01 Aug 2018

With a rapidly ageing population, Singapore’s sole pension system must be evaluated to determine whether it can meet the needs of a changing demographic.

In 2016, Singapore climbed from grade C+ to B in the Melbourne Mercer Global Pension Index, thanks to an improvement in pension adequacy. This was mainly because of a higher level of financial support from the government, as well as more people working beyond retirement age.

While Singapore holds the highest ranking in Asia and seventh globally the country faces the challenges of an ageing population.

The number of Singaporean citizens aged 65 or older is expected to double to approximately 900,000 by 2030, due to a low fertility rate and increasing life expectancy. As one in four Singaporeans will be senior citizens, this raises the question about whether Singapore's current pension system is adequately prepared.

New challenges to post-retirement income security

Singapore's pension scheme relies solely on the Central Provident Fund (CPF), a mandatory savings scheme to provide post-retirement financial security for Singaporean workers.

The current structure of the scheme requires both employees and employers to contribute to an individual's CPF, which consists of three separate accounts. These accounts can be used primarily for retirement savings, funds for housing, and funds for hospitalisation or limited outpatient expenses.

Although Singapore's pension system is one of the best in Asia, it is not without its critics. The biggest criticism involves the Minimum Sum, which is a target threshold that the government set as a minimum amount in order for citizens to be eligible for a monthly pay-out of about S$1,200 after the age of 65.

However, less than half of CPF members are able to meet this amount because many Singaporeans spend most of their retirement savings on housing. Some of them also feel that the amount of S$1200 isn't enough, due to inflation and the rising healthcare coststhat come with age.

Traditionally, familial obligations require individuals to support their parents financially. In his paper titled The prospects for old-age income security in Hong Kong and Singapore, Professor Ng Kok Hoe, Lee Kuan Yew School of Public Policy at the National University of Singapore, pointed out the important factor of post-retirement income from children. However, with a declining birthrate, citizens have fewer children to provide such support, which has increased the population's reliance on the pension system.

The shrinking number of younger working citizens coupled with the higher proportion of senior citizens means there will be an inevitable increase in fiscal costs. This will place a further strain on the economy and make it even harder to garner financial resources.

The fiscal policy also needs to address the issue of increasing healthcare and care costs for an ageing population. Under the CPF, Medisave is a savings scheme where part of a citizen's incomeis put aside for future hospitalisation and certain medical expenses. With higher demand for healthcare and increased rates of inflation, current Medisave allocations may be insufficient, especially for lower and middle-income groups.

Exploring ways to address the problems

The government has worked on initiatives to provide better support for low-wage seniors. The Silver Support Scheme is a newly-introduced pension programme for the bottom 20 per cent of seniors in terms of wealth and income. However, social workers have stated there are still many poor families who do not qualify for the scheme and other seniors who will fall through the cracks.

An obvious economic solution may be to raise the retirement and re-employment age. Currently, the Retirement and Re-employment Act requires employers to offer re-employment to eligible employees until the age of 65. Employers may encourage to retain older workers for longer, as Singapore's Prime Minister Lee Hsien Loong said: Longer lives can make up for lower fertility, if older workers can be supported in achieving lifelong employability.

Nevertheless, lifelong learning is an uphill battle for older lower-skilled workers. Upgrading their skills may be a real challenge for workers who face long working hours, low pay and part-time work. Therefore, a reallocation of reserves may also be necessary. There have also been suggestions to raise the top marginal tax rate to fund the Silver Support Scheme.

When looking at other successful pension systems for ideas, Europe's relatively more generous pension systems will naturally come to mind. However, Singapore has always rejected this idea as it would make workers less competitive and weaken the spirit of entrepreneurship.

A welfare state model would also mean an increase in taxes, which Singaporeans may be unwilling to take on. Hence this model is unlikely to be implemented anytime soon.

Silver lining for those in their golden years

Other schemes to aid the elderly are constantly being introduced, such as the Centre of Healthcare Innovation Co-Learning Network and the ComCare Assistance scheme. Singapore has also held talks with Denmark, which holds the top position in the Mercer Global Pension Index. This dialogue allows for the exchange of ideas and strategies on how to better cater for an ageing population.

Although the current forecast for the future of old-age income security seems gloomy, the Singapore government has clearly indicated its intent to tackle the issue. It also emphasised the importance of recognising that senior citizens can still be productive, and contribute economically and socially. These efforts will be essential to ensuring financial security and equity for the ageing population.