Ethos Issue 1, October 2006

Ageing and Public Policy - A Global Perspective
Andrew Kwok

Social Security and Pensions
Pension systems were originally designed to alleviate the elderly poverty that became rampant after the Second World War. They have since become a financial burden and a political minefield for many governments, particularly in the West. Pension entitlement is typically pegged to price inflation, but as growth in wages outpaced inflation over the past decade, an uncomfortably large gap between workers’ last drawn pay and their entitlements has emerged, leading to much discontent. Consequently, these governments have become pressured on all fronts, having to finance a rapidly increasing pool of pensioners from a shrinking tax base.

Under the fiscal strain, many pension systems are gradually moving away from the pay-as-you-go model, where contributions by workers go directly to pay benefits to pensioners, to a funded or savings plan model, where contributions are invested in assets which pay for their own retirement benefits, or are notionally recorded, to entitle them to their contributed sums plus some interest upon retirement.

Yet the pace of reform is slow. Few pension programmes in Organisation for Economic Co-operation and Development (OECD) countries have been radically overhauled in favour of private or fully-funded schemes. Measures to reduce benefits or raise the retirement age are also politically unpopular. Tweaks and half-measures suggest that the root problems will linger. As a result of this historical baggage, the problem of pension reform is likely to continue to dominate the discourse on population ageing worldwide.

Founded on a social ethic of self-reliance, Singapore’s Central Provident Fund (CPF) is a compulsory savings scheme, fully funded by workers’ and employers’ contributions to individual accounts. It is immune to many of the pressures faced by pension systems elsewhere. However, in a bid to lower labour costs, legislated contribution rates to the fund have declined. From a peak of 50%, contribution rates have settled to their present levels of 33%. While the Government has maintained CPF as the primary instrument for retirement financing, it has also encouraged citizens to be more proactive in personal financial planning, and continued to emphasise the family as a source of support in retirement.

Individuals tend to be poor long-term planners. While 61% of working Singaporeans are seriously concerned that they might not have enough money to last them through their retirement years, only one in 10 surveyed actively save for retirement.¹³ One safeguard introduced to address this is the 1987 CPF Minimum Sum Scheme. Currently set at S$94,600, this minimum sum will be raised gradually to S$120,000 (in 2003 dollars) in 2013; it cannot be withdrawn from members’ accounts until retirement. This sum ensures a monthly payout of S$711, which is roughly 21% of the monthly income of an average earner,¹⁴ for 20 years from retirement at age 62. In comparison, average earners in OECD countries can expect a post-tax pension of about 70% of their earnings after tax.¹⁵ Nevertheless, only four in 10 Singaporeans aged 55 had the mandatory nest egg in their CPF accounts in 2005.¹⁶

The CPF differs from pensions in one other aspect: basic pension schemes provide all retirees with a flat rate payout, as long as they have worked for a specified number of years. As a further social safety net, targeted schemes pay a higher benefit to poorer pensioners and reduced benefits to better-off retirees. The CPF system, while self-sustaining and generally equitable across different generations, does not redistribute income in this way. Accordingly, it has limited merit in forestalling elderly poverty, since lower-income earners are less able to accumulate as much savings.

As more people move up the population pyramid, higher expectations and practical needs will fuel greater demand for instruments that complement and make up for the inadequacies of the CPF. As other nations have found, it may be the Government, rather than fragmented private sector services, that is in the best position to operate or facilitate such programmes with sufficient economies of scale.

Supporting Seniors: A National Approach
Many countries have found it useful to adopt a whole-of-government approach to supporting an increasingly senior population, whose needs straddle several sectors. The "National Strategy for an Ageing Australia" is reportedly exemplary: its comprehensive mix of policies, a result of a wide participative process, addresses the multi-faceted concerns of its senior citizens.¹⁷ Like Australia, New Zealand has a dedicated minister overseeing the welfare of seniors. That such resources are invested in the public services reflects the growing emphasis and importance accorded to this sector of the electorate.

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