Why Singapore Retires Securely
Singapore’s Central Provident Fund is based on individual savings and building assets, unlike the American Social Security system. Singapore’s national philosophy, “nothing should be free,” has encouraged free-market strategies and individual responsibility, a good model for American social policy.
In the U.S., government-run entitlement programs like Social Security, Medicare and Unemployment Insurance are staggering under an ever-increasing price tag, while a parallel and struggling asset-building movement carefully tiptoes around the wide spread of government welfare programs, all the while repeating that asset-building for low-income Americans is only supplementary.
Like the U.S., Singapore also has a compulsory social welfare system. However, since it is based on individual savings and building assets, it stands in marked contrast to the American welfare state. In Singapore, social policy is not separate from economic policy. Instead of becoming a welfare state, Singapore introduced the Central Provident Fund in 1955 as a compulsory savings scheme from which workers would benefit in their retirement. Singapore’s national philosophy, “nothing should be free,” has encouraged both market-based strategies and individual responsibility. The former led to the development of private hospitals and the latter to the Central Provident Fund (CPF) savings scheme.
Singapore relies primarily on this mandatory savings program to finance retirement and health care, with no social risk pooling. The CPF, introduced by the British colonial administration in 1955, is the main instrument of social security in Singapore. The scheme was gradually revised after independence to allow members to use their savings for a variety of purposes. Although originally designed to fulfill the purely economic goal of generating sufficient savings for the future, the CPF subsequently has been used for other social purposes, such as creating a sense of belonging and nationhood by encouraging home ownership and by investing in public limited companies.
The most fundamental difference between the CPF model of Singapore and American Social Security is that the former is a system of fully funded individual accounts, while the latter works on a pay-as-you-go (PAYG) basis. For a PAYG system, almost all the incoming funds are immediately paid out to current beneficiaries, instead of being saved and invested in individual accounts for workers’ future benefits. The future benefits of today’s workers in the Social Security System then will be similarly financed by taxes from the next generation of workers.
An advantage of a fully funded system over the PAYG system is that the former is wealth producing, whereas the latter is merely a redistribution of wealth. CPF balances are invested in government bonds, which generate positive rates of return. Under the Social Security system, no funds are saved and invested, thereby adding nothing to production. This implies that workers under Social Security forego the amount of increased production and associated returns that they would have received if their money were invested. Each retiree gets no more out of the program in benefits than the simple amounts paid in taxes, unless the government raises the amount of taxes it collects from the next generation of workers.
The CPF scheme has some other positive points as well. First, it firmly establishes that individuals and families are responsible for providing for their own social security benefits. Second, the pool of savings the system generates can help stimulate economic growth by providing a long-term, predictable and large flow of funds for investment. This, in turn, can lead to higher income levels, which produce more economic security both before and during retirement. Third, defined-contribution plans, such as Singapore’s, are by nature fully funded and do not generate the distortions and welfare losses associated with systems that pay benefits to one generation by imposing taxes on another.
American policymakers who seek to expand welfare and social insurance by including universal single-payer health care should look carefully at Singapore. Singapore’s health care system is a practical mix of personal payments, limited national insurance coverage and employment-based health care benefits. They have never socialized healthcare, and they spend a third of what the U.S. spends on health care (as a percentage of GDP). Yet, Singapore has better health indicators than the U.S.
While Singapore’s system is not perfect, they have implemented pragmatic public policies that place a significant part of the weight of social welfare on families and individuals, rather than on the state.