The Economist finds CPF wanting

Singapore’s new moves to help the less well-off show its pension fund policy had to change – it was no longer inadequate. So says The Economist in one of its rare articles on the city-state. The commentary follows Prime Minister Lee Hsien Loong’s National Day Rally speech.

The Economist article on Singapore
The Economist article on Singapore

The Economist says:

As usual, he offered plenty of crowd-pleasing goodies: gardens and a science centre for western Singapore; a new government department to co-ordinate public services; praise for Singapore’s “pioneer generation”. But Mr Lee also unveiled two significant changes in pensions policy that hint at some deeper systemic problems.

The first is a “Silver Support Scheme”, under which government will top up some payouts from Singapore’s retirement scheme. From the time they start working, Singaporeans and their employers are obliged to contribute a share of their monthly salary (starting at 20% for employees and 16% for employers) to the Central Provident Fund (CPF). Money in the CPF is intended to cover part of Singaporeans’ health-care, housing and retirement needs. As Mr Lee noted, the CPF rewards personal responsibility: “The more you work, the more you have in retirement,” he said. “Your retirement savings are for you, not someone else.” There is, in other words, no redistribution among Singaporeans paying into the fund.

In an economy with full employment and a favourable ratio of working-age to elderly people, a provident fund works well. But as life expectancy and living costs in Singapore have both risen, so has income inequality. The CPF has begun to look inadequate for many Singaporeans. A survey released shortly before Mr Lee gave his speech found that nearly half those questioned believed that their CPF contributions would be insufficient to tide them over during their retirement. The Silver Support Scheme—along with a broadening of Singapore’s Lease Buyback Scheme, under which the government buys back the remaining years of leases on flats—amounts to a tacit acknowledgment that a CPF which involves no redistribution at all no longer works for a sizeable minority of its citizens…

Mr Lee said people will be able to withdraw a lump sum of their savings after the age of 65. It remains unclear, though, how much money the Silver Support Scheme will contribute and to whom. Beyond the details, Asia’s richest country is acknowledging that its social compact poorly serves the lowest earners.

Singapore is not alone in facing a growing income gap. You hear about the same problem in India, China, America and other countries. As Thomas Piketty writes in his introduction to Capital In The Twenty-First Century:

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine meritocratic values on which democratic societies are based. There are nevertheless ways democracies can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.”