Friday, 6 March 2015

Ho Kwon Ping proposes 'CPF-Plus'

This would entail govt top-ups so retirees can lead dignified lifestyle
By Linette Lai, The Straits Times, 5 Mar 2015

THE Central Provident Fund (CPF) needs a "bold and audacious" revamp to meet future retirement needs, said businessman Ho Kwon Ping yesterday.

In a lecture organised by the Institute of Policy Studies, he said it has become harder for the basic CPF scheme to fund retirees' living expenses.

Instead, he proposed a "CPF-Plus" - under which the Government would top up people's accounts to ensure a "minimally reasonable" quality of post-retirement life.

This sum, he said, would be more than what is needed for survival. It would allow retirees to lead a "basic but dignified" lifestyle. How much is needed to sustain such a lifestyle can be determined by an impartial authority at regular intervals - for example, every five years, Mr Ho added.

Doing so, he said, "removes the anxiety from Singaporeans that occasional measures to help them may still not be enough to bridge future retirement funding gaps".

Mr Ho said CPF-Plus would be means-tested and could be funded using the net investment income from Singapore's national reserves.

In fact, it is time to start discussing how much more of our reserves can be used rather than saved, and for what purposes, he added.

Mr Ho's proposal drew questions and comments from about 300 people who attended last night's lecture. This is the fourth in a series of five lectures Mr Ho is delivering as the Institute of Policy Studies' first S R Nathan Fellow.

Among the questions Mr Ho was asked was whether Singapore saves too much. Another person lauded the idea of a compulsory savings system that is simple and easy to understand.

The question-and-answer session was held under the Chatham House rule, which guarantees confidentiality in order to promote free discussion.

During the lecture, Mr Ho also proposed more than just monetary incentives to fix Singapore's falling fertility rate, such as better work-life balance and encouraging small and medium-sized firms to take over household chores from working parents.

"A two-child - or more - family is a natural desire of all parents but they are not procreating because the overall support environment is not conducive," he said. "Create a truly conducive environment and leave the rest to nature."

His lecture yesterday, held at the National University of Singapore, follows his third talk on security and sustainability last month. He will give a final lecture on society and identity on April 9.

Wanted: A bold co-funding model for retirement
Retirement adequacy is a worry as lifespans grow faster than people's years of work. State funds should be used to address anxieties about paying for one's golden years.
By Ho Kwon Ping, Published The Straits Times, 6 Mar 2015

WE ARE one of the fastest-ageing countries in the world. Today, only around 10 per cent of Singaporeans are 65 years old or above, compared to 25 per cent in Japan. But around 40 years from now, we will intersect with Japan, with both countries having around 35 per cent of their populations 65 years or older. Shortly thereafter, we will overtake Japan.

In other words, in the next 40 years, our elderly people will triple in numbers - from one in 10 to one in three. That rate of ageing is unsurpassed in the world.

The Government's promise to Singaporeans at independence 50 years ago was that every hardworking citizen would be able to own a decent home through the HDB, and save enough money through the CPF to fund living expenses throughout retirement. These promises were a critical part of the social compact between citizen and State, and have been met. However, because of increasing life expectancy, the Central Provident Fund has been increasingly stressed to provide enough cash for retirement, and changes, some of them controversial, have been made to the original terms of the CPF in the past three decades.

Instead of the CPF retaining its place as the centrepiece and the cornerstone of the Singapore retirement system, current trends will eventually relegate it to being just one component in an increasingly disparate and complicated collection of retirement-related schemes.

The danger is that people will fail to fully understand, much less appreciate, the totality of the many separate schemes now in place and yet to come in the next 50 years, and may be perplexed by the State's role in ensuring retirement adequacy. Should that happen, a creeping cynicism may start to undermine the social contract which the CPF in its simple boldness represented.

It may be appropriate then, at this critical juncture of Singapore's history, during which the Government's Budget has implicitly embraced a model of co-responsibility for what was previously a self-funded model of retirement savings, to explicitly create an integrated, unified platform for all future schemes to supplement the CPF. I call this platform, for lack of a better word, CPF-Plus. In other words, Big CPF may be simpler and better than many small supplements.

Living way past retirement

WHY is retirement adequacy a growing problem? The inevitable and inexorable trend is simply that, like chasing someone who is running even faster, life expectancy is extending faster than the age of retirement.

Every generation is living longer and also retiring later, but the ratio of retirement years to working years does not remain the same. The ratio is increasing in favour of retirement years, so that what we save in our working lives has to be stretched out over a longer period. The net effect is less money to spend each year.

When the CPF was created 60 years ago and the retirement age was 55 years, life expectancy was around 65 years. Our parents worked during the first 85 per cent of their lives (excluding of course childhood and schooling years) and their savings financed the remaining 15 per cent. I call this 85:15 ratio the retirement-funding ratio.

A high ratio indicates a high probability of retirement adequacy, simply because there are more working years to build up savings for fewer retirement years. Conversely, a lower ratio means poorer retirement adequacy because fewer working years are available to finance a longer retirement period.

Now fast forward to 2015. Life expectancy is now around 82 years and the retirement age has been extended to 62 years. The retirement-funding ratio has now declined to 76:24. This will worsen to 72:28 when our children's life expectancy rise to, say, 92 years and they retire at, say, age 66.

From a work-life balance perspective, this is social progress. Instead of retirement as a short precursor to death, we will enjoy longer, more active and meaningful retirement years. Eventually, almost one-third of our life expectancy can be spent in retirement, and that will be double what the pioneer generation enjoyed.

There is only one hitch: Who's going to pay for these golden years?

An enjoyable second career may be possible for professionals and other white-collar workers, but for the bulk of the working class, post-retirement employment is usually part-time or at a lower wage, and is usually no less stressful than the first career. Exacerbating this is the fact that the cost of retirement rises faster than income from salaries.

So if the retirement-funding ratio is not to worsen, people of my generation can stop working only at the age of 70 and my kids will have to retire at 78. This may be physically possible and some may well choose to do so, but they will have to sacrifice enjoying retirement or doing voluntary service.

In a collective social security system, the State pays for all the bonus years, and that is why in Western developed countries there is a concern that current generations have to fund future generations' hip operations and physiotherapy exercises. But because social security is collectivised, no single or individual pensioner is having anxiety attacks that his own State-funded pension will run out.

In a self-funded compulsory savings system - which to me includes the employer's contribution because companies consider this to be part of an employee's total compensation cost - the anxiety is much higher, because you have only what you personally saved up to tide you into retirement. And while this is good for the State and avoids inter-generational funding pressures, it puts the pressure squarely on the individual Singaporean.

The Government's approach to this problem is to ring-fence the truly exorbitant post-retirement expenses from a person's retirement needs so that the monthly CPF payouts can be quite small. And so, medical care for the most needy is heavily subsidised through Medifund; the elderly have their own special Pioneer Generation Package, and MediShield Life provides universal hospitalisation insurance.

Another potential drain on retirement adequacy is the cost of housing, which can be high for low-income retirees who do not own their own homes. In Singapore, this problem does not exist because of widespread home ownership, financed by CPF accounts.

But that still leaves the non-medical, non-housing costs of retirement spending. The fundamental dilemma of a worsening retirement-funding ratio is simply that retirement adequacy will inevitably worsen over time.

Furthermore, people's expectations of what basket of goods or services should constitute a minimally acceptable retirement lifestyle will only increase over time as we become more developed and affluent.

One argument is that if people were willing to monetise their homes by selling and downgrading, or do reverse mortgages with the HDB, a lot of cash will be released for them to spend during retirement. The problem is that this option has not been popular and most people seem to consider home ownership an essential part of their retirement security.

The anxiety of Singaporeans as they approach what should be the happiest period of their lives - an active, enjoyable retirement as the reward for all their hardworking years - will not lessen but instead will increase, unless there is an explicit assurance that a fundamental change will be made to the current CPF model. And mind you, at 2,402.4 hours a year, we already work the longest hours in the world.

Fifty years ago, the social contract our pioneer leaders made with the people of Singapore through the CPF-HDB dual promise was instantly audacious, compelling, and risky in its promise. People rallied to its simplicity and the People's Action Party's (PAP) ability to deliver on this promise underpinned, to a great extent, its continuing success at the polls.

Today, the original CPF vision has been tweaked almost beyond recognition and is unable to provide, by itself, retirement adequacy for Singaporeans. The Government has responded with laudable and socially beneficial schemes outside the CPF system, but the social compact which the CPF represented in its simplicity is at risk of being frayed because the uncertainties about retirement adequacy are being addressed by separately conceptualised and executed schemes.

Addressing anxieties

TO ERASE anxieties and restore the CPF as the cornerstone of our retirement system, is a simple, bold and audacious commitment now needed for the next 50 years?

Should the State simply guarantee all Singaporeans that it will top up the accounts of those CPF members, plus citizens without CPF savings, to whatever levels are periodically deemed necessary by a competent authority for a minimally reasonable level of retirement livelihood? I note here that the commitment should not be limited to just a survival level of retirement livelihood, but to a reasonable level as determined by periodic and impartial assessment, because what constitutes reasonableness will change as we mature into an increasingly developed and affluent society.

This unequivocal commitment, with all schemes to be encompassed within the single CPF platform, is what I call CPF-Plus.

If, for example, a competent authority such as an advisory panel were to determine that the minimum monthly sum required for a basic but dignified retirement lifestyle for any particular period of years is, say, $1,000 a month, then the difference between that and what the Minimum Sum or Basic Retirement Sum can provide, will come in the form of direct cash injections to that CPF account. The Silver Support Scheme is similar in concept, but is an independent scheme and until more financing and administrative details are revealed, it is hard to comment further.

CPF-Plus can be funded from the net investment income of our national reserves. This is the surplus generated by investing our reserves, after deducting for liabilities such as payment to CPF account holders. The Constitution was amended in 2008 to allow up to half of the net investment return or NIR to be utilised by the Government for current spending.

To be cautious and to not have an open-ended commitment which it might regret later, the commitment could be capped at a certain percentage of NIR, such as 5 per cent or 10 per cent - whatever is both prudent as well as likely to be sufficient.

If even committing a maximum percentage of NIR to CPF-Plus is considered too radical, another option is to set up an endowment fund, which is only a once-off commitment, and leaves increases to the fund to future governments to decide. In this case, only the investment returns from the endowment fund would be utilised for CPF-Plus. This is how Medifund is structured, and it has grown from $200 million in 1993 to $3 billion now.

To put some figures in perspective, the current Silver Support Scheme is going to cost $350 million a year. Say we establish an endowment fund and it manages to generate 4 per cent profit. In order to get $350 million a year, there needs to be around $9 billion in the CPF-Plus endowment fund to start with.

Several basic principles can already be envisaged for CPF-Plus.
- First, it should be paid into the CPF accounts of only the Singaporeans whose retirement savings will not be adequate to fund their retirement needs, as determined periodically by a competent authority convened every, say, four to five years. In other words, there should be a means test for reasons of social equity.
This, of course, also assumes that CPF will revert to its original role as a savings fund, so that people cannot intentionally draw down or overspend their CPF savings for housing or investments just in order to be topped up by CPF-Plus.
- Second, it should take into account the fact that non-working Singaporeans do not even have CPF accounts but still need retirement savings. This can be a good opportunity to reform the CPF- only-for-workers model entirely, so that husbands can pay part of their own CPF into their wives' accounts if they are homemakers or caregivers. Or these homemakers and caregivers can be given an allowance from the State which goes into their CPF.
- Third, it can be tweaked to reward those who are willing to save more, or willing to withdraw later, than the minimum mandated by CPF regulations, or even to reward entire special groups such as national servicemen.
Explicitly committing to a CPF-Plus co-responsibility model for retirement payment removes the anxiety from Singaporeans that occasional measures to help them may still not be enough to bridge future retirement-funding gaps.

Furthermore, it also provides flexibility for a government because the cap on the NIR percentage to be used for CPF-Plus or the increase to the endowment fund, depending on which model is used, can be determined from time to time and, therefore, can be kept within the limits of sustainable and realistic long-term investment returns from the reserves. This will minimise the likelihood of unfunded pension liabilities which haunt the pension systems of the developed world.

In line with values

THERE may be two objections to CPF-Plus. First, to guarantee a supplemental source of funding for a person's CPF account may erode the work ethic and de-incentivise savings. Second, drawing upon the reserves, even if only the NIR, is sliding even further down the slippery slope of raiding the reserves, which started with the constitutional amendment to allow half the NIR to be used for current expenditure.

There are sound counter-arguments to these objections. To top up a person's CPF accounts just prior to retirement, whenever that is determined to be, does not equate to giving money to a person during his working years. Rewarding sections of the population through CPF-Plus does not erode the work ethic nor create an entitlement mentality of handouts because of its deferred impact. It can even be argued that this can help to inculcate a culture of deferred gratification.

The fact is that CPF-Plus is in line with values of governance in Singapore, which, starting with the ideological origins of the PAP, are more aligned towards social democracy than laissez-faire or market capitalism. And Singaporeans are better off for it. Medifund, Workfare Income Supplement Scheme, or the Pioneer Generation Package have not eroded the work ethic nor created an entitlement mentality of handouts. They have rewarded and brought comfort to sections of the population.

As for drawing upon the NIR of the reserves to fund CPF-Plus, we need to recognise that not only is the NIR already being tapped for various purposes, but also that this is not transferring the burden of funding CPF-Plus to future generations, which would be the case with most tax-based collective social safety nets.

Indeed, this may prompt a separate discussion on the reserves itself. The fact that the Government amended the Constitution to allow half the NIR to be allocated for current expenditure implies a recognition that the growth of our reserves is approaching a point of sufficiency for whatever unforeseen contingencies may arise. It can be argued that after this point is reached - whatever size of reserves it might imply - the NIR should belong to current and not future generations, and failure to return at least a large chunk of such returns to finance a current generation's welfare is, in fact, inter-generationally inequitable.

The case can even be made that as more pioneer Singaporeans who contributed to our reserves are dying out and as we multiply less, our reserves per capita increases at an exponential rate, and thus, if anything, the Government should consider being more generous with its spending.

Europe's baby bump holds lessons for S'pore
Couples will have more children if the State funds a big increase in paid leave and ensures enough home-help services
By Ho Kwon Ping, Published The Straits Times, 5 Mar 2015

THE central issue about increasing Singapore's birth rate is whether we are prepared to take the perhaps radical steps which have enabled some developed Western countries to raise their birth rates from near terminal decline to more than replacement levels. Whether such steps, which largely involve creating a state-funded parental support ecosystem, are prohibitively expensive or a vital necessity, depends on whether we consider our birth rate to be a strategic imperative of the same priority as, say, national service, which is certainly not cheap either.

Ever since the mid-1960s when the Government launched a population control programme, our TFR, or total fertility rate, has been continually declining. For three decades, it has been below the replacement rate of 2.1 births per woman and, since 2003, a dozen years ago, it has been less than 1.3 births per woman.

We're hovering at the edge of the precipice, the so-called low-fertility trap, which is when a confluence of demographic, sociological and economic trends all converge and create a self-reinforcing, unstoppable spiral downwards. A slight uptick last year is encouraging news, but hardly a trend yet.

A few years ago, our resident population already started to shrink, although it has not been noticeable to most people because of the influx of foreign workers. Arresting this trend will not be easy: One Institute of Policy Studies finding was that even with an increased TFR to, say, 1.8 births per woman, which is quite optimistic and 50 per cent higher than at present, the resident population will still start to decline in the next 15 to 20 years.

We would need to take in about 20,000 new citizens per year on a net basis - meaning that it has to be more in reality to offset those migrating out of Singapore - to stem the decline and achieve simple zero population growth. This is about the size of a Marine Parade town each year. It is not small. And with anti-immigration sentiments persisting, if at least not increasing, in-migration cannot fill the population gap.

Surge in birth rates

HOWEVER, the demographic future of Singapore need not be as dismal as statistics suggest, nor should we be defeatist.

Birth rates in developed countries have somehow bottomed out and are starting to increase again. Demographers have discovered that when the Human Development Index or HDI increases, fertility rates decline but reach a level where it becomes a J curve and starts to rise again. The HDI is a more holistic measure of development beyond simply economic wealth which, in my last lecture, I advocated that Singapore adopt.

The negative correlation between rising HDI and falling birth rates has been observed for decades and was once thought to be inevitable. After all, it was a trend with virtually every country observed - as lifestyles improve, parents want fewer children.

But the study, first published in the magazine Nature in 2009, found that at some point as the HDI continues to advance, fertility starts to rise again. Some Western developed countries such as France, Sweden and Norway have seen fertility actually climbing back to replacement leve1s after decades of continuing decline. In the United States, fertility briefly surged above replacement level and is now hovering around there. New Zealand's TFR is now at replacement level.

What has caused this reversal in birth rates, and how can it be sustained? The prevailing theory is that this considerable and apparently sustained uptick in fertility rates is due to changing notions of gender roles within the family, work-life balance within careers, and government policies which support the ability of families to enjoy the natural happiness of raising children.

Studies in Europe have shown that before 1985, as more women went to work, couples have fewer children. Singapore's history corroborates this trend. But after 1985, the correlation reversed - countries where more women worked started to gradually have higher birth rates than those where more women stayed home. This has noticeably not happened in Singapore, where birth rates have stayed stubbornly low. Other East Asian economies like Hong Kong and Taiwan have similar trends as Singapore.

Sociologists say the data suggests that countries which recognise through concrete policies that young families today want more children only if both parents undertake equal responsibility for child rearing, and that children are well taken care of while both parents continue to engage in their careers, will get a positive response from young parents.

In other words, there is no need for campaigns to encourage people to have at least one and preferably two children, or to bribe them with cash grants to make more babies.

A two-child - or more - family is a natural desire of parents, but they are not procreating because the overall support environment is not conducive. Create a truly conducive environment and leave the rest to nature.

The State and fathers

IN FACT, there is a phenomenon in the behavioural sciences called motivation crowding theory, which when applied would mean that trying to use money to motivate what should be an intrinsic desire - that of having children - can have the perverse effect of reversing the desired result instead. So, creating a suitable environment (which cannot be monetised as easily) is much better than direct cash handouts for bearing children.

What might such an environment entail for us in Singapore? Well, such truly pro-family policies will not come cheap. Sweden grants each new parent two months of paid leave which cannot be transferred between each other, and another full year - 360 days - of leave which can be shared or transferred between themselves. Parents on leave are paid 80 per cent of their monthly salary for 80 per cent of the total leave allowable, with a cap which is roughly $6,500. The balance 20 per cent allowable leave is paid a lower flat rate.

One refinement is an interesting example of how family dynamics operate and how the state can nudge behaviour. Data showed that Swedish mothers used up on average 75 per cent of their total leave entitlement, but fathers only 25 per cent or two months, and pressured their wives to take up the majority of the shared leave.

This was resented and so the government - recognising who ultimately calls the shots when it comes to childbirth - will reduce the shared leave and give more to the father so that the pressure will be on them to use it or lose it. The State essentially helped mothers to nudge fathers to do their share of parenting - which was a key factor in convincing women to have more children.

This seems to have worked. Sweden's previously declining fertility rates have almost returned to replacement levels, and further refinements are likely to spur even higher growth. High-quality and inexpensive childcare facilities are also important and Sweden again leads in the provision of such services, even to the extent of having overnight centres for children of single parents who have to do shift work.

Sweden is just one example; other European countries pursuing the same policies have achieved similar results.

The takeaway for Singapore is that if we want the same birth rates as in Europe, we should work harder to promote work-life integration and gender equality within the family, so that for women, there is no trade-off between having a meaningful career and enjoying motherhood.

The Singapore Government is well aware of the success of these European countries, whose experts have visited Singapore and shared their experiences. But there seems to be either scepticism about the impact of long parental leave on fertility rates, or an unwillingness to confront the economic costs of such programmes. Employers, already reeling under the current clampdown on foreign workers, will be extremely unhappy about having to give a lot more paid leave to their child-bearing employees.

But as our fertility rates continue to plunge while Europe starts to see a reversal, it behooves us to perhaps consider whether the strategic dangers of not stemming a population decline may actually outweigh the economic costs.

We need to decisively conclude whether we are facing an issue of demographic security requiring the same kind of mindset shift which enabled national service to be implemented, despite the loss of economic productivity as well as cost to the State.

Furthermore, we may have to change the entire support system for the young family, beyond just increasing paternity and maternity leave. An entire ecosystem of small and medium-sized enterprises (SMEs) has to be created to undertake more of the work done by working parents. Liberalising the employment of domestic helpers will not necessarily help and there is even some evidence to suggest that it may be counterproductive. Young families with domestic maids have found themselves increasingly dependent on them to relieve their stress, but without increasing the intimacy of family life to encourage more children. We need a network of SMEs to which much housework, family meal preparation, and many other household chores can be outsourced. Reliable childcare facilities need to be more widespread, particularly in or near the workplace or home. Facilities and services serving the dependants of young working families - both the aged and the infants - will also go a long way to encourage Singapore families to want to enjoy having rather than being stressed by, more children.

But unless we recognise that our current policies are not working and learn from other countries which have indeed achieved success, we will simply go into genteel decline and bemoan our fate while not doing much about it.

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