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26 Mar 2012
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As Singapore once again scrutinises its policies amid tackling economic and social challenges, a look back at the reform of the Central Provident Fund in 2007 may be instructive.

As Singapore once again scrutinises its policies amid tackling economic and social challenges, a look back at the reform of the Central Provident Fund in 2007 may be instructive.

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Ever touched a hot stove burner? You probably haven’t made that mistake again. Yet here was Prime Minister Lee Hsien Loong, the leader of Singapore, one of the world’s most prosperous nations, getting ready to touch that hot burner again. Intentionally.

When Singapore’s government tried once before, in 1984, to reform the country’s Central Provident Fund—the functional equivalent of the U.S. Social Security system, but based on fully funded personal savings accounts—it ignited cries of pain from nearly everyone, including employers, workers, and the elderly. The government quickly backed off and left the system alone.

Now (in 2007), despite incremental changes over the years, serious reform was needed even more urgently. Improved life expectancy was threatening to undermine the CPF. When the CPF was originally set up in the 1950s, the average Singaporean lived 60 years. If someone worked until age 55, his accumulated lifetime savings need only last on average five years. By 1984, when the government tried to push through a change that would have advanced to age 60 the point at which workers could tap into their accumulated contributions to the CPF, life expectancy had already grown to more than 70 years of age. By 2006, life expectancy was 80 years, and elderly Singaporeans were beginning to exhaust their CPF accounts. The system had to change. Singapore simply couldn’t condemn its elderly poor to destitution. They were the generation that lifted Singapore up from Third World to First World status.

But how would the system have to change? Lee, who was educated with honors at Cambridge University and was Singapore’s youngest brigadier general, knew he could impose his own ideas if he thought it necessary, and he leaned toward creating a private pension system as the best solution. Yet he also knew that whatever the decision, he would be upsetting several constituencies. Businesses were intent on maintaining their competitive edge in the global economy, and any changes that raised their costs would bring howls of protest. Unions representing workers would want higher contributions from business and had long been pressing for an extension of the retirement age so their members could work until they were older. And Singapore’s elderly were growing increasingly worried about outliving their savings, yet didn’t want to put off the age at which they could tap into their CPF savings.

“It’s a super-sensitive subject, first because it affects everybody’s money,” Lee says. “Second, these are personal accounts, so it’s all the more painful for people, who think, ‘It’s my money, give it back to me now.’ And third, that one attempt in 1984 to delay the withdrawal age by five years, from fifty-five to sixty, nearly brought the house down.”

The trick would be to fashion a system that spread the burden of reform equitably among the various constituencies so that no individual group would feel singled out to surrender too much. To do that, Lee knew he needed to listen carefully to each constituency, as well as to his own government advisers, to figure out not only what was most important to each group, but also what the government could afford to do.

First stop, the various government ministers that could offer expert advice and make recommendations. The prime minister put together a group of representatives from different ministries, including many bright young men and women, to study various issues such as demographic trends, estimates of return on various investments, and possible ways to restructure the CPF, including the pros and cons of switching the entire retirement security program to a private pension plan. Lee took on the role of first among equals, encouraging his colleagues and associates to speak out forcefully and without fear about any concerns they had. As the prime minister listened to their expert opinions, it became evident to him that his private plan wouldn’t work. A private plan, his advisers told him, would put the onus on people to manage their funds themselves, something those with low incomes were not well equipped to do. And when everyone agreed that extending the point at which a person could begin to tap his CPF account was a basic goal, there was one objection.

“One of the youngest of the ministers, said, ‘You know, this is going to be very difficult on the people who are in their fifties, because they are the ones who are nearly at the point when they are hoping to take their money out, and just as they’re reaching the target, we’re moving the glass away. So how about a little bit of sweetener for these people so they feel that you’re helping them make this transition?’”

Workers in their fifties who suddenly saw access to their nest eggs receding three years into the future were given bonus interest payments on their savings to help mitigate the impact.

Second stop, the employers, all of which were concerned about maintaining their competitive position in the global marker. Yet listening to them enabled Lee to pick out some very specific hot points. First, the employers knew their workers wanted to stay on the job longer, rather than retire at the mandated age of sixty-two. But they told Lee that older workers often were not as productive as they once had been, and they also had higher medical costs than young employees. What’s more, they said, if older workers held on to their senior-level jobs longer, it would be difficult to promote ambitious young employees.

Next stop, the unions that represented many of Singapore’s workers. Over the years, Lee had established a rapport with many union leaders, often inviting them to lunch or tea to discuss various issues affecting workers, and he knew they would be candid with him. As he expected, the unions were all for extending the official retirement age. But as he listened to them, it became clear, too, that they knew their older members weren’t as productive as they had been and that employers would strongly resist any efforts to force them to keep older workers on the payroll. They were eager for ideas about how best to overcome that resistance through some compromise proposal.

Finally, what were older Singaporeans thinking about work and retirement? Lee had to listen carefully to understand their concerns in order to communicate how the changes he wanted to make would affect them. To do that, as well as to get a preview of what Singapore might look like in the year 2020, Prime Minister Lee visited Radin Mas, a district in which nearly one person in six is 65 or older, compared to the one in 12 in Singapore as a whole. Radin Mas’s demographic profile is where Singapore will be in 2020. As he listened to the elders, Lee once again identified two hot points: employment opportunities for older workers and having sufficient funds for old age. One woman of 67 put it bluntly to Prime Minister Lee: “My CPF runs out this year. What happens after that?”

He could only tell her that the government was working on the problem.

Amid all the consultations, the prime minister was careful not to be too specific about what he and his team of government experts were thinking. “You can’t go around asking, ‘Do you prefer this particular scheme or that scheme?’ People don’t have informed views on how to design a social security system,” he explains. “You have to think about how you’re going to present it and persuade people to come along.”

But he was gratified to find that the people with whom he consulted understood the nature of the problem confronting Singapore. A woman representing one of the labour unions told him, “It’s not going to be very popular, but you have to do it. I know this. I was young, I paid no attention, and only when I had two children did I start doing financial planning for my old age.”

“She’s telling her people this is going to have to happen, so let’s see how we can massage the package to make it more acceptable,” Lee says. “So that’s reassurance to me that it’s saleable.”

Still, the days leading up to the unveiling of the new CPF provisions were tense. Just a few days before details were to be released, the Straits Times, Singapore’s national newspaper, released a poll that showed heavy support for working to an older age and for increased returns on personal savings in the CPF system. But when asked if they favored an increase in the age at which people would withdraw their funds from the CPF, the answer was a resounding “No!”

Finally, on August 19, 2007, Prime Minister Lee used his annual National Day Rally speech to unveil the result of the many interviews, meetings, consultations, and studies about how to reform the CPF. To help sell the reform program, he illustrated the speech with photographs taken during his visit to Radin Mas, painting a picture of what Singapore will look like in 2020.

The new plan addressed the various hot points that each group had voiced, granting concessions to offset the pain. While the official retirement age remains 62, employers will be required under new re-employment legislation to offer workers a new job at age 62. It maybe a less-senior job and at a lower rate of pay, but at least an employee won’t be forced out. And to provide incentives for older people to work and for employers to hire them, a negative income tax will offer workers a wage supplement of up to 25 per cent of their salary. To help the poorest Singaporeans, the interest rate that the government pays on each employee’s required savings in the CPF will rise modestly on the first S$60,000. But the biggest change of all was the extension of the age at which workers can draw down their CPF funds, to 65 from 62. Workers in their fifties who suddenly saw access to their nest eggs receding three years into the future were given bonus interest payments on their savings to help mitigate the impact.

The sweeping plan to reform the CPF was broadly accepted. There would be some finetuning to do as the various changes were implemented, but because Prime Minister Lee invested large amounts of time and effort listening to his various constituencies’ concerns and weighing them against what he thought the government needed to do to ensure the long-term viability of the CPF, he was able to convince his fellow citizens that if they all shared a little pain, Singapore would continue to have a healthy economy with no one left behind.


This extract is reprinted from the book, “How the Wise Decide”, with the permission of co-authors Bryn Zeckhauser and Aaron Sandoski (Crown Publishing Group, New York, 2008)

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