Focus
Everybody's money by Bryn Zeckhauser and Aaron Sandoski
As Singapore once again scrutinises its policies amid tackling economic and social challenges, a look back at the reform of the Central Provident Fund in 2007 may be instructive.
E
ver touched a hot stove burner? You probably haven’t made that mistake again. Yet here was Prime Minister Lee Hsien Loong, the leader of Singapore, one of the world’s most prosperous nations, getting ready to touch that hot burner again. Intentionally. When Singapore’s government tried once before, in 1984, to reform the country’s Central Provident Fund—the functional equivalent of the U.S. Social Security system, but based on fully funded personal savings accounts—it ignited cries of pain from nearly everyone, including employers, workers, and the elderly. The government quickly backed off and left the system alone. Now (in 2007), despite incremental changes over the years, serious reform was needed even more urgently. Improved life expectancy was threatening to undermine the CPF. When the CPF was originally set up in the 1950s, the average Singaporean lived 60 years. If someone worked until age 55, his accumulated lifetime savings need only last on average five years. By 1984, when the government tried to push through a change that would have advanced to age 60 the point at which workers could tap into their accumulated contributions to the CPF, life expectancy had already grown to more than 70 years of age. By 2006, life expectancy was 80 years, and elderly Singaporeans were beginning to exhaust their CPF accounts. The system had to change. Singapore simply couldn’t condemn its elderly poor to destitution. They were the generation that lifted Singapore up from Third World to First World status.
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But how would the system have to change? Lee, who was educated with honors at Cambridge University and was Singapore’s youngest brigadier general, knew he could impose his own ideas if he thought it necessary, and he leaned toward creating a private pension system as the best solution. Yet he also knew that whatever the decision, he would be upsetting several constituencies. Businesses were intent on maintaining their competitive edge in the global economy, and any changes that raised their costs would bring howls of protest. Unions representing workers would want higher contributions from business and had long been pressing for an extension of the retirement age so their members could work until they were older. And Singapore’s elderly were growing increasingly worried about outliving their savings, yet didn’t want to put off the age at which they could tap into their CPF savings. “It’s a super-sensitive subject, first because it affects everybody’s money,” Lee says. “Second, these are personal accounts, so it’s all the more painful for people, who think, ‘It’s my money, give it back to me now.’ And third, that one attempt in 1984 to delay the withdrawal age by five years, from fifty-five to sixty, nearly brought the house down.” The trick would be to fashion a system that spread the burden of reform equitably among the various constituencies so that no individual group would feel singled out to surrender too much. To do that, Lee knew he needed to listen carefully to each constituency, as well as to his own government advisers, to figure out not only what was
most important to each group, but also what the government could afford to do. First stop, the various government ministers that could offer expert advice and make recommendations. The prime minister put together a group of representatives from different ministries, including many bright young men and women, to study various issues such as demographic trends, estimates of return on various investments, and possible ways to restructure the CPF, including the pros and cons of switching the entire retirement security program to a private pension plan. Lee took on the role of first among equals, encouraging his colleagues and associates to speak out forcefully and without fear about any concerns they had. As the prime minister listened to their expert opinions, it became evident to him that his private plan wouldn’t work. A private plan, his advisers told him, would put the onus on people to manage their funds themselves, something those with low incomes were not well equipped to do. And when everyone agreed that extending the point at which a person could begin to tap his CPF account was a basic goal, there was one objection. “One of the youngest of the ministers, said, ‘You know, this is going to be very difficult on the people who are in their fifties, because they are the ones who are nearly at the point when they are hoping to take their money out, and just as they’re reaching the target, we’re moving the glass away. So how about a little bit of sweetener for these people so they feel that you’re helping them make this transition?’”