to re-distribute
economic gains better. This is what social assistance schemes
should aim at, rather than being offered reluctantly as a
last-resort form of state charity, which is the case now.
We should recognise that while it is important to retain our
flexible labour market policies, the benefits derived are being
distributed unevenly.
Technology increasingly creates a 'winner-takes-all' effect. TV,
for example, rendered the talent of many local performers obsolete
and, as a popular song goes, 'video killed the radio star'.
Many other jobs will go in the future. Sharing the gains and pains
of opportunities from new technology will ease the job transitions
required in a dynamic economy.
Second, we need to provide better protection of living standards.
This requires social insurance. And it should be comprehensive -
covering not just health, but unemployment and retirement
needs.
Insurance, together with the power of the state to require
participation, can transform individual misfortunes into social
costs that are distributed broadly across the population.
For example, people saving for their retirement must save enough to
sustain themselves in case they live a long life or incur huge
health-care costs. But individuals can achieve the same goal with a
smaller amount of savings, if everyone pooled their funds. Each
person then needs to contribute just enough to support the average
life and health expectancy of the group.
The stakes are high, especially in the face of our rapidly ageing
population. If we prepare adequately for the immense challenges
ahead, we could save many from destitution in their old age.
The writer is a former Straits Times economics reporter.