Professor Tan Eng Chye, Deputy President and Provost, NUS
Professor Brenda Yeoh, Dean, FASS
Mr Gerard Ee
Dr S Vasoo, Chairman, Ee Peng Liang Memorial Fund
Distinguished guests
Ladies and gentlemen
Thank you for inviting me to this forum and allowing me to share my thoughts on Singapore’s social security system and how we are gearing up to meet the challenges of an ageing population.
2 I believe we are all familiar with the demographic trends. Singapore is ageing rapidly. By 2030, 1 in 5 of us will be above 65 years old. Our old-age support ratio, or the number of residents aged 15 to 64 years per elderly resident, has decreased from 11.8 in 1990 to 8.3 in 2009.
3 Hence, the urgency to make adjustments to our system to ensure financial and social security in old age. We need to take a long-term view and plan ahead. We have four pillars to ensure our social security. They are the Central Provident Fund for retirement savings, home ownership, the 3Ms for healthcare and Workfare. Fortunately, we start off in a good position.
Central Provident Fund
4 First, our Central Provident Fund forms the bedrock of our social security system. There are many features of CPF that makes it the right model for Singapore.
5 Since 1955, we have established a fully-funded, defined contribution scheme. With periodic reviews and adjustments to contribution rates and the Minimum Sum, it has enabled the scheme to weather changes in demographic trends and increasing longevity, as well as to meet higher costs of medical care and retirement expenses. It is based on the principle that every generation must earn and save enough for its entire lifecycle. This is the only way to ensure a sustainable safety net for the future given the demographics confronting us. All “pay-as-you-go” systems in ageing societies will ultimately go bankrupt or saddle future generations with unsustainable levels of taxation. There will of course, be exceptions for the very low income who will need additional help. However, this rule of earning and saving enough for a lifetime must apply for the vast majority of us. This also means that Singaporeans can be assured that the CPF system is sustainable.
6 Some people claim that “pay-as-you-go” defined benefit schemes provide better protection against inflation and are more redistributive in nature. These seductive political Ponzi schemes may work well initially for younger societies when inflow of funds exceeds pay-outs. With ageing populations and increasing old-age dependency ratio, fiscal pressures on these countries are mounting. For example, taxes from the younger workers would need to be increased in order to pay out to the current beneficiaries. Alternatively, benefits need to be cut. Both of these are politically unpalatable, and often lead to political paralysis.
7 In terms of coverage, CPF is a mandatory scheme for all Singaporeans who are working. The majority of the population will set aside some savings for their own retirement needs. We allow transfers from members to their children, spouses, parents and grandparents. In fact, there are incentives in place to encourage family members to help one another, to top up the accounts of those who do not work or have not accrued adequate savings of their own. This is in line with our philosophy of family care and support.
8 CPF savings are portable. Contributions are made to individual accounts, which allow greater labour mobility. In this way, more efficiency is generated than when workers are tied down by pension plans. Some have suggested that there is a lack of company-sponsored pension plans in Singapore to augment our retirement adequacy. However, besides these “Section 5 Funds”, we have the Supplementary Retirement Scheme (SRS), which also provides tax incentives to encourage individuals to save for retirement, over and above CPF savings. For many Singaporeans, CPF is still the mainstay.
9 CPF returns are risk-free. Our CPF balances are invested in government bonds and in advanced deposits with the Monetary Authority of Singapore (MAS). The CPF floor rate of 2.5% on all accounts is guaranteed by legislation. Additionally, until the end of this year, the Special and Medisave Accounts as well as retirement monies continue to enjoy a floor rate of 4%. Since 2008, the interest rates for Special, Medisave and Retirement Accounts are to be pegged to the 12-month average yield of the 10-year Singapore Government Securities plus 1%. This is based on the principle that CPF interest rates be pegged to those in the financial markets, that is, to instruments of comparable risk and duration. This is because the government’s ability to pay interest on CPF balances will also depend on financial market conditions. For the scheme to remain sustainable, it should not become an interest rate subsidy scheme. In addition, the government pays an additional 1% on the first $60,000 of CPF monies to further improve one’s CPF returns. This will benefit proportionally more for those with lower CPF balances.
10 Other critics have said that the government has been using the CPF balances for investments by the Government of Singapore Investment Corporation (GIC). They say that GIC is earning much higher rates of returns, and yet, these are not paid to members. Some say this is an implicit tax on members. However, I must remind all that the returns of GIC and the CPF are not linked. Furthermore, GIC’s returns resulting from investments in the higher risk-class are not guaranteed, unlike CPF returns. As demonstrated in the recent economic recession, the returns on GIC’s investments have been adversely impacted, but CPF interest rates are shielded from the downsides. The government has taken over the liabilities of the CPF Board, which promises a risk-free rate to members. Most Singaporeans would not wish to expose their hard-earned retirement savings to market uncertainties and potential losses. Nonetheless, on this front, we have also been constantly reviewing and allowing Singaporeans some flexibility to invest part of their CPF savings for potentially higher returns, through the CPF Investment Scheme.
Pension Reforms around the World
11 Around the world, many countries have made or are making changes to their pension systems to ensure sustainability. There are three possibilities to improve the health of the pension systems. First, by encouraging people to work longer and retire later. Second, by contributing more to your pension while working. Third, by accepting a smaller pension after one retires. In the 16 OECD countries that undertook major reforms in the decade up to 2004, the effect was to cut lifetime pension benefits by an average of 22% for men and 25% for women. France, Germany, Italy and Portugal, for example, all substantially reduced benefits for future retirees. Many countries have raised their retirement ages and the corresponding pension age. They have also curtailed early retirement benefits. These are all difficult choices. This is why pension reform is such a politically difficult issue all over the world.
12 Other than Singapore, India and Malaysia, which have established provident funds, Hong Kong has since introduced its Mandatory Provident Fund in Dec 2000. The Hong Kong government has made it mandatory for employers to enroll its employees in the MPF. Both employers and employees would make regular contributions into privately managed MPF schemes. The UK will also introduce a national pension savings scheme in 2012. Called the National Employment Savings Trust, or NEST, all UK employees will automatically be enrolled unless they are members of an occupational pension scheme which has contribution rates above those of the new scheme. Contributions for NEST from employers, employees and government tax relief will be phased in and will reach 8% eventually.
13 While many countries are curtailing pension benefits and moving toward defined contribution plans, we still get calls for the Singapore government to introduce old-age pension benefits for all elderly. It is said that the government can afford to carve out a small percentage of our GDP or to utilize our Reserves for this purpose. I would caution against such benefits that engender an entitlement mentality. The CPF system is fair because each older person draws on what he has contributed over his working life. Nonetheless, to further help older Singaporeans, the government periodically tops up their CPF accounts where there are budget surpluses. For example, the Government just announced in this year’s budget, top-ups of $310million to the Medisave Accounts of 1.02 million Singaporeans aged above 50. Each would receive $200 to $500, with older ages receiving more. For those in need, we have also provided targeted social assistance through ComCare and our “Many Helping Hands”.
CPF Reforms
14 Pension reforms across the world attempt to improve on the various aspects: coverage, adequacy, financial sustainability, economic and administrative efficiency, and security of pension funds. Even with our CPF system, we have not remained stagnant. Our CPF scheme is continually being refined to improve on these various dimensions.
15 In 2009, we launched the CPF LIFE scheme. It introduced a deferred annuity that pools together part of our retirement savings to mitigate longevity risks. CPF LIFE provides an income for life, which supplements our own private savings and family support. It is an important improvement over the original Minimum Sum Scheme where payouts lasted about 20 years.
Home Ownership and Workfare Income Supplement Scheme
16 I have spoken at length about our key pillar of CPF as it forms the foundation. The subsequent pillars of housing, healthcare and Workfare, are in turn linked to the CPF system. Let me touch on housing and Workfare, before moving on to healthcare.
17 The second pillar of social security is our housing assets. Our CPF mechanism has a role to play in enabling our home ownership policy and meeting the aspirations of Singaporeans. Last year, 80% of new flat buyers use their CPF contributions to service their housing loan instalments completely. This means that they do not need any cash to service their flat purchases. This is unique to Singapore, and it explains our 89% home ownership rate in 2009 – one of the highest in the world. There are heavy government subsidies in the form of concessionary loans and housing grants. For example, first time flat buyers can receive up to $80,000 in housing subsidies, with more for the lower income[1]. Singaporeans also receive substantial subsidies through the various HDB upgrading programmes, so that the value of their ageing flats can be enhanced and monetized when needed.
18 Why is such a substantial part of government subsidies for Singaporeans channeled through the public housing system? This is to ensure that Singaporeans not only have a roof over their head, but also own an asset that appreciates over time in tandem with the growth of the country. This allows the majority of Singaporeans to share in the growth of the country. The HDB flat is also a hedge against inflation. When one gets old, this valuable asset can be monetized to pay for expenses in old age. For example, they may sublet a room or even their entire flat to earn rental income. Alternatively, they may unlock cash from their flat by right-sizing to a HDB Studio Apartment for the elderly. For the elderly living in two-room or three-room flats, the Government introduced the Lease Buyback Scheme in 2009 to provide a lifetime income stream while they age in place. Therefore, the HDB flat complements, rather than depletes, CPF savings in supporting retirement adequacy. Nonetheless, it is important that Singaporeans invest in housing prudently, so that they do not overstretch themselves financially and are forced to sell their flats prematurely.
19 The pillar of Workfare can be represented by the introduction of the Workfare Income Supplement in 2007. The WIS aims to increase income and savings for older workers and low-wage workers. It is a form of “negative income tax”. Instead of unemployment benefits and early retirement benefits, the government provides incentives through WIS to these targeted groups of workers on the premise of continued work and contributions to their CPF. The WIS complements the CPF changes made in 2007. For older workers, reduced employer contributions improve employability, while lower employee contributions increase take-home pay. These provide more incentives for older low-wage workers to work, and for employers to hire them. As announced in the Budget Speech, enhancements to the WIS have been made this year.
Healthcare and Long-Term Care
20 Let me now move on to the final pillar of healthcare. Besides heavy government subsidies which provide universal healthcare coverage, we have our 3Ms framework to help Singaporeans co-pay their healthcare bills. Built into our CPF system, Medisave is our mandatory savings for hospitalization needs. Medisave monies can also be used to purchase MediShield that provides basic coverage for catastrophic medical needs. CPF members can also purchase private insurance plans that are integrated with MediShield to increase their coverage over and above MediShield. This allows a better national risk-pool for MediShield and guards against ‘cherry picking’ of healthy lives by private insurers. In a similar fashion, ElderShield also allows Singaporeans to risk-pool against the financial risks of suffering from severe disability. ElderShield Supplements offered by private insurers allow policyholders to enhance benefits coverage.
21 Finally, Medifund provides the ultimate safety net for the needy who cannot afford to pay their medical bills despite government subsidies, Medisave and MediShield provisions. In effect, healthcare is affordable for all in Singapore and Singaporeans enjoy universal access to basic healthcare.
22 Moving forward, we are refining the 3Ms and ElderShield to prepare for an ageing population. A key concern here and in many other ageing countries is that of financing long-term care. Many countries have looked at the financing of long-term care, and have come up with different solutions. Some are still grappling to find a sustainable solution. For the individual, the cost of long-term care can add up in view of the long tail of care needs. Fiscal sustainability is a key consideration in designing our financing mechanisms.
23 Let me give some examples. Japan introduced a national insurance for long-term care in 2000. While it is structured as social insurance, it is financed by a combination of both contributions and general tax revenues in a “pay-as-you-go” system. However, since its introduction, Japan has experienced a surge in demand for paid care services. This was more pronounced at lower levels of acuity because of low barriers to entry. For example, a relatively ambulant elderly could consume costly preventive care services at home. For most care services, there is in effect only 10% co-payment from care recipients. Since all Japanese above 40 pay monthly premiums for the insurance, they expect to be entitled to these benefits. While the scheme claimed to relieve some of the burden on family caregivers, this has inevitably shifted the traditional responsibility of family caregiving to the government. The scheme has led to increased public expenditures, prompting the government to make further refinements in recent years.
24 In the Netherlands, there is also universal social insurance for long-term care. The system is also designed to be “pay-as-you-go”, with no reserves against future payments. Its principal source of revenue is an income-related premium. This annual premium was 12.15% of payroll in 2008. This was 21% higher than a decade earlier, so as to keep up with rising costs. Overall costs had increased from about €13billion in 1998 to €20billion in 2008. To control costs, the government has made the obligation of informal care provided by family members more explicit in determining the entitlement to care. Domestic help, which used to be covered by the insurance, was shifted to the local municipalities in a bid to relieve the fiscal pressure. The Dutch are reviewing their insurance system.
25 In the UK, while healthcare and skilled nursing care are provided by the National Health Service, other long-term care such as personal care is excluded. Long-term care is provided on a means-tested basis by local authorities and financed separately. Because of geographic disparities in benefits and eligibility, critics have referred to the system as the “postcode lottery”. The UK government has been studying the options to finance long-term care. However, the Brown government recently proposed a bill to guarantee free personal care at home to those who require the highest level of care. The cost is expected to be about £670million in the first year. This has come under sharp criticism from both Conservative and Labour MPs. There are concerns of supply-induced demand and escalating costs for both the government and local councils. The BBC reported that after free home care was introduced in Scotland in 2002, the number of claims went up by 36% within the first five years[2]. Hence, I think such moves must be considered very carefully.
26 Rather than using a blanket approach where everyone has to make contributions to keep the funding pool afloat and stake claims on what they deserve later on in life, our financing philosophy is guided by the principles of individual responsibility and targeted subsidies to assist the needy. It enables us to provide more help to those who need it the most. This prevents healthcare costs from spiraling out of control, and keeps our system sustainable and affordable.
27 Increasing long-term care costs will be an inevitable reality for Singapore. How do we find the solution? First, we have to identify who are likely to require long-term care. I believe the two large groups of elderly are those with dementia and those who suffered a stroke. Second, we have to determine the duration and level of care required. What are the true costs to support such care? Next, we then need to contemplate who should provide these services, who should pay and how to pay for them. Based on the probability of needing long-term care and the expected costs, we have to decide how much will be provided in government subsidies, how much one should set aside in Medisave and personal savings, and how much premiums to pay into ElderShield and other insurance schemes to supplement savings in times of need. Families would have to consider how much to rely on informal caregiving and how much to spend on buying services from the market. If we can help Singaporeans understand long-term care and how to finance such care, we can help them make informed decisions. The provision of long-term care services is currently dominated by voluntary welfare organizations with government subsidies for the lower-income. In time to come, the market should respond to the growing demand, and we may then see more commercial players in the sector. As a society, I think we are gaining greater understanding of our needs in old age. The government will continue to refine our 3Ms and ElderShield to better prepare Singaporeans for our long-term care needs.
Conclusion
28 The trends of population ageing are clear. The costs of healthcare and longevity will increase. While we cannot claim to have a perfect solution, we will make gradual enhancements to our system. The experiences in other countries have told us that we have to be cautious not to create mechanisms that could unwittingly bankrupt our future. The principle of self-reliance is an essential tenet underpinning the CPF system. It continues to meet the three key needs of retirement expenditure, healthcare and home ownership, which constitute the basis of financial security in retirement. We are well-positioned to respond to the challenge of population ageing and to ensure that Singaporeans have adequate provisions for a secure and happy life in old age.
Thank you.
[1] The Additional Housing Grant of up to $40,000 is given to households earning $5,000 or less e.g. households earning $1,500 receive $40,000 in AHG.
[2] http://news.bbc.co.uk/2/hi/business/8488350.stm
