Gaps in retirement income system cannot be fixed with small tweaks

Academic Views / Friday, March 6th, 2020

Ng Kok Hoe, Senior Research Fellow and Head, Case Study Unit at the Lee Kuan Yew School of Public Policy, considers the implications of recent Budget announcements for achieving retirement income security in Singapore.

Income security for older people was one of the major themes in this year’s budget, with changes announced to the CPF and Silver Support Scheme. Policymakers are right to be concerned about gaps in the retirement income system.

Despite very high contribution rates, in 2018 the CPF paid just $450 per month to persons aged 65 to 69 years old, and less than $300 per month to those aged 70 and above. According to our research on minimum income standards, this is significantly short of the $1,379 per month that older people need for a basic standard of living in Singapore.

Across the richer economies, Singapore’s retirement income system is unique in its heavy reliance on individual savings derived from work income. Many other countries also provide some form of tax-financed basic pensions. Our unusual approach creates deep challenges for income security that cannot be addressed from within the CPF system alone.

Matched Retirement Savings Scheme

A new Matched Retirement Savings Scheme (MRSS) has just been announced. For people aged 55-70 years old who have not accumulated the CPF Basic Retirement Sum, the scheme matches every dollar of voluntary cash contribution to the Retirement Account, up to $600 a year, between 2021 and 2025. In total, individuals stand to receive a maximum of $3,000 from the scheme.

What difference will this make in retirement?

For a person turning 65 years old in 2020, an additional $3,000 in the Retirement Account will translate into approximately $17 more per month in CPF Life payout. To put this amount into context, it is just above 1% of the budget required for a basic standard of living. It is fair to say that the scheme will not have a noticeable impact on retirees’ living standards.

Furthermore, the MRSS is one-off and will end in 2025. Such ad hoc policy measures help to avoid long-term fiscal commitments but offer no assurance to future cohorts and prevent the kind of long-term thinking that individuals need for retirement planning.

From a policymaking perspective, ad hoc measures like these may be held to a lower standard of rationality and accountability precisely because they are seen as temporary. Permanent programmes need to have carefully framed goals and clear targets. Their outcomes are often reported publicly and some are tracked with key performance indicators alongside the annual budget cycle.

Ad hoc schemes rarely receive similar levels of scrutiny. In the case of the MRSS, one may also ask how the duration (why five years?), amount (why $3,000?) and eligibility (why the age range of 55 to 70?) were decided.

Yet the MRSS does not come cheap. The finance minister estimates that 435,000 people will qualify for the MRSS. If all of them receive the maximum matching contribution of $3,000, it will cost the government $1.3 billion. The Silver Support Scheme for lower-income retirees, by comparison, costs $330 million.

Deeper changes needed

The MRSS signals a continuation in the prevailing thinking: that retirement income should come mainly from individual savings. The design of the scheme reflects an implicit diagnosis that CPF payouts are inadequate because people have the means but are choosing to save or spend their money in other ways than retirement planning.

Older people collecting cardboard for income are a reminder for many Singaporeans of the problem of retirement income inadequacy. (Photo: Wikimedia, Creative Commons license)

In fact the challenges go much further than that.

For older people who are lifetime low-wage workers, there will be no spare resources for voluntary CPF savings and so no opportunity to benefit from the MRSS. Instead, they face a stark choice between planning for retirement and meeting current basic needs like housing, healthcare and food.

For a wage-based pension system to function effectively, wage interventions must be intensified. In recent years, important steps have been taken through a combination of wage protection for low-paying sectors via the Progressive Wage Model and wage enhancement in the form of the Workfare Income Supplement. Both schemes need to be expanded.

People who do not take up wage work in order to care for family members, often women, are also disadvantaged in retirement. Here, the scope for reform is extensive.

An expanded care sector for children and older people, providing affordable and high-quality services, will give more people an opportunity to join the workforce. For those who stay at home to provide care, an allowance can be introduced, perhaps in the form of CPF top-ups.

As the nature of work changes and job security becomes less certain, a basic tier of income protection will be more critical. In 2019, assistance from ComCare Long Term Assistance, the Silver Support Scheme, and GST Voucher-Cash added up to just half of what is needed for a basic standard of living, and only for people who qualify for these schemes.

In a 2019 Minimum Income Standard report, analysis of different sources of income for older people in Singapore pointed to worrying gaps. (Figure from report)

This year’s budget includes an expansion of the Silver Support Scheme to cover more people and a higher benefit quantum of $300 per month. Even with this increase, the maximum payout is just 22% of the amount required for a basic standard of living. In the long run, pegging the scheme’s eligibility criteria and generosity to benchmarks like a minimum income standard or median earnings will help to ensure that older people’s living standards keep up with the rest of society.

There are many examples of pension systems which build in mechanisms for income redistribution and poverty avoidance, such as a basic layer of tax-financed income provision or minimum pension guarantee. These systems achieve a better balance between individual responsibility to save on the one hand (for consumption-smoothing, i.e. to prevent a sharp decline in personal lifestyles after retirement), and on the other hand, state responsibility to collectivise and mitigate the risks of poverty posed by market uncertainties and demographic forces.

Singapore’s retirement income system, by design, already individualises the financial risks that people face in the labour market and at various life stages. The gaps in the system therefore cannot be plugged by small tweaks targeted at individual behaviours. The CPF can only continue to serve its purpose if it is accompanied by other forms of protection and collective provision.

In addition to his positions at the Lee Kuan Yew School of Public Policy, Ng Kok Hoe is one of the lead researchers on the Singapore Minimum Income Standard project, and editor of They Told Us to Move: Dakota—Cassia (Ethos Books, 2019).

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