Policy Responses

The policy responses to managing prolonged low fertility levels in Singapore have been wide-ranging. They are discussed below.

Strong Emphasis on Growth and Fiscal Management

Singapore has continued to emphasize high growth, which its policymakers regard as essential for the city-state to sustain its competitiveness and dynamism in a globalizing world; and to address various political economy and demographic challenges.

Singapore has recorded persistent budget surpluses, measured using IMF methodology, and has accumulated substantial fiscal reserves over the years (Asher 2003).⁵ The fiscal surpluses have primarily been due to extensive use of non-conventional revenue sources. Thus, during the 1991 to 2001 period, the fiscal revenue from leasing of land⁶ averaged 6.2% of GDP annually, while its reported investment income included in the budget⁷ averaged 4.5% of GDP annually (Asher 2003, Table 8.1).

Singapore has also made extensive use of regulatory levies, such as Electronic Road Pricing (ERP), and Certificate of Entitlement (COE) (requirement of the right to own a car for a 10-year period) to generate budgetary revenue.

While Singapore does not publish net national savings, or a breakdown of gross domestic savings, Asher (2003) has estimated that between 1991 and 2001, budgetary savings contributed, on average, about two-fifths of gross domestic savings.⁸

High Net Immigration

Singapore's TFR has been below the replacement rate for over three decades. Policymakers realize that measures designed to increase TFR such as the Children Development Cosavings (Baby Bonus) Scheme,⁹ increased maternity leave, and subsidies for infant and child care are likely to have a limited impact on fertility levels. Therefore, the primary instrument has been relatively large scale and sustained but selective net immigration. Singapore has sent out strong signals that such net immigration will be pursued without changing the dominant Chinese character of the city-state, or altering the ethnic composition.

Table 3 [ PDF 17.5KB | 1 page ] provides a breakdown of Singapore's population between citizens, permanent residents, and foreign workers and their dependents. The data indicates a sharp decline in the share of citizens in the total population between 1990 and 2005. The share of citizens declined by 15% from 86.1% in 1990 to 71.5% in 2005. Correspondingly, the share of permanent residents nearly increased by 300%, while the share of the non-resident population nearly increased by 200% during this same period. In 2005, close to 30% of the total population were non-citizens. This share is expected to rise (Burton 2007). Such level of absorption of foreign-born persons is likely to create both profound and subtle changes in the Singapore society, the contours of which will unfold over time.

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 20 years.

A public opinion survey published in a local paper in early 2007 reports that nearly 43% of Singaporeans believed the government is more concerned about foreign talent than its citizens; and doubted that high immigration helps create jobs and fresh opportunities. Nearly 9 respondents out of 10 feared that foreign talent will take away their jobs (Bala 2007). It is significant that these perceptions are held when Singapore is currently experiencing a favorable macroeconomic cycle. This suggests that political management would become even more difficult if employment growth slows substantially. This is relevant as the 6.5 million population target implies much higher levels of net immigration. 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), and therefore in managing the impacts of low fertility.

Unpublished research by Singapore's foremost demographic expert, Dr. G. Shantakumar suggests that while relatively high net immigration sustained over time can help in averting a decline in population, it will not address the rapid aging of Singapore's population. ¹⁰

Singapore's official attitude towards its citizens emigrating abroad has been shifting from ridiculing them as “quitters” to cautiously encouraging them to retain at least some links with Singapore. A survey by Singapore Press Holdings in July 2006 found that 67% of young Singaporeans wanted to work abroad, and more than 50% of them would consider emigration (The Straits Times 14 June 2008).

There are no regularly published figures on emigration from Singapore, but a recent official figure suggested that at least 150,000 (4.8% of citizens in 2005) Singaporeans, mostly in their prime working age, are living abroad. About 1000 citizens are annually giving up their Singapore citizenship (The Straits Times 14 June 2008).

Thus, even as the Singapore government attempts to compete for talent from abroad, it has been facing a difficult challenge of retaining its own citizens. This challenge with become more acute as the proportion of those from abroad markedly grows.

Besides addressing the root causes of such large emigration, Singapore policymakers also need to consider more flexible categories, such as the varying degrees of rights already enjoyed by the citizens. This may include a people of Singapore origin category under which individuals can obtain maximum economic benefits enjoyed by the citizens; less discrimination against permanent resident status in housing and other economic benefits; automatic right of citizenship to those born in Singapore, as well as for children with at least one Singapore parent. More liberal rules of employment for expatriate spouses could also help augment the labor supply.

Minimum Social Risk Pooling in Financing Retirement and Health Care

Unlike other high income, demographically mature economies, Singapore has relied almost exclusively on a single-tier mandatory savings arrangement,¹¹ administered by the Central Provident Fund (CPF). The CPF has become the key social, political, and economic institution in the country. The CPF system is quite complex, due to its multiple roles. It is, for example, the primary mortgage financing institution in the country. The CPF system does not contain any social risk pooling elements.

CPF contributions are channeled to three accounts. Two-thirds is channeled to the Ordinary Account (OA) which can be used for housing and investment schemes. 19% is channeled to the Medisave Account (MA) which can be used for hospitalization expenses, and for catastrophic health insurance. The remaining 14% is channeled into a Special Account (SA), which can be used for retirement and other purposes.

Effective from 1 July 2007, the CPF contribution rate of employers was raised by 1.5% to 14.5%, while the rate for employees remained unchanged at 20%, for a total of 34.5%. There was, however, no increase in the wage ceiling of $4,500 per month.¹² 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.

In 2006, the average balance per member of $40,598 was less than the per capita GDP of $46,832. This is extremely inadequate, as an average person will require financing for at least two decades during retirement. The age at which a member can withdraw the minimum sum in monthly installments, increased from 62 to 65 years, which will not make additional resources available during retirement.¹³

It is now reluctantly acknowledged, even by the policymakers in Singapore, that the CPF system will not be adequate to meet the aging issues. 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% during the period from 2001 to 2006 (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 macroeconomic cycles suggested slower growth; and increased when the opposite was indicated.

The administered interest rate structure, and lack of transparency and accountability in the ultimate investments of CPF balances ($125.8 billion as of December 2006) have meant low real returns on these balances.¹⁴ Thus, from the 1987 to 2006 period the annual real rate of return credited to CPF members was 1.26%. As the returns are lower than their corresponding growth in GDP by about 8% and in real wages by around 4.5%, the replacement rate is likely to be low.

The interest rate paid on CPF balances has been a weighted average of savings accounts and one year fixed deposit interest rates of domestic banks, with a minimum nominal interest rate of 2.5%.¹⁵ 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, a member will receive an additional 1% over the normal rate. However, instead of paying 1.5% more than the normal rate on balances in MA and SA accounts, the rate will be pegged to a rate of 10- year Singapore government securities plus 1%.

The Singapore budget has shown a trend towards persistent and large structural surpluses.¹⁶ The CPF balances have therefore not been used for government expenditures. Instead, through complex procedures, they are turned over to one of Singapore's holding companies, Government Investment Corporation (GIC).

GIC has a global portfolio. By statutory protection, it does not need to reveal its investment policies and performance to the public or the Parliament. To the extent GIC obtains a higher return than those credited to the CPF members, the difference is an implicit tax or 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 2006).

There are also two other factors which reduce the real value of CPF balances. First, Singapore increased the rate of its Goods and Services Tax (GST) from 5% to 7% in 2007. There is strong econometric evidence from international experiences that such an increase will raise the cost of living by the same percentage points as the increase in GST, i.e., 2%. This will act as a tax on CPF wealth. Second, in 2008, Singapore's inflation rate is expected to be about 6%. To the extent interest credited to CPF members is less than the inflation rate, an erosion of the real value of CPF balances will arise. This will further accentuate the inadequacy of the CPF for financing retirement and health care. Singapore also has the highest negative real interest rate (3-month market rate minus official CPI inflation) of about 5.5% in Asia (Minder 2008). This distorts household financial decisions. The centralized control of national savings by the government agencies and banks, however, is of considerable advantage to those controlling them.

Blake et al. (2008) suggest that a DC system should be designed from back to front (that is, from desired outputs to required inputs) with the goal of delivering an adequate targeted pension with a high degree of probability. In Singapore, there has been no public discussion of the actual replacement rate that will be obtained by different cohorts of the elderly. There also does not appear to be any target rate of replacement and the contribution of the CPF's savings and other instruments to the rate. Singapore's DC system thus does not meet the requirement of good design recommended by Blake et al. (2008).

It should be emphasized even without the above design and governance features, a singletier retirement financing system involving only mandatory savings, can never provide an adequate replacement rate; or address inflation and longevity risks;¹⁷ or provide survivor and disability benefits (Asher and Nandy 2006). A multi-tier system involving a mixture of defined benefit (DB) and defined contribution (DC) systems, with varying degrees of risk-pooling or risk-sharing arrangements are needed for a robust, adequate, and equitable social security system (Holzmann and Hinz 2005).

Singapore's health care financing system follows a pattern similar to the retirement financing system. The share of private provision of health care in Singapore is around three-fourths, with one-fourth coming from the government budget (Asher and Nandy 2006). The respective shares are reversed in the Organisation for Economic Co-operation and Development (OECD) countries. The private-public composition of healthcare expenditure in 1980 resembled the current OECD composition, so the public policies have contributed to a lopsided share of private provisions in health care. The share of third party payment through insurance and other risk-pooling instruments in Singapore's national health expenditure is extremely low. The adverse impact of these factors has been partially mitigated by the state's utilizing its overwhelming dominance over hospital beds to promote autonomy and efficiency in the hospitals (Ramesh 2008).

The Medishield system, which is Singapore's health insurance system for relatively long hospital stays, has no social risk-pooling arrangements as premiums vary positively with age.¹⁸ Moreover, the coverage stops at age 85. Table 1 suggests that the number of old-old (over 80 years) will rise rapidly reaching 88,000 by 2010, and 297,000 by 2030. Assuming the cutoff age for Medishield remains constant, there will be an estimated 111,000 persons above 85 years (US Census Bureau 2006) who will not have basic catastrophic insurance coverage during their most vulnerable stage in life.

For an affluent and rapidly aging society, assessment of the health financing system needs to go beyond the conventional indicators. If international experience is any guide, social riskpooling in the financing of healthcare, near universal coverage, and greater individual choice should be additional criteria in evaluating a health system. The application of technology in healthcare provision becomes more pervasive in an affluent and aging society. This drives up costs, making cost control a high priority objective. In addition, the expectations concerning quality of healthcare are much higher. At the same time, low fertility rates make reliance on family and immediate community more difficult to sustain.

The above discussion suggests that minimizing the importance of the social insurance and social risk pooling elements in the retirement and health financing systems has been a key method of coping with low fertility rates over a prolonged period. The policymakers have repeatedly emphasized that this approach will continue even as Singapore's demographic structure begins to resemble that of a typical OECD country. Singapore's strong fiscal position and increasingly aggressive investment strategies of its SWFs have provided resources and flexibility to enhance the adequacy of their retirement and health care financing systems.

A research finding from Europe should be especially illuminating for the Singapore policymakers. In Europe, the Scandinavian countries have both the most extensive social welfare systems in Europe and at 1.8, among the highest fertility rates (Shorto 2008).

Additional Measures

Singapore has also begun to undertake certain measures that encourage the continued employment of the aged. These measures include increasing the retirement age, opening job placement offices for the elderly, and providing subsidies to companies that hire elderly workers, both male and female. Increasing the labor force participation rate of women of all ages is helpful in coping with labor supply constraints arising from prolonged low fertility rates.

Subsidies are also provided to certain voluntary organizations that undertake various community-based social services for the elderly.

Though the government's explicit philosophy has been to discourage institutional long-term care for the elderly, it has encouraged certain community-based aged services. The government's Housing and Development Board (HDB) offers housing plans for multigenerational families and “granny” flats for the elderly.

However, unlike other high-income, de-populating economies, it has not taken sufficient advantage of the demographic complementarities with other Asian countries (such as India, Philippines, or Viet Nam), by engaging in outsourcing and off-shoring activities, despite its geographical and cultural proximity to these economies; and technological sufficiency. It has therefore failed to sufficiently extend its economic space as an instrument for countering the labor force and productivity impacts of prolonged fertility decline.

Singapore is attempting to increase the identification between companies and domestic workers. The policymakers hope that this will make companies more willing to provide health and retirement benefits, as well as training. The key objective is employability of workers at all ages.

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