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Singapore’s policy responses

to ageing, inequality and


poverty: An assessment
Mukul G. Asher and Amarendu Nandy

LKY School of Public Policy, National University of Singapore

Abstract Singapore represents an instructive case study in


responding to rapid ageing, growing inequalities, and significant
relative poverty. Unlike other high-income Asian countries, it
has relied on single-tier mandatory savings to finance
retirement, housing, and to a lesser extent, healthcare. To
address the low fertility rates, it has permitted the share of the
non-citizen population to triple between 1990 and 2005 to
nearly 30 per cent. This is subtly altering Singapore’s
socio-political dynamics, while assisting in sustaining growth
and competitiveness. The paper argues that Singapore has the 41
fiscal, institutional, and organizational capacities for a modern
multi-tier social security system. Singapore is, however,
determined to continue with current inadequate and
inequitable arrangements, requiring individuals and their
families to bear disproportionate risks in financing retirement,
healthcare, and short-term income support. This reflects
conscious policy choices arising from a Darwinist vision of
society, and the need for socio-political control.

Singapore, an affluent1 and rapidly ageing city State, has pursued a strategy of
high-growth,2 high net immigration, and minimal social risk-pooling elements in
its social safety nets to manage globalization. As will be evident from the discussion
in the paper, in Singapore’s economy it is possible for positive aggregate indicators
to coexist with recessionary or stagnant conditions for a significant proportion of
the population.

Unless otherwise stated, all dollars are in Singapore dollars. US$1 = S$1.51 and €1 = S$2.10 as on
19 September 2007. The paper has benefited greatly from the suggestions of the anonymous referees.
The authors would also like to thank G. Shantakumar, M. Ramesh, Henri Ghesquiere and Ruchika Saluja
for useful comments. The usual caveat applies.
1. Singapore’s per capita GDP in 2006 was $46,832.
2. Singapore’s real GDP growth averaged 4.6 per cent during the 2001-06 period.

© 2008 The author(s) Journal compilation © 2008 International Social Security Association International Social Security Review, Vol. 61, 1/2008

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Singapore’s policy responses to ageing, inequality and poverty: An assessment

This paper analyses Singapore’s policy responses to ageing, inequalities, and


poverty. Singapore represents an interesting case study as its strategy differs
significantly from those of other high-income Asian countries such as Japan and
the Republic of Korea; or Taiwan, China. They have had fairly low levels of
in-migration, and have adopted conventional welfare state instruments involving
significant social risk-pooling in financing retirement and healthcare (Tachibanaki,
2006; Kim, 2007; Lee and Yang, 2007).
The rest of the paper is organized as follows. The next section provides the
socio-economic context within which Singapore’s policy responses to ageing,
inequality, and poverty have been shaped. Then follows an analysis of the policy
responses centring on the mandatory savings administered by the Central Provident
Fund (CPF); social assistance schemes; tax provisions; and the Workfare Income
Supplement (WIS) scheme. The final section provides the concluding remarks.

Socio-economic context

Singapore is among the most globalized economies in the world, with external
demand, technology, investments, and human resources playing a dominant role in
42 its evolution from a low-middle income country in the 1960s to a high-income
country now (Rajan, 2003).
Table 1 provides a breakdown of Singapore’s population as between citizens,
permanent residents, and foreign workers and their dependants. The data indicate
a sharp decline in the share of citizens in total population between 1990 and 2005,
by 15 percentage points from 86.1 per cent in 1990 to 71.5 per cent in 2005.
Correspondingly the share of permanent residents nearly tripled, while the share of
the non-resident population nearly doubled during the period. In 2005, close to

Table 1. Singapore: Population composition, 2005, in thousands (%)


1990 2000 2005

Total population 3,047 4,018 4,351


(100.0) (100.0) (100.0)
Citizens 2,624 2,973 3,113
(86.1) (74.0) (71.5)
Permanent Residents 112 290 441
(3.7) (7.2) (10.1)
Non-resident population 311 754 798
(10.2) (18.8) (18.3)

Source: Chua (2007a); Singapore (2002).

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Singapore’s policy responses to ageing, inequality and poverty: An assessment

30 per cent of the total population were non-citizens. This is expected to rise to 50
per cent (Burton, 2007). Such a level of absorption of foreign-born persons is likely
to bring profound but subtle changes in the Singapore society, the contours of
which will unfold only over time.
It should be noted that foreign workers who are not citizens or permanent
residents are not permitted to be a part of the CPF system, or receive public
assistance or welfare benefits.
In February 2007, Singapore officially announced a population target of 6.5
million. While an exact date has not been set, media reports suggest a time frame of
two decades. Singapore’s TFR (Total Fertility Rate) has been below replacement rate
since 1975. It was only 1.26 in 2006.3 Therefore, an even larger flow of in-migration
will be needed to achieve the population target.4 Large net immigration is positive
for growth, but will pose significant challenges for political and social management.
A public opinion survey published in a local paper in early 2007 indicated that
nearly 43 per cent of Singaporeans believed the government is more concerned
about foreign talent than citizens; and doubted that high in-migration helps create
jobs and fresh opportunities. Nearly nine out of ten respondents feared that foreign
talent will take away their jobs (Bala, 2007). It is significant that these perceptions
are held when currently Singapore is experiencing a favourable macroeconomic 43
cycle. This suggests that political management will become even more difficult if
employment growth slows substantially. This is relevant as the 6.5 million popula-
tion target implies a much higher level of net in-migration. If the negative
perceptions about foreign talent take deep root, it could have a negative impact on
the attraction of Singapore as a business location (Bala, 2007).

Ageing trends

Singapore will be ageing rapidly, particularly after 2010 (Table 2). Thus, the popu-
lation aged above 65 years, as projected by the United Nations, will rise by 207 per
cent from about 0.46 million in 2010 to 1.41 million in 2030 (Table 2). The ratio of
working-age to elderly persons will decline from 7.7 in 2010 to 2.2 in 2030.
Figure 1 provides the population pyramid for Singapore. It exhibits the dynamics
of rapid ageing there.

3. International experience suggests that if the TFR remains below 1.5 for a prolonged period, it is
difficult to raise it significantly through policy actions.
4. The Manpower Ministry’s projections are that for the economy to grow at 6 per cent till 2012, the
additional labour force needed is 87,300 persons, but the domestic labour force, comprising citizens and
permanent residents, is expected to grow by only 52,700, leaving a shortfall of 34,600 persons (Straits
Times, 9 March 2007). This shortfall will have to be met through net immigration.

© 2008 The author(s) Journal compilation © 2008 International Social Security Association International Social Security Review, Vol. 61, 1/2008
Singapore’s policy responses to ageing, inequality and poverty: An assessment

Table 2. Singapore: Indicators of ageing


Year Population aged 65+ Population aged 80+ Dependency ratio Working
(medium variant) (medium variant) (medium variant) age/Elderly

(thousands) (%) (thousands) (%) (total) (child) (old age)


2000 287 7.2 48 1.2 41 31 10 10.0
2010 461 10.0 88 1.9 35 21 13 7.7
2020 871 17.5 153 3.1 43 18 25 4.0

2030 1,411 26.8 291 5.5 69 24 45 2.2


2050 1,632 31.3 730 14.0 78 23 56 1.8

Source: United Nations (2004, 2003).

Feminization of old age

On the basis of data provided in Table 3 on the composition of the resident popu-
44 lation aged 65 and above by living arrangements, age group, and gender, the
following observations may be made.
First, the proportion of women in the elderly population is far higher (56.4 per
cent) than that of men (43.6 per cent). Second, nearly two out of five older people
were above 75 years of age, with females outnumbering men by a wide margin.
Third, females, particularly those above 75 years of age, are more likely than men to
be living with their children, or to be living alone. Widowhood rises to about 80 per
cent of those aged 80 and above.
Disabilities also affect older women more than older men. Both this factor and
the greater likelihood that they will be living with their children increase their
physical dependence on the extended and immediate family members. If lack of
income or savings is also considered, then the problem of the old-old becomes
acute. As family sizes become smaller, it is highly probable that an increasing
proportion of the elderly population will live alone in the future.
Women as a group have lower exposure to the labour force, and on average earn
less, than men do.5 But as they live longer, they require retirement financing for a
longer period. The gender issue is particularly important in the mandatory savings
schemes, as there are no survivor’s benefits or protection against longevity risk, i.e.
the risk that retirement savings may be exhausted before a person dies. The inflation
risk will be particularly burdensome for aged women.

5. The average CPF balance among women was $36,946 in 2006, about a sixth lower than that of men
at $44,175 (CPF, 2006).

International Social Security Review, Vol. 61, 1/2008 © 2008 The author(s) Journal compilation © 2008 International Social Security Association
Singapore’s policy responses to ageing, inequality and poverty: An assessment

Figure 1. Singapore population pyramids (in thousands), selected years

2000 2010
Male 100+ Female Male 100+ Female
95-99 95-99
90-94 90-94
85-89 85-89
80-84 80-84
75-79 75-79
70-74 70-74
65-69 65-69
60-64 60-64
55-59 55-59
50-54 50-54
45-49 45-49
40-44 40-44
35-39 35-39
30-34 30-34
25-29 25-29
20-24 20-24
15-19 15-19
10-14 10-14
5-9 5-9
0-4 0-4

300 200 100 0 0 100 200 300 300 200 100 0 0 100 200 300

45
2030 2050
Male 100+ Female Male 100+ Female
95-99 95-99
90-94 90-94
85-89 85-89
80-84 80-84
75-79 75-79
70-74 70-74
65-69 65-69
60-64 60-64
55-59 55-59
50-54 50-54
45-49 45-49
40-44 40-44
35-39 35-39
30-34 30-34
25-29 25-29
20-24 20-24
15-19 15-19
10-14 10-14
5-9 5-9
0-4 0-4

300 200 100 0 0 100 200 300 300 200 100 0 0 100 200 300

Source: US Census Bureau (2006).

© 2008 The author(s) Journal compilation © 2008 International Social Security Association International Social Security Review, Vol. 61, 1/2008
Singapore’s policy responses to ageing, inequality and poverty: An assessment

The above suggests that the provision of survivors’ benefits should be an


important criterion in assessing adequacy and equity of retirement financing in
Singapore.

Poverty and income inequality

Singapore has no official poverty line. The absolute poverty measure is based on
Minimum Household Expenditure, defined as actual expenditure for a subsistence
budget ¥ 1.25. While no precise estimates are available, absolute poverty incidence
is low.
The incidence of relative poverty, defined as half of the median per capita
household income, is likely to be higher, though again no official estimates are
published on a regular basis. In policy discussions, a working assumption used in
Singapore to define the low-income group is the bottom 30 per cent of households.
There are several indications of rising income inequalities in Singapore. First, the
share of wages in GDP has declined from 47 per cent in 2001 to 41 per cent in 2006
(Singapore, 2007); while the share of capital has increased correspondingly. As
capital income is more unequally distributed, its increasing share implies rising
46 inequality and constrained consumption capacity among low- and middle-income
households. Public policies, particularly centring on a reduced tax burden on capital
income6 and reduced mandatory contributions by employers to the CPF, have been
partially responsible for the declining share of wages (Chua, 2007a).
Second, the ratio of the disposable income of the top 20 per cent of households
to that of those in the bottom 20 per cent has increased from 11.4 in 1990 to 20.9 in
2000 (Kamimura, 2006). According to official statistics, nearly 40 per cent of the
households at the bottom experienced a decline in real income between 2000 and
2005.7
Third, the Gini coefficient for income, which is the traditional measure of
inequality, has increased from 0.43 in 1990 to 0.52 in 2005, ranking Singapore as
105th in the world (Kamimura, 2006).8 Rising income (and wealth) inequalities in
Singapore suggest that its current policies for promoting equality of opportunity are

6. In 2000, the corporate tax rate was 26 per cent. In a series of steps this rate has been reduced to
18 per cent in the 2007 Budget. The top rate of personal income tax was 28 per cent in 2000, but it had
been reduced to 20 per cent by 2007. Certain types of capital income such as interest income have been
completely exempted, even for citizens. In contrast, the consumption taxes have increased. The Goods
and Services Tax (GST) was introduced in April 1994 at the rate of 3 per cent. From 1 July 2007 the GST
rate is 7 per cent.
7. The household income is sensitive to the number of working persons in a given period per household;
and to wage trends.
8. In contrast, fellow Asian high-income countries Japan and the Republic of Korea ranked 2nd and 25th
respectively.

International Social Security Review, Vol. 61, 1/2008 © 2008 The author(s) Journal compilation © 2008 International Social Security Association
Table 3. Singapore: Resident population aged 65 years and above, by living arrangements, age-group and gender, 2005
Living arrangements All 65+ 65-74 75 and above
Total Male Female Total Male Female Total Male Female

© 2008 The author(s)


Total (%) 284,329 124,055 160,273 180,823 82,886 97,936 103,505 41,169 62,337
(100.0) (43.6) (56.4) (63.6) (29.2) (34.4) (36.4) (14.5) (21.9)

Living with spouse (%) 148,898 93,411 55,487 111,738 66,837 44,900 37,160 26,574 10,587
(52.4) (32.9) (19.5) (39.3) (23.5) (15.8) (13.1) (9.3) (3.7)

Not living with spouse but with children (%) 98,130 16,955 81,175 46,122 7,252 38,871 52,007 9,703 42,304
(34.5) (6.0) (28.5) (16.2) (2.6) (13.7) (18.3) (3.4) (14.9)
Not living with spouse or children (%) 37,301 13,690 23,611 22,963 8,799 14,164 14,339 4,892 13,954
(13.1) (4.8) (8.3) (8.1) (3.1) (5.0) (5.0) (1.7) (4.9)

Note: Figures in parenthesis are percentage of total elderly population.


Source: Calculated from Singapore (2005), Table 93.

Journal compilation © 2008 International Social Security Association


Singapore’s policy responses to ageing, inequality and poverty: An assessment

International Social Security Review, Vol. 61, 1/2008


47
Singapore’s policy responses to ageing, inequality and poverty: An assessment

insufficient to bring about the requisite degree of socio-economic mobility.9 The


smaller the identification between companies and their employees, the less willing
or able the employers will be to provide health and retirement benefits and perhaps
even training. Resistance by currently employed citizens and permanent residents in
all occupations to job losses and restructuring also increases in the absence of social
risk-pooling in health and pensions.
It is estimated that the cumulative impact on average wages of the CPF cuts (in
employers’ contribution rate and in the salary ceiling) during 2003-06 was minus
3.6 per cent and that of income tax cuts during 2002-07 was plus 0.8 per cent
(Chua, 2007a). The overall net impact was significantly negative, particularly for the
middle-income groups. The personal income tax base has also been reduced in
recent years in a manner disproportionately benefiting the higher-income groups.
This is exemplified by the exemption of interest income from income tax. The CPF
and income tax changes have therefore contributed to the rising inequalities.
As the above discussion suggests, high and increasing income inequalities are an
outcome of the particular set of policies adopted by Singapore, and not due to the
general effect of globalization alone.
Some analysts have explicitly raised the issue of whether pursuit of high growth
48 is worthwhile if it is leading to such high inequalities, and to uneven distribution of
gains between citizens and non-citizens (Bhaskaran, 2007). The rich-poor gap in
Singapore has become a political issue (Trofimov, 2007b). If left unattended, this
gap could undermine the support for Singapore’s current strategy of managing
globalization.

Health financing

It may be useful to briefly comment on healthcare financing in Singapore. The share


of private provision of healthcare in Singapore is around three-fourths, with
one-fourth coming from the government budget (Asher and Nandy, 2006a). The
respective shares are reversed in the OECD countries. Yet the private-public
composition of Singapore’s healthcare expenditure in 1980 resembled the current
OECD composition. So public policies have contributed to a lopsided share for
private provision in healthcare. The share of third-party payment through insur-
ance and other risk-pooling instruments in Singapore’s national health expenditure
is extremely low.
Medishield, which is Singapore’s health insurance scheme for relatively long
hospital stay, has no social risk-pooling arrangements, as premiums vary positively

9. There are no rigorous studies of the trend in socio-economic mobility in Singapore. But the casual
empiricism and anecdotal evidence suggests that barriers to such mobility are indeed rising. Wolf (2007)
reports that in countries with higher inequalities, such as the US and the UK, intergenerational mobility
is lower than in the Nordic countries and in Germany.

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Singapore’s policy responses to ageing, inequality and poverty: An assessment

with age.10 Moreover, the coverage stops at age 85. Table 2 suggests that the number
of old-old people (over 80 years) will rise rapidly, reaching 88,000 by 2010, and
297,000 by 2030.Assuming the cut-off age for Medishield remains constant, there will
be an estimated 111,000 persons over 85 who will not have the basic catastrophic
insurance coverage at the most vulnerable stage in life (US Census Bureau, 2006).
The practice of requiring the full cost of anticipated medical procedures as a
deposit even when the patient has valid medical insurance is not uncommon,
including in public hospitals in Singapore (Straits Times, 9 July 2007, p. H10).11 This
defeats the purpose of having medical insurance, and unnecessarily increases
anxiety and insecurity among patients and their family members.
Ramesh (forthcoming) acknowledges inadequacies and inequities of health
financing in Singapore. But he argues that these are partially mitigated by the
government’s role as a regulator, volume purchaser, and owner of public hospitals in
keeping healthcare costs under relative control,12 and in sustaining good standards
of service (Ramesh, forthcoming). Proposals to subject access to lower-class wards
in public hospitals to means-testing may, however, adversely impact lower middle
class households.

Public assistance programme 49

Singapore’s public assistance programme is means-tested, with stringent qualifying


requirements. The public assistance rates are by policy design kept between 5 and
10 per cent of per capita income.
It is in the above context that this paper analyses Singapore’s policy responses to
ageing, inequality, and poverty.

Policy responses

Singapore relies primarily on mandatory savings to finance retirement and health-


care, with no social risk-pooling. The mandatory savings scheme, administered by
the CPF, has become the key social, political, and economic institution in the
country. In addition, Singapore has implemented narrowly focused social assistance
schemes, supported by individual income tax incentives and grants to meet ageing

10. The Singapore government has adopted an opt-out method for enrolling newborn babies into the
Medishield scheme. Such a method is to be extended to school-going children as well.
11. This indicates how the details of design of programmes, their implementation, and in some cases
wide variations in application of roles could result in outcomes which are significantly different from the
generic nature of the policy instrument.
12. In 2006, average hospital bills went up by 10-30 per cent, with subsidized Class C wards exhibiting
the highest percentage increase (Straits Times, 25 July 2007). The official reasons cited for the increase
were better data, and inflation. The former reason suggests that analysts should be cautious in interpret-
ing the actual costs and other data relating to Singapore’s healthcare sector.

© 2008 The author(s) Journal compilation © 2008 International Social Security Association International Social Security Review, Vol. 61, 1/2008
Singapore’s policy responses to ageing, inequality and poverty: An assessment

challenges. It is also experimenting with new schemes such as the Workfare Income
Supplement (WIS) scheme, designed to assist the working poor.

The CPF system

The CPF system is quite complex, and has come to dominate Singapore’s policy
responses towards housing, retirement financing, healthcare, and other objectives
(Asher and Nandy, 2006b). The CPF contributions are channelled to three accounts:
two-thirds to the Ordinary Account (OA), which can be used for housing and
investment schemes; 19 per cent to the Medisave Account (MA), which can be used
for hospitalization expenses and catastrophic health insurance; and the remaining
14 per cent to the Special Account (SA), which can be used for retirement and other
purposes.
In this paper, the focus is on the extent to which the CPF system will help
members cope with financing needs during retirement. Pension experts recom-
mend a replacement ratio (i.e. post-retirement income as a percentage of pre-
retirement income) of between 66 and 75 per cent, with requisite longevity and
inflation risks protection, and survivors’ and disability benefits.
50 As the government does not want to release data for estimating replacement rates
on the basis of actual CPF cash balances, the only technique available is simulation
analysis. Analysis by McCarthy et al. (2002) suggests that in 2001 the real replace-
ment rate was 28 per cent for the base case (Table 4).13 Since then, both the wage
base and the CPF rate have been reduced substantially, thus reducing the replace-
ment rate to about half of the base rate. The replacement rate for most members will
be substantially below the recommended rate.
Effective 1 July 2007, the CPF contribution rate for employers was raised by
1.5 percentage points to 14.5 per cent, while the rate for employees remained
unchanged at 20 per cent, for a total of 34.5 per cent. There was, however, no
increase in the wage ceiling of $4,500 per month.14 If such a ceiling remains fixed in
nominal terms over a long period, it implies a decrease in the wage ceiling in real
terms. This in turn will further adversely impact the replacement rate.

13. The simulation assumes a contribution rate of 40 per cent (20 per cent by the employer, and 20 per
cent by the employee), while the wage ceiling assumed was $6,000 per month. The other key assumptions
were annual earnings of $30,000; annual real earnings growth of 2 per cent; annual inflation rate of
2.5 per cent; and initial purchase of four-room public housing, subsequently upgraded to five-room
public housing (McCarthy et al., 2002).
14. The total CPF contribution rate was 36 per cent in 2001, with a wage ceiling of $6,000, with employer
and employee contributions at 16 and 20 per cent respectively. The employer contribution was
reduced to 13 per cent for a total of 33 per cent in 2003. The rate and wage ceiling changes were
undertaken in response to macroeconomic conditions and the perceived need to sustain Singapore’s
business competitiveness.

International Social Security Review, Vol. 61, 1/2008 © 2008 The author(s) Journal compilation © 2008 International Social Security Association
Table 4. Singapore’s Central Provident Fund (CPF): Impact on replacement rate of simulated policy changes for a hypothetical
member

© 2008 The author(s)


Scenario A B C D E
Total wealth Proportion in Replacement rate (%) IRR on
(thousands of S$) housing (%) property (%)
Earnings Subsistence

1. Base case 1774.3 75 28 296 5.82


CPF changes

2. Both CPF accounts’ ROR up from 0%/1.5 % to 5% real 2052.6 65 34 359 4.60
3. Portion to Special CPF Account up from 4% to 8% 1800.3 74 30 319 5.34
4. CPF contribution ceiling held at 0% nominal instead of 0% real 1598.5 83 17 186 5.23
5. CPF contribution rates lowered from 40% to 30% 1604.6 83 14 148 4.61
HDB changes

Journal compilation © 2008 International Social Security Association


6. ROR on HDB property falls from 4% real to 0% real 768.5 36 32 339 0.77

7. ROR on HDB property 4% real up to 10 years, 0% real thereafter 749.1 37 30 322 0.47

8. ROR on HDB property 0% real up to 10 years, 4% real thereafter 1797.6 74 30 316 6.04
9. HDB resale levy falls from 22.5%/25% to 0% 2296.2 77 34 364 7.42

10. HDB capital subsidy doubles in nominal terms 2037.8 65 49 526 8.84
Singapore’s policy responses to ageing, inequality and poverty: An assessment

Notes: The calculations assume a male head of household married to a same-age non-working wife. They do not reflect actual data.
HDB — Housing Development Board; ROR — Rate of Return; IRR — Internal Rate of Return.
Source: McCarthy et al. (2002).

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51
Singapore’s policy responses to ageing, inequality and poverty: An assessment

In 2006, the average balance per member of $40,598 was less than the per capita
GDP of $46,832. This is quite inadequate as an average person will require financing
for at least two decades during retirement. The increase from 62 to 65 years in the
age at which a member can withdraw the minimum sum in monthly instalments
will not make additional resources available during retirement.15
It is now reluctantly acknowledged in Singapore that the CPF system will not
be adequate to meet the ageing challenges. There are several reasons for this
inadequacy.
First, given the multiple focus of the CPF, the proportion of contributions
withdrawn during the pre-retirement period is very high, averaging 82.7 per cent
during the 2001-06 period (CPF, 2006). The share of contributions devoted to
retirement is therefore low. In some years, discretionary policy measures have
reduced the CPF contributions towards retirement to zero.
Second, design and governance issues also act against the adequacy objective; and
so does the tendency to use the CPF system as a short-term stabilization instrument.
The CPF contribution rates and wage ceiling have been dramatically reduced when
the macroeconomic cycle suggested slower growth; and increased when the oppo-
site was indicated.
52 The administered interest rate structure, and lack of transparency and account-
ability in the ultimate investments of CPF balances ($125.8 billion as of December
2006), have meant low real returns on these balances (Figure 2).16 As the returns are
lower than their corresponding growth in GDP and real wages, the replacement rate
is also likely to be low.
The interest rate paid on CPF balances has been a weighted average of savings-
account and one-year fixed-deposit interest rates of domestic banks, with a
minimum nominal interest rate of 2.5 per cent.17 The investment of the CPF Board
is in essence only in non-marketable government securities. The interest on these
securities is determined retroactively based on the interest declared on CPF
balances.
In August 2007, the government announced changes in the administered interest
rate arrangements, effective from 2008. For the first $60,000 of CPF balances,

15. The minimum sum is the amount people must keep in their retirement accounts after withdrawing
their CPF at age 55. Currently, a member may withdraw the minimum sum (as of 1 July 2007 this was
$99,600) at age 62 in monthly instalments over a roughly 20-year period. According to official figures, of
the 22,600 CPF members who turned 62 in 2006, only 34 per cent were able to meet the minimum sum
requirements. The median shortfall for the remaining members was $49,300, nearly half of the minimum
sum.
16. Chua (2007b) has argued that the inflation rate in Singapore, as measured by the consumer price
index, is significantly understated, primarily because of the way the housing component is incorporated.
This could result in an even lower real rate of return than shown in Figure 2.
17. On balances in SA and MA of the CPF funds, the administered interest is 1.5 percentage points
higher than the declared rate.

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Singapore’s policy responses to ageing, inequality and poverty: An assessment

Figure 2. Singapore: Real rates of return on CPF balances, 1987-2006

%
10

8
8.6
6

4 5.9

2
2.9
0 1.3

Real GDP Real wage Real rate Real rate


of return of return
on balances on insurance
funds

Note: The Average Annual Compound Growth Rate (AACGR) is calculated from the formula r = ((1 + rA) ∧ (1/t)) - 1, where
rA = aggregate return over t years (annual rates are aggregated by taking their product for t years).
Source: Calculated by the authors from various official sources.
53
a member will receive an additional 1 percentage point over the normal rate.
However, instead of paying 1.5 percentage points more than the normal rate on
balances in MA and SA accounts, the rate will be pegged to the rate of ten-year
Singapore government securities plus 1 percentage point.
The Singapore budget has shown a trend towards persistent and large structural
surpluses.18 The CPF balances have therefore not been used for government
expenditure. Instead, through complex procedures, they are turned over to one of
Singapore’s holding companies, the Government of Singapore Investment Corpo-
ration (GSIC).
GSIC has a global portfolio. By statutory protection, it does not need to reveal its
investment policies and performance to the public or Parliament. To the extent
GSIC obtains higher returns than those credited to the CPF members, the difference
is a tax on CPF wealth. This is large, growing, and highly regressive as low-income
households are likely to have a disproportionate share of their wealth in CPF
balances (Asher and Nandy, 2006b).
It should be emphasized, even without the above design and governance features,
that a single-tier retirement financing system involving only mandatory savings can

18. As at March 2004, total accumulated budget surpluses were $399.1 billion, or 228 per cent of GDP
(IMF, 2006, p. 16). The IMF (2006) study reports that “there is . . . no comprehensive information on the
market value of the government’s assets, including those of the Government of Singapore Investment
Corporation” (p. 16).

© 2008 The author(s) Journal compilation © 2008 International Social Security Association International Social Security Review, Vol. 61, 1/2008
Singapore’s policy responses to ageing, inequality and poverty: An assessment

never provide an adequate replacement rate; or address inflation and longevity


risks;19 or provide survivor and disability benefits (Asher and Nandy, 2006b).20
A multi-tier system involving a mixture of defined benefit (DB) and defined con-
tribution (DC) schemes, with varying degrees of risk-pooling or risk-sharing
arrangements, is needed for a robust, adequate, and equitable social security system
(Holzmann and Hinz, 2005).

Other social programmes

Singapore has several social programmes to meet the needs of poor and elderly
populations and assist workers in coping with a high-growth strategy based on high
net in-migration.
Case-by-case, stringent means-tested approaches, which by definition have high
transaction costs, are preferred by the policymakers in Singapore. As the number of
older people increases rapidly after 2010 (Table 2), and as the number of those
relying on social assistance programmes increases, the transaction costs of such
methods will increase relative to the benefits provided. Ad hoc social welfare
schemes in Singapore are also inequitable (Ramesh, 2004). As yet, there is no
54 evidence of rethinking towards more generalized, entitlement-based criteria.
As mentioned earlier, there are no official time series data on either absolute or
relative poverty. The indication, however, is that poverty is becoming deeper and
more visible. Between 2000 and 2005, households in the three lowest decile groups
experienced declines in wage income in nominal terms (Singapore, 2005).
Indirect evidence suggests that the relative poverty level in 2006 may have been
around a quarter of the population (see section on WIS, below), if the OECD
definition of relative poverty, comprising persons in households whose income is
below 50 per cent of the median income of all households, is adopted. By way of
comparison, the poverty level in Taiwan was 6.3 per cent in 2004 (Lee and Yang,
2007), and in Japan it was 15.3 per cent in 2000 (Tachibanaki, 2006). Singapore’s
poverty rate may therefore be regarded as high.

19. In August 2007, the government announced that the members will have to compulsorily purchase an
annuity from their own balances at age 55, while the benefits will be paid after a member reaches 85 years.
The government has ruled out any budgetary support for the scheme. But the other details have still not
been announced. The compulsory annuity will reduce already low CPF balances, thus adversely affecting
the adequacy. If the generally observed correlation between income and life expectancy holds for
Singapore, then the compulsory annuity will be inequitable, as poorer groups will receive proportion-
ately less benefits. There are no plans for inflation indexation of the annuity.
20. Recommendations by the Social Security Commission of Chile recognize this point. Chile was a
pioneer in introducing mandatory savings accounts for social security in 1981. The recommendation to
shift from a single-tier to a multi-tier social security system is of huge significance, suggesting a paradigm
shift.

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Singapore’s policy responses to ageing, inequality and poverty: An assessment

Public assistance programmes. Singapore has a limited public assistance pro-


gramme. Fewer than 5 per cent of households in the low-income group are
beneficiaries of state-funded systems. The amount of assistance is deliberately kept
extremely low, at around 5-8 per cent of per capita income. In 2005, out of a total
population of 4.3 million, there were only 2,772 persons receiving public assistance,
86 per cent of whom were old and destitute (Singapore, 2006).

Personal income tax concessions. In addition to the exemption of employee CPF


contributions from personal income tax (for year of assessment 2005, the CPF
deductions were $5.6 billion), and employer contributions from company income
tax, three other personal income-tax-related measures which are relevant are Quali-
fying Child Relief; Working Mother’s Child Relief (the total deduction under the
above two schemes was $1.4 billion in 2005); and Relief for Foreign Maid Levy (this
amounted to $246 million in 2005) (IRAS, 2006).
Only 0.73 million persons, equivalent to 31 per cent of the labour force, paid
income tax in 2005 (IRAS, 2006). So the income-tax-based arrangements are regres-
sive, with most of the subsidies going to upper-middle- and high-income groups.
The current tax provisions for increasing TFR and encouraging female employ-
ment primarily focus on the 31 per cent of the labour force subject to income tax. 55
To mitigate the upside-down subsidy inherent in a pro-natal programme based
on income-tax exemptions and deductions, we suggest that an additional scheme
providing direct government contributions to the CPF account of the designated
parent merits consideration. The design features should incorporate the govern-
ment contributions varying positively with the number of children, with eligibility
criteria based on median wage. As an illustration, those earning less than two-thirds
of the median wage could receive contributions from the government, with each
successive child receiving progressively higher contributions. Such a scheme would
benefit the vast majority of the population who are not subject to personal income
tax; and who can utilize existing co-savings-type schemes only to a limited extent.
The financing for this scheme should be from general revenue.

Workfare Income Supplement (WIS) scheme. A WIS scheme21 was introduced in


the 2007 Singapore Budget.22 Its aim is to help low-wage workers to adjust to
Singapore’s strategy for managing globalization. The principal target groups for

21. This is a revised version of the Workfare Bonus Scheme (WBS) that was in operation from May 2006.
The WBS covered employed and self-employed “older” citizens (above 40 years). To qualify, a worker was
required to have six continuous months of paid work during the previous year and an average monthly
income of $1,500 or less, and be living in a property with an annual value of $10,000 or less. The grant
amount varied from $75 to $600; 90 per cent as cash and 10 per cent credited to the CPF account
(http://www.mom.gov.sg).
22. The 2007 Singapore Budget speech can be accessed at: http://www.singaporebudget.gov.sg/
budget_2007/budget_speech/index.html

© 2008 The author(s) Journal compilation © 2008 International Social Security Association International Social Security Review, Vol. 61, 1/2008
Singapore’s policy responses to ageing, inequality and poverty: An assessment

WIS are full-time workers aged above 45 years, but reduced benefits are provided to
those between 35 and 45 years. The WIS scheme is initially for a three-year period.
The announced intention is to make it permanent. The official estimates are that
438,000 workers, equivalent to 18.5 per cent of the total labour force, are likely to be
covered by WIS. If approximately 700,000 foreign workers are excluded from
the labour force, 26 per cent or about one out of four workers will be potential
beneficiaries of the WIS. The stringent criteria for qualifying (as listed below)
may, however, reduce the potential coverage, especially under soft labour market
conditions.
The WIS scheme requires the person to be a Singapore citizen, with a monthly
salary between $50 and $1,500; possessing a property not more than $10,000 in
annual value; and with employment for at least three months in any six-month
period in the calendar year for half the payout, or at least six months in the calendar
year for the full payout.23 The payouts are higher for those above 45 years old, up to
a maximum of $1,200 a year (to be increased to $2,400 a year), and a maximum
of $900 a year for those aged 35 to 45 years.24 For employees, the WIS is to be
paid with a cash-to-CPF ratio of 1 to 2.5. The WIS is thus a lump-sum amount
which decreases with wage level and with form of participation (employee or
56 self-employed). The benefits as a proportion of earned income decrease with more
than the prescribed minimum participation of six months.
From an analytical point of view, the WIS scheme is essentially a means-tested,
restricted-use (as most of it is deposited in the CPF), delayed cash grant to low-
income workers.
Owing to the delayed nature of the actual WIS distribution, and its restricted
nature given that most of the amount is deposited in the CPF account, the positive
impact on work incentives is likely to be minor in static terms.25 In dynamic terms,
the wage behaviour of those qualifying will depend on the demand and supply
adjustments in the labour market. An important element of labour market

23. It therefore differs from wage subsidy schemes, such as Earned Income Tax Credit (EITC) in the
United States, under which the size of the subsidy depends on the number of children in the family
(Rosen, 2005, p. 176) and which is thus family-centred, and not individual-centred as in Singapore.
24. As of July 2007, the detailed formula for calculating the workfare amounts is yet to be announced.
The official example suggests that for a 46-year-old worker, earning $1,000 per month, the total WIS will
be 10 per cent of the earnings. For a self-employed worker with similar characteristics, the WIS will be
equivalent to 6.7 per cent of the earnings. Since these are maximum amounts, the percentages for many
workers will be lower.
25. There is, however, a possibility that the WIS may lead to substitution of market participation for
currently provided unpaid household work and care. The empirical importance of this effect is difficult
to ascertain. Empirical evidence suggests that while the EITC has increased labour force participation
rates in the United States, it has on a net basis not led to an increase in the number of hours worked by
low-income persons in the labour force. This is because hours of work are encouraged for individuals
when the EITC is being phased in, but discouraged when it is being phased out, with the two effects
roughly cancelling each other out (Rosen, 2005, pp. 177-178).

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Singapore’s policy responses to ageing, inequality and poverty: An assessment

conditions will be the relative wage and other costs of the sizeable number of foreign
workers present in Singapore.
For workers earning less than $1,500, the current arrangements require employ-
ers to pay 13 per cent for all workers earning more than $50 a month. The 2007
Budget has proposed a graduated reduction in employer’s CPF contribution rates
for those aged above 35 years and earning less than $1,500. As the full 14.5 per cent
rate will be applicable for wages of $1,500 and above, there is a reduction in the
market wages for those earning below $1,500 a month. The official rationale is that
the reduced wages for this group will make them more employable (estimates of
elasticity of wage rates with respect to employment have not been provided).26 The
reduced market wages as a result of reduction in employers’ contribution to the CPF
will make this group more dependent on state subsidy in the form of WIS. This
outcome is contrary to the official rationale.
The employee component of CPF contributions has also been phased in for
those earning less than $1,500 a month. While the current arrangement requires
employees to contribute the full 20 per cent rate when their monthly wage is $750,
under the proposed arrangement they are required to pay the full rate only at a wage
of $1,500. The WIS therefore provides per-worker subsidy to employers. The
reduced CPF for the workers will have a large impact over the years on accumulated 57
CPF balances.27
The combined impact of cuts in CPF and WIS will make low-income workers
more vulnerable to macroeconomic cycles as their accumulation of CPF will decline
on a permanent basis, reducing the balances which are subjected to the power of
compound interest. Besides, though the WIS is of an impermanent nature, the
qualifying conditions are far more stringent than for the CPF.

Children Development Co-savings (Baby Bonus) scheme (introduced in 2001).


Children of citizens (first to fourth child) receive a cash gift of $6,000 and
co-savings, i.e. a dollar-for-dollar matching of up to $12,000 per child by the
government. The scheme applies until the child is 6 years old.
The community organizations also play a role. All assistance schemes (including
direct transfers) are administered by community agencies such as Community
Development Councils; National Council of Social Services; voluntary welfare
organizations; and self-help or religious groups.

26. The extent to which workers with higher wages are likely to be replaced by workers eligible for WIS
is also pertinent for full analysis but the relevant data are not available.
27. For example, a person aged 40 years, with a monthly wage income of $800, accumulates a total of
$264 per month in balances (20 per cent or $160 through self-contribution, and 13 per cent or $104
through employer contribution). Under the proposed arrangement, he or she is required to contribute
16.5 per cent or $132, while the employer contributes 9.7 per cent or $78, for a total of $210 a month in
balances. This is a reduction of 20.5 per cent or $54 in monthly accumulation.

© 2008 The author(s) Journal compilation © 2008 International Social Security Association International Social Security Review, Vol. 61, 1/2008
Singapore’s policy responses to ageing, inequality and poverty: An assessment

Most community agencies are partially funded by the State through subventions
or matching donations; and they also have close connections with the ruling party.
This is because the demarcation line between the public and private sectors in
Singapore is not sharp (Hamilton-Hart, 2000). It is not surprising that genuinely
private initiatives in the social sector are rare in Singapore.

Concluding remarks

Singapore represents an instructive case study in managing globalization and


addressing ageing, inequality, and poverty challenges. It has relied on a single-tier
mandatory savings scheme (CPF) for housing (primarily); for healthcare (minor
importance quantitatively but major ideologically); and for retirement. Stringent
means-testing, a case-by-case approach, and low levels of benefits have been hall-
marks of the various social assistance schemes. The end result of these social policies
has been to make individuals and their families bear disproportionate risks of old
age and of low incomes, with grossly inadequate social risk-pooling.
The CPF system and the current extensive set of schemes will become even more
inadequate, inefficient, and inequitable as economic growth reflects a mature,
58 affluent economy; as the number of older people increases rapidly after 2010,
significantly raising the transaction costs of the case-by-case approach used cur-
rently; as the limits of relying on large net in-migration (while keeping Singapore’s
ethnic balance) become evident; and as the political impact of rising inequalities
and stagnant incomes of nearly half the households begins to manifest itself.
Singapore has the fiscal, institutional, and organizational capacities to shift
towards more equitable, adequate, and efficient social safety nets, and mitigate
inequalities and relative poverty. Sustaining domestic political support for the
current strategy will be crucial if policymakers want to avoid such a shift. The
trade-off, however, will be a much lower level of risk protection, a much higher
correlation between poverty and old age, and much greater inequalities.
Ultimately, social sector policies exhibit a revealed preference concerning the
vision of the society. As Bowring (2007) has argued,
investment in children through government spending may provide a much better return
than accumulating vast fiscal surpluses to be invested in low yielding foreign assets or
unnecessary infrastructure. There is a dumb arrogance in East Asia’s approach to excess
savings and its inability to face up to the reasons for its abysmal fertility rates. The two are
linked. That must change if the whole region is not to be a geriatric poor-house.
This applies to Singapore, where adherence to social Darwinism and desire to
perpetuate socio-political control are additional factors preventing the development
of a much-needed multi-tier social protection system.
The current social protection system in Singapore is an outcome of conscious
policy choices, and cannot be attributed to the globalization phenomenon. As

International Social Security Review, Vol. 61, 1/2008 © 2008 The author(s) Journal compilation © 2008 International Social Security Association
Singapore’s policy responses to ageing, inequality and poverty: An assessment

Ramesh (2004) has argued, it is the internal social and political dynamics which will
determine the future of Singapore’s social protection system.

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