시 Singapore’s Multi-Pillar System of Social Security

M Ramesh
LKY School of Public Policy
The National University of Singapore
Email: [email protected]

Paper presented at the KDI-World Bank Conference on

“Multi-Pillar Model of Social Safety Net”
Held in Seoul, 6 December 2006

ABSTRACT
The paper describes and analyzes the multipillar system of social security in Singapore with reference to
the five pillars of social security outlined in the World Bank’s 2005 policy note Old-Age Income Support
in the 21st Century.
The paper shows that Singapore has a weak Zero pillar and a non-existent First pillar. Its public assistance
schemes impose tough eligibility conditions and offer paltry benefits. The scheme is shaped by the
Singapore government’s antipathy towards “hand-outs” and, as a corollary, emphasis on self-reliance,
hard-work, thrift, and family support. But in recent years the government has had to reckon with uncertain
economic conditions, stagnant wages for low-skill workers, growing long-term poverty, and rising
income inequality. It has responded through ad hoc assistance but is currently considering more long-term
programs. However, it has made it clear that the assistance program it develops will not be of the
“welfare” sort found in Western countries.
The lynchpin in the Singapore’s social security system is the Central Provident Fund (CPF), which is a
Second pillar compulsory savings scheme. The scheme has near-universal coverage and very high
contribution rates. However, the scheme provides inadequate income protection during old age due to low
returns and withdrawals for housing and other purposes. The lack of redistributive features innate to
Defined Contribution schemes leaves nearly half the members inadequately covered, especially those on
low or no income during their working lives.
Singapore recently established a Third Pillar voluntary retirement savings program called the
Supplementary Retirement Scheme (SRS). The coverage of the scheme and the benefits it offers are
modest. These are not a significant drawback, however, as there is already a robust individual savings
scheme in the form of CPF.
The Fourth pillar in Singapore is remarkably wide and robust. Home ownership is near-universal and
housing has offered good investment returns in the past. However, the housing market has been in
recession for almost a decade and it is feared that it will never offer the returns available in the heydays of
the early 1990s. Family support too is remarkably strong and widespread in Singapore. But, again,
increasing female participation in the labourforce and declining family size is weakening the pillar.
All in all, Singapore has the essential foundations of a strong social security system, marred by a weak
basic pillars. Designing a meaningful and sustainable public assistance system is the key challenge facing
the government. The government continues to hope that it will be able to establish such programs without
turning Singapore into a welfare state.
 Ramesh, Singapore # 2

Singapore’s Multi-Pillar System of Social Security

M Ramesh
LKY School of Public Policy
The National University of Singapore
Email: [email protected]

Paper presented at the KDI-World Bank Conference on

“Multi-Pillar Model of Social Safety Net”
Held in Seoul, 6 December 2006

The People’s Action Party (PAP), which first came to office in 1959 and has ruled the
country since, inherited a feeble and residual social security system from the British and the
basic structure remains intact to this date. Indeed the only substantive change that has occurred in
the last four decades is the expansion and reinforcement of the Central Provident Fund (CPF). As
a result, Singapore has had only a strong Second pillar, to use the World Bank’s terminology. It
has also had a strong Fourth Pillar in the form of family support and home ownership. But these
mechanisms are now recognized as inadequate and the government is gradually beginning to
recognize the importance of a strong state -funded basic pillar for those who cannot be protected
through contributory systems. However, the government remains firm in its opposition to
establishing anything resembling a Western welfare state built on the notion of entitlement to
statutory social protection.

Historical Synopsis

Singapore has had a provident fund, the CPF, since long before ‘individual retirement
account’ (IRA) became popular in policy discussions in the mid-1990s. PF is similar to IRA in
every respect except that it is centrally pooled and managed by the government rather than
private managers. Investment returns are determined by the government and everyone receives
the same rate. Otherwise, both are compulsory Defined Contribution (DC) arrangements which
specify the level of contribution rather than benefits typical of social insurance arrangements,
also known as Defined Benefits (DB). Both are based on the principle of save-as-you-earn
(SAYE), as distinct from the pay-as-you-go (PAYG) principle characteristic of DB schemes.
 Ramesh, Singapore # 3

Both are also fully funded in the sense that members’ benefit is equal to the balance in their
personal account, imposing no actual or accrued liability on the government.

The CPF was established in the context of grim economic conditions following the Second
World War. Its establishment involved a lot of deliberations, even though the government largely
ignored the recommendations. The McFadzean Commission established in 1951 to inquire into
the feasibility of a retirement scheme emphatically rejected provident fund as an option on the
grounds it would not provide adequate benefits to the target population and instead
recommended a contributory pension scheme paying subsistence-level benefits. But the Report
failed to persuade the government, which went on to promulgate the Central Provident Fund
Ordinance in 1953 and implement it in 1955. The decision was based more on the colonial
government’s reluctance to establish a program that might involve significant public expenditure
rather than a belief in its greater efficiency or effectiveness. The fact that Malaysia, with which
Singapore had a common labor market, already had such a scheme made its adoption all the
more convenient (Parrott, 2000).

Soon after CPF’s launch, the government realized its limitations and established the
Committee on Minimum Standards of Livelihood which submitted its report in 1957. In the same
year, an ILO team reviewed the social security arrangements in Singapore and recommended
reforms. In separate reports, the two recommended establishment of a contributory social
insurance scheme providing retirement, survivor and sickness benefits. They also recommended
strengthening of the public assistance scheme to supplement social insurance. However, by 1959
the PAP was in office and it was even less keen than the colonial rulers about social insurance
(Low and Aw, 1997).

The CPF was originally established as an interim measure to provide retirement income. In
the subsequent decades, however, the scheme was not only retained but expanded as the
government began to appreciate its potential for pursuing a range of social and economic policy
objectives: housing, economic development, and health care, in addition to maintaining income.
Indeed it is hard to think of any social security arrangement anywhere in the world which is
intended to serve such a variety of goals.
 Ramesh, Singapore # 4

At its inception, the emphasis of the CPF scheme was on providing retirement income for
old age. Despite calls from unions to allow workers to withdraw their savings should they fall ill
or become unemployed, the CPF Board adhered to the rule that CPF savings could only be
withdrawn upon retirement. This stand prevailed until the mid-1960s when the government
began to recognize that financial security could take many forms, and need not be restricted to a
monetary payoff each month. The first move towards liberalization came in September 1968,
when the home ownership scheme was introduced to allow members to finance the purchase of
HDB flats with their CPF savings.

Since then, the CPF has been slowly liberalized to meet the changing needs of an
increasingly sophisticated and educated labor force. Currently, members can use their CPF
savings for a host of schemes, including those for retirement, home ownership, investments,
health care, insurance or college loans. But the most salient features of the scheme have not
changed since 1955, i.e. it is compulsory, its basic principle is thrift and self help; and the
contributions made by each member are earmarked for the benefit of the individual, with no
redistribution among members. The government has also adjusted CPF contribution rates in line
with its macroeconomic objectives from time to time.

In July 2002, a high power government committee looked into the CPF and concluded that
‘The CPF system is fundamentally sound’ (Singapore, Economic Review Committee, 2002). It
affirmed that the ‘CPF should continue to cater to the three key needs of retirement expenditure,
healthcare and home ownership.’ However, it noted the insufficiency of funds for retirement and
healthcare and recommended ameliorative measures. The government did not act on the
recommendations – indeed it reduced employers’ contribution, on the grounds of maintaining
Singapore’s wage competitiveness in relation to other Asian countries.

There is also a public assistance scheme in Singapore which has existed since colonial
times. It is steeped in the British poor house tradition with an emphasis on helping only those in
abject poverty and with no other means of support. The eligibility and benefits conditions are
designed to make it unattractive to all but the most unfortunate. However, the government is
currently considering a revamp in the face of rising income inequality and long-term poverty.
 Ramesh, Singapore # 5

Multi-Pillar System: Introduction

The notion of multi-pillar security is a creation of the World Bank though others have
talked about it in general terms for decades. Its first full enunciation is to be found in the World
Bank’s 1995 Report Averting the Old Age Crisis which recommended three
pillars of social security for all countries. The recommendations was a source
of inspiration and prescription for scores of countries around the world which
reformed their social security system during the late 1990s and early 2000s.

After almost a decade of experience with reforms along the lines proposed
by the Bank, in 2005 a group of World Bank’s staff members led by the Director of the
Social Protection unit, Robert Holzmann, published “a policy note” which significantly
revised the 1994 Report. The new document represents a clear, if still
controversial, exposition of a multi-pillar system of social security. The
document is notable for its reflective analysis of the problems faced by the aged and
consideration of a expanded range of mechanisms for dealing with them. It proposes a multipillar
system consisting of five (rather than only three, proposed by the 1994 report) complementary
components.
 Ramesh, Singapore # 6

The Five Pillars of Old Age Income Security

Objective Financing Program Features Equivalent scheme in

Pillar Singapore
•Mandatory •Publicly Paltry Public Assistance. Ad
Poverty alleviation, Government’s general
0 through redistribution revenues
managed •Means tested hoc financial relief.
•Minimum Benefits
Contribution, •Mandatory •Publicly Nil
Income replacement,
employer and/or managed •Defined Benefits or
with some
1st redistributive
employee on PAYG Notional Defined
or partially funded Contributions •Earning-related
component
basis benefit
•Mandatory •Privately CPF (which includes
Tax-Preferred private
managed •Defined provisions for retirement,
Income smoothing, savings or private
2nd through savings insurance. Fully
Contributions •Benefits equal health, housing and education)
contribution plus returns on
funded.
investment
•Voluntary •Privately Supplementary Retirement
managed •Fully Funded Scheme
Income smoothing,
Tax-Preferred private Defined Benefits or Defined
3rd through enhanced
saving. Fully funded. Contribution •Benefits equal
savings
contribution plus returns on
investment
•Voluntary •Privately and High level of Family support.
informally managed •Informal High level of home ownership.
Continuing protection Financial and other intra-family or inter-
4th where possible assets generational financial and non-
financial help. Eg. Housing,
healthcare

The Zero Pillar is meant to be an essential pillar in the pension edifice in all countries, rich
and poor. It corresponds to the first pillar of the 1994 Report but is given a more central role in
the new formulation. It is meant to provide a minimal level of protection to all those without
sufficient income during retirement. The benefits may be in the form of universal benefit
available to all elderly or means-tested public assistance available only to the needy. Eligibility
conditions are meant to be flexible so as to include all those who need support. The funding for it
is to come from the government’s general revenues, as contribution requirement would have the
effect of excluding some potential beneficiaries.

The proposed First Pillar is a new proposal targeted at the working poor, those who don’t
or can’t save, and those who face unusually high longevity or market risks (eg. financial market
collapse at the time of retirement). As the document sums it: “First pillars address, among others,
risks of individual myopia, low earnings even within the formal economy, and inappropriate
 Ramesh, Singapore # 7

planning horizons due to uncertainties of life expectancies and financial market risks…
(Holzmann et al. 2005: 37).” The structure of the program may be of Defined Benefits or
“Notional” Defined Contribution (NDC) types. While the benefits are to be related to income,
the relationship is to be loose so as to allow some redistribution to those who need additional
support. It is to be financed from contribution by employers and employees on a PAYG basis
though there is scope for some pre-funding. The level of contribution, and consequently benefits,
is to be modest so as to not impose heavy tax burden on members or promote work disincentives.

The Second And Third Pillars, similar to their namesakes in the 1994 document, are
designed to promote savings for retirement so that subscribers can enjoy a higher standard of
living than the minimum standard made available under the zero and first pillars. However, the
second pillar is mandatory while the third pillar is voluntary so as that only those who can afford
to save more take advantage of the latter in the form of tax concessions. Both pillars may be
designed in a way so as to provide longevity insurance in the form of periodic annuities for life.

The Fourth Pillar is an entirely new proposal and is in response to the recognition that
informal mechanisms play a vital role in providing income protection to the aged and others.
Family members and home ownership are vital sources of income and other support and need to
be considered while designing an overall income protection system for the aged. However, the
report recommends no specific government measure to promote their fourth pillar except to
consider its role while designing other pillars and ensuring that they are not undermined.

Singapore’s social security system includes many of these pillars, but there is only one real
pillar, the Second, and the rest are non-existent, feeble, or weakening. As we will see in the
following discussion, its public assistance is meant only for abject cases and the First Pillar is
absent altogether. Its Second Pillar, the CPF, is strong and indeed goes beyond retirement
income to include health and housing. Recently, Singapore established a Supplementary
Retirement Scheme as the Fourth Pillar. Its Fifth Pillar in the form of family support and home
ownership is still strong but is under stress.
 Ramesh, Singapore # 8

The Current Organization of the Social Security in Singapore

Zero pillar: means-tested assistance

The Government’s poverty alleviation strategy consists of a Public Assistance scheme,

various programs run by the Community Development Councils (CDCs) and the Ministry of
Community Development, Youth and Sports (MCYS). There are also numerous ad hoc grants
and fiscal reliefs that the government occasionally, and increasingly frequently, gives out to
lower income groups. There are also tax incentives in place for encouraging private donations to
charities by individuals and firms. The government also encourages more social services to be
delivered by volunteers. The government calls these disparate measures ‘many helping hands’
approach to social welfare whereby social assistance and social work is shared between the
government and community organizations.

Public Assistance (PA) Scheme is intended to benefit “… financially distressed

Singaporeans who by reason of age, illness, disability or unfavourable family circumstances, are
unable to work and have no means of subsistence as well as no one to depend upon.”
(www.cdc.org.sg/services/social.html) Note that the scheme is not for all low-income individuals or
households, but only for those who have a good reason for not working and have no other source
of income or family support. In other words, the scheme is meant to be truly of last resort.

The amount of PA benefit ranges from S$260 a month for an adult to a maximum of S$825
for a four-person household. The monthly PA benefit for single adults was equivalent to 8
percent of average monthly gross national income (GNI) in 2003. The per capita benefit was yet
smaller for larger households: for instance, for a family of four adults and two children, the
benefit was S$189 per person which was equivalent to 6 percent of monthly per capita GNI in
2003. To get a perspective on the generosity of the PA benefit amount, the average retirement
benefit from all basic-tier schemes is around 29 percent of national average earnings across all
30 OECD countries (Whiteford and Whitehouse, 2006). In Singapore, PA recipients also receive
free medical care, subsidized housing, discounted utilities, and so on, but these are discretionary
and there is no data available on the total value of these benefits.

The total number of individuals receiving PA assistance in 2005 was 2,770, which was a
slight increase from 2,409 in 2000, but a decline from 2,867 in 1988 (Ho, 2006). The PA
 Ramesh, Singapore # 9

recipients together former 0.07 percent of the population. An overwhelming majority of the PA
recipients – approximately 85 percent of all PA recipients since 1995– are “aged destitutes”,
while another 7 percent are “medically unfit for work”, and 6 percent are “disabled persons
under 60 years” (Singapore, Yearbook of Statistics 2006). Thus the PA scheme is for all practical
a program for the aged destitutes and disabled rather than poor. Yet only a small proportion of all
aged in Singapore receive PA: the proportion of the elderly population receiving PA has been
around 0.8 percent for several years.

Many social welfare benefits in Singapore are offered through the ComCare, which is a
S$1 billion endowment fund established by the government to pay for social assistance programs
run by the Community Development Councils (CDCs). The fund provides assistance to families
in financial need, especially families with children, aged, and unemployed (Tan, 2005). The
number of households receiving financial aid from CDC increased from 14,300 in 2001 to
31,570 in 2003, while the total amount given out doubled from $14.6 million to $27 million (Tan,
2005). Thus, in 2003 the average amount of CDC benefit was $855, which is equivalent to 3
percent of the per capita GNI.

CDC provides tuition fee assistance towards before- and after-hours childcare for school-
going children of families with combined family income under S$2,500. One or both parents
need to be working to be eligible for benefits. There are separate means-tested schemes for Child
Care for pre-school children from low-income families (Centre-Based Financial Assistance
Scheme and Kindergarten Financial Assistance Scheme). The subsidies for kindergarten children
can be as much as 75% of the school fees, or up to $600 per year, whichever is lower.

The Work Support Program helps needy families to find employment and achieve self-
reliance. The type of benefit is flexible, depending on the family situation, and includes: Rental
and utilities relief; cash grant for meeting basic needs; Childcare subsidies; Training grant; and
Educational assistance, and Medical Assistance. The benefits are awarded by the CDCs on a case
by case basis. To receive benefits, “The main breadwinner and other adult family members are
not able to work; The family has weak support network; and The family has limited or no
savings.” (http://www.cdc.org.sg/services/social.html)
 Ramesh, Singapore# 10

The Home Ownership Plus Education is an assistance scheme to help young low income
families get out of poverty trap by providing housing assistance to poor and young working
families so that they can devote their resources on education and skills upgrading. To be eligible,
the family must include married couple and no more than two children. The Monthly gross
household income should be below S$1,500. In addition, the education level of both parents
should be no higher than secondary schooling and the wife’s age should be lower than 35 years.
Eligible household receive $50,000 disbursed in annual installments in the form of housing
grants; training grant of up to $10,000 per family over a 10-year period; A one-off cash grant of
$1,000 to help the family offset utilities bills; and Cash grant of $6,000-$9,000 to help the
couples with family life education, family planning and parenting skills. Educational bursaries
ranging from $250 to $2,000 per annum per child is also available for children from pre-school
up to University level education, including special education.

The Interim (Short-term) Financial Assistance Scheme (IFAS) offers short term financial
help to needy individuals or families who need to tide them over a difficult period. The financial
assistance varies from approximately S$140 to maximum S$600 per month and the maximum
assistance duration varies from two months to one year. The scheme is administered by the
Ministry of Community Development.

Rent and Utilities Assistance Scheme (RUAS) assists families residing in small public
housing rental apartments who are in arrears of rent, utilities charges and service & conservancy
charges to meet such payment. To receive assistance, 1 person household need to have monthly
income below S$240, while 4 person household need to be below S$710. % OF PER CAPITA
INCOME.

There are also several “local” financial assistance schemes which are disbursed by
members of parliament. “These are mainly short term, small quantum assistance, and/or certain
in-kind assistance e.g. food vouchers.”

In line with the government’s belief in self-reliance for the poor, the government offers
training and employment/re-employment though several job training, course fee subsidization,
counseling and job data bank services. Examples include, "Skills Re-development Program",
 Ramesh, Singapore# 11

"Education and Training Fund", "Interest-Free Loan Scheme for Skills Training and Upgrading",
and "Employment Placement Assistance Programme".

In 2006, in months leading up to election, the Government distributed $3.6 billion in

Progress Packages and Workfare Bonuses, dubbed “pre-election goodies” by commentators. In
recent years, billions of dollars have been given out through various assistance schemes,
including New Singapore Shares, Economic Restructuring Shares and CPF Top-Ups. What is
notable about these benefits is that they are ad hoc and impose no binding obligation on the
government and are available on a purely discretionary basis.

Second pillar: Defined Contributions

There is no first pillar scheme in Singapore in the sense under by the World Bank’s 2005
document. The lynchpin of Singapore’s social security system is its Second Pillar comprising
compulsory savings in the form of CPF. It is a compulsory savings scheme for individuals
administered by the government.

Participation in CPF is compulsory for employed persons, except for foreign workers (who
form a fifth of the labor force), casual and part-time workers, and certain categories of contract
workers. Self-employed are required to participate in the Medisave component of the scheme and
may participate in the overall scheme on a voluntary basis. As at June 2006, CPF had a
membership of 3.08 million, of whom 1.42 million (60 percent of the 2005 labor force) were
active contributing members. In other words, nearly two-fifth of the labor force in Singapore are
not covered by the PF scheme. Many of the non-covered are, of course, covered under other
programs, but still a significant proportion of the labor force remains uncovered. Foreign
workers form the bulk of the non-covered in Singapore.

The CPF Board is the trustee of members’ CPF savings. The Board is entrusted to protect
and preserve the value of the savings, and provide fair market returns at minimal risk, while
opening avenues for members to seek higher returns on their own after carefully considering the
risk involved. The government helps by exempting CPF earnings from tax and guaranteeing
payment of CPF savings. The Board’s part is to make the assets and services available to help
meet Singapore’s social and economic objectives, thereby improving the quality of life of all
Singaporeans and CPF members.
 Ramesh, Singapore# 12

Unlike social insurance schemes, the CPF is fully funded - members accumulate assets in
their individual accounts, which they later draw upon for their various needs. Contribution to the
CPF is compulsory for all employed Singaporeans and permanent residents. Both the employer
and employee make monthly contributions to the Fund.

The CPF contribution rate began with 5 percent each for employers and employees in 1955,
creeping up to 10 percent each in 1970, reaching the peak of 25 percent each in 1984, then
declining to and staying at 20 percent each for much of the 1990s. To improve the older workers’
employment prospects, a lower rate of employer-contribution applies to workers older than 55
years of age and yet lower for those above 60 years. Currently, the total contribution rate for
workers up to 55 years old is 33 percent for employees up to 55 years, with contributions of 13
percent from the employer and 20 percent from the employee. The percentage changes with age,
regardless of the income level. Other rates are 27 percent for those in the “above 50 to 55 years”
age group, 18.5 percent for those in the "above 55 to 60 years" age group, 11 percent for those in
the "above 60 to 65 years" age group, and 8.5 percent for those above 65 years old (Table 1).

All employees who earn more than $750 per month are required to contribute to their CPF
accounts. For employers, CPF contributions are payable for employees whose wages exceed $50
a month. The maximum monthly contribution payable for all age groups in 2006 is based on a
salary ceiling of $4,500 a month. Besides providing for CPF members’ needs, these rates also
encourage the continued employment of older workers.

In most years, CPF contributions have exceeded withdrawals (Figure 1), allowing the fund
to accumulate total members’ balance of $ 112.6 billion as at end June 2006. The entire fund is
by law invested in Singapore Government Bonds or awaiting to be invested in such bonds.

Reflecting the CPF’s multi-purpose role, members’ accounts are divided into three separate
sub-accounts: Ordinary, Special, and Medisave. The Ordinary Account (OA) can be used for
retirement, buying a home, buying CPF insurance, investment and education. The entire balance
in the account may be withdrawn for housing but only the sum above the ‘minimum sum’ may
be withdrawn for investment purposes. The Medisave Account can be used to pay hospital bills
and approved medical insurance. The Special Account is reserved for old age and contingencies.
 Ramesh, Singapore# 13

At age 55, there is another account, the Retirement Account, created for members for holding
compulsory Minimum Sum.

Ordinary Account holds 60-70 percent (depending on age) of one’s CPF funds. The Special
Account holds 10-20 percent, whereas another 15-20 percent is channeled to the Medisave
account (Table 2). Funds in the Ordinary Account earn interest rate tied to the rates offered by
local banks, subject to a minimum rate of 2.5 percent per annum. Funds in the Special and
Medisave Accounts earn an additional 1.5 percentage points, or a minimum rate of 4 percent per
annum. The interest rate is calculated based on a weightage of 80 percent on the 12-month fixed
deposit rates and 20 percent on the savings rates of the major local banks. It is reviewed quarterly
to keep up with prevailing market interest rates. In 2005, the interest rates was 2.5 percent per
annum for the Ordinary Account and 4 percent per annum for the Medisave, Special and
Retirement Accountsi and total interest credited into members’ accounts amounted to $3,675.4
million. In real terms, the annual returns offered on CPF funds averaged 1.2 percent over the
1987-2004 period which was lower than the growth in GDP (8.7 percent) and income (5.9
percent) in the corresponding period (Asher and Nandy, 2006). This is gradually eroding the
replacement rate whose cumulative effect over time is likely to be significant.

In 2005, 44 percent of all withdrawals from CPF was to pay for housing and another 38
percent for investment in approved financial instruments. Withdrawal for housing and
investment, thus, form more than three-quarters of all withdrawals, leaving little savings for
retirement purposes.

Funds in Special Account is set aside for retirement and may only be withdrawn at the age
of 55 years. Since 1987, however, members have been required to leave a minimum sum in the
CPF to ensure that members don’t fritter away their savings in the early years of retirement.
Members who turn 55 between 1 July 2005 and 30 June 2006 were required to set aside a
Minimum Sum of $90,000. Of this, at least $45,000 must be in cash while the remaining $45,000
can be pledged with a property. The amount is released in installments from the age of 62 years
until it is exhausted. Members are encouraged to buy approved life annuities with their Minimum
Sum to give them a guaranteed income for life. Alternatively, they may deposit their savings
with approved banks or continue to keep it with the CPF Board.
 Ramesh, Singapore# 14

Withdrawal for retirement (including transfer to Minimum Sum Scheme) formed only 14
percent of all withdrawals in 2005. The Medisave account, which may only be used for paying
for hospitalization expenses, accounted for a yet smaller 2.4 percent of all withdrawals that year.

The most important criterion for judging a retirement program is the adequacy of the
income it provides its members. The Singapore government claims that the CPF contributions
are sufficient to generate a retirement annuity equivalent to 20-49 percent of last take-home
income, in addition to paying for housing and medical needs (Low and Aw, 1997: 26). The
Economic Review Committee (2002) noted that ‘The CPF should focus on the broad majority of
the population, between the 10th and 80th percentiles of the income spectrum’, implying that it
was adequate for the remaining 70 percent of the population. These estimates by the authorities
appear highly optimistic.

CPF is estimated to provide replacement income of 27-30 percent (depending on the level
of earlier withdrawal) of the last-drawn salary (Lim, 2001: 374; McCarthy et al, 2002: 209). In
comparison, the average gross replacement rate for all 2nd Pillar retirement programs across all
OECD countries is 57 percent (Whiteford and Whitehouse, 2006). It is projected that 60-70
percent of the 50-55 years age group will not have sufficient funds in their CPF account to meet
the minimum sum requirement (Lim, 2001: 374). Lowering of wage ceiling from $6000 in 2001
to $4500 in 2006 was likely to further reduce the replacement rate by 10 - 15 percent. Given the
one-tier approach to financing retirement, this is clearly inadequate (Asher and Nandy, 2006).
The government’s own committee admitted that only about 50 percent of members with a full
career of CPF contributions would have sufficient in their Special Account to meet even the
minimum sum requirement (Economic Review Committee, 2002).

There are several reasons why the CPF is unable to provide adequate income support
during retirement despite contribution rates that are high, if not the highest, by international
standard. A key reason is pre-retirement withdrawals for a range of purposes which reduces the
sum available for retirement. In 2001, a massive 86 percent of the total withdrawals in Singapore
were for purposes other than retirement. While housing, health and education are worthwhile
purposes, withdrawal of funds to spend on them reduces the amount available for retirement.
 Ramesh, Singapore# 15

Cardarelli (2000) estimates that the removal of housing withdrawal alone in Singapore would
double the CPF replacement rate.

The low returns that members earn on their funds is another major reason why provident
funds are inadequate, especially in Singapore. As mentioned earlier, between 1987 and 2004, the
CPF provided average annual real returns of only 1.2 percent, which is well below the 8 percent
and more earned by pension funds in many countries. McCarthy et al (2002: 214) estimate that
boosting CPF returns over time is the most practical alternative for improving the level of
retirement benefits under CPF. The government has encouraged people to earn higher returns by
allowing members greater opportunities to invest directly in the financial markets, but the results
have been disappointing, as a majority have lost money (Business Times, 4 January 2001). The
situation has been particularly bad in times of bear market conditions when members would have
been better leaving their money with CPF.

A no less important reason for the CPF’s inadequacy is the absence of any redistributive
mechanism inherent to personal savings schemes. Those on low income or in intermittent
employment have little in their fund to withdraw when they reach retirement age. In contrast,
redistributive mechanisms built into social insurance, for instance, allows the arrangement to
deliver 60 percent replacement income with contribution of only 10 percent of income over 25
years.

Equity is an important criterion by which social security programs are judged. In the case
of provident funds, however, they make little difference in that they merely replicate the income
distribution generated by the market system. Each member’s provident fund balance corresponds
to their income – at the age of 55 years, they get what they and their employers have contributed,
which is strictly tied to their salary. The high wage inequalities in the country is reflected in the
CPF balances: active CPF members with balance (including all withdrawal) below S$ 20,000
formed 20 percent of all active members but less than 1 percent of the total CPF balance
(Singapore, CPF Board Annual Report, 2005). To the extent the share of income channeled to
the CPF is exempt from taxes, it is inequitable because the benefit is positively related to income.
Indeed, majority of the population in Singapore do not pay any income tax and hence do not
receive any tax benefit.
 Ramesh, Singapore# 16

The Singapore government is aware that the CPF is insufficient for low-income households.
As the Economic Review Committee (2002) noted: ‘Those in the lowest income group (10th
percentile and below) cannot rely on CPF alone for their retirement needs… Other social support
schemes and policies will be required to supplement the CPF framework for this group.’ Even if
we accept the 10 percent figure (the actual proportion is probably much higher), there is no
public scheme to look after them in a substantive sense. As we saw earlier, public assistance
amount is small and available to only a few people.

Third pillar: Voluntary Savings

Similar to the efforts in other countries to establish voluntary privately-financed schemes,

the Singapore government established the Supplementary Retirement Scheme (SRS) in 2001.
The scheme allows employees (but not their employers) to make voluntary contributions up to
S$11,475 (S$26,775 for foreign workers) a year into their personal accounts, which can be
invested in a variety of financial instruments excluding property
(http://www.mof.gov.sg/taxation/contribution.html). Contributions and investment gains are
exempt from taxes, but half of the withdrawal amount at retirement is subject to tax. The scheme
is privately administered by financial institutions approved by the government. Businesses have
demanded that they be given the option to contribute to their employees’ account, but the
government has resisted, understandably concerned that businesses will make large tax-exempt
contributions in lieu of salary to their more highly-paid employees. The scheme is likely to
appeal to the high-income earners who are able to take advantage of tax concessions and have
sufficient cash surplus to put away until the age of 62 years.

In 2005, there were 31,413 SRS accounts, a three-fold increase over 2001
(http://www.mof.gov.sg/taxation/cumulative.html). The total SRS contributions amounted to
S$952 million, which translates into S$30,306 per account holder. Almost 40 percent of the
funds were invested in insurance products and 19 percent in mutual funds, while 24 percent was
held in cash. Nearly 72 percent of the account holders were between the ages of 36 and 55 years
old (http://www.mof.gov.sg/taxation/cumulative.html)
 Ramesh, Singapore# 17

Fourth pillar: Family and Housing

Fortunately, the low income support offered by public assistance and CPF schemes is
significantly offset by support from family members in Singapore. Around two-fifths of aged
male in Singapore and over half of all aged females in the country depend on their children,
grand-children and spouse as their main source of income (Jones, 1990). In comparison, 97
percent of the elderly population in the OECD countries on average rely on statutory social
welfare programs. [FIND RECENT DATA.]The 1995 National Survey of Senior Citizens in
Singapore found that children provided more than three-quarters of the income for 58 percent of
the elderly aged 55 years or above. Even then, the aged were hardly in an enviable position, as
79 percent of them had monthly income of below US$ 584, which was approximately one-third
of the national per capita GDP. Having said that, 89 percent of the elderly considered their
income sufficient for their expenses (Lim, 2002: 69).

The income support the aged receive from their family members is reinforced by common
living arrangements. The percentage of the elderly living alone is only 7 percent in Singapore,
confirming that the traditional care system is largely intact. In comparison, in the OECD
countries 29 percent of the elderly (65+ years) population lived alone and only 23 percent of the
lived with children or family. However, the proportion of the elderly not living with their
children is creeping upwards: the share of all-elderly households in Singapore increased from 1.6
percent of all households in 1990 to 2.8 percent in 2000 (Singapore Department of Statistics,
2001).

However, there are worries that as the proportion of the aged increases and the family size
shrinks, an increasing number of aged will need additional income support. While Singapore’s
aged population is still relatively young – only 7 percent in Singapore are 65 years of age or
above - it is ageing at one of the fastest rates in the world. For instance, in just twenty-one years
the proportion of the aged in Singapore will double from 10 to 20 percent of the population, a
process that took 68 years in Sweden and 86 years in Britain (Jones, 1990: 23). The proportion of
the population over the age of 65 years will similarly rise from 6.1 in 1990 to 14.5 in 2020 in
Singapore. As the aged population expands, so will the need for protecting their income during
old age.
 Ramesh, Singapore# 18

While the cultural system in Singapore is likely to continue to ensure that most elderly will
live with their family in the short and medium terms, the same cannot be said with certainty for
the long-term. As a Singapore government report itself admitted: ‘Changes in social and
demographic trends in Singapore mean that future retirees cannot rely on their children to the
same extent as today’s retirees. With longer life expectancies, families with fewer children, and a
growing proportion of unmarried retirees, future generations will have to depend more on their
own CPF savings for financial security (Economic Review Committee, 2002).’

But even if the family structure remains intact and the aged continue to be looked after
within the family, there will be people who will face financial difficulties during old age. Poor
people often have poor relatives who do not have the resources to look after their aged kins.
Moreover, there are people who do not have family members or, if they do, lack emotional bonds
for a variety of reasons and cannot realistically expect help. Again such people will be left
without income unless they have sufficient savings or access to state support.

The PAP government regards housing as a vital pillar in its social security system.
Singapore has near-universal home ownership, crucially enabled by the CPF’s Approved
Housing Scheme (1968) which allows members to use funds in their Ordinary Account to pay
for purchase of public housing. The use of CPF funds to purchase private housing was permitted
in 1981. Buyers of public housing flats are eligible for Housing Development Board loans up to
80 percent (may rise to 90 percent in certain cases) of the selling price for up to 30 years. The
interest rate is set at 0.1 percent above the interest offered on savings in the Ordinary Account,
which is currently set at 2.5 percent.

The housing scheme within the CPF has been phenomenally successful, as most
Singaporeans use it to the fullest extent to purchase their own home. As a result, home ownership
in Singapore stands at 90 percent, up from 30 percent in 1970. The enthusiasm for ownership
housing is hardly surprising considering that buyers earned average annual real returns of 4
percent while Ordinary Account offered nominal returns of only 2.5 percent. It was only rational
for CPF members to buy housing than leave the money with CPF (McCarthy et al, 2002).
Significantly, most home owners in Singapore are able to service their mortgage loans entirely
from their CPF contributions (Business Times, 13 March 2000). In other words, Singaporeans are
 Ramesh, Singapore# 19

able to pay for apartments without reduction in their monthly disposable income (Chua, 2000:
49).

There are concerns, however, that the success of the housing scheme has been at the
expense of the CPF’s main objective of providing retirement income. Nearly half of all CPF
withdrawals in a typical year is for housing purposes, leaving little to accumulate for retirement
purposes. It is argued that people may be over-investing in housing and thereby jeopardizing
their income security during retirement. A typical worker at the age of 50 years and above in
Singapore has 73-77 percent of her/his financial assets in housing and only about 20 percent in
CPF (McCarthy et al, 2002: 207-9). This is much higher than in the US (where home-ownership
is also high), where only 20 percent of retirement wealth is typically in the form of housing.

Housing is, of course, a tradable asset which may be liquidated to generate income during
retirement. But there are a number of practical complications which come in the way (Lim,
2002). For reasons particular to Singapore, owners of public housing cannot readily down-grade
or reverse-mortgage their property to generate income. A more important concern is the
possibility of long-term decline in housing prices which will reduce the value of Singaporeans’
most important financial asset. In the meanwhile, the government cannot substantially increase
the share channeled to the Special Account (which is reserved for retirement) because of the fear
that many CPF members will have difficulty meeting their mortgage commitments which will
depress housing prices. Success in housing the population is a major reason for the Singapore
government’s popularity, indeed legitimacy, and it is unlikely to undermine it, even if it means
accepting inferior income maintenance outcomes (Chua, 2000).

Conclusion

The discussion above showed that Singapore has robust Second Pillar in the form of CPF, a
strong Fourth Pillar in the form of widespread home ownership and family support, and a
reasonably strong Third pillar in Supplementary Retirement Scheme. Its main shortcoming is the
absence of a meaningful Zero and First pillars capable of adequately protecting those not covered
by other arrangements. Emerging social and economic trends make the need for basic pillars all
the more imperative.
 Ramesh, Singapore# 20

The economic recession of the late 1990s and the sluggish conditions of the early 2000s
highlighted the vulnerabilities of the population to external economic circumstances, especially
in Singapore, which has the world’s most globalised economy in terms of dependence on foreign
trade and investments. People who lose jobs and livelihood for no fault of their own expect their
government and the community to support them in times of need as a part of their citizenship
rights.

Stagnant or declining wages for lower skilled and older workers and growing income
inequality is aggravating the pressures for an expanded basic income support program.
According to the 2005 Census, 5 percent of households - or 50,654 households - earned less than
S$1,000 per month (Singapore, Household Survey 2005. Table A4). According to the same
census, approximately 15 percent of the households had either no person with income from work
or had one or more working persons with combined income under S$1,180, an amount less than
10 percent of the average household GNI. It is likely that a large proportion of these households
are poor yet do not receive public assistance. It will be recalled than less than 1 percent of the
population in Singapore receives public assistance.

The 2005 household survey also showed increasing divergence between the wages of the
bottom and top income earners. Over the 2000-2005 period, according to the survey, the bottom
income decile had no or negative income, the average income from work of the second lowest
income decile declined by 4.3 percent, and the average income of the third lowest income decile
declined by 0.5 percent. In contrast, over the same period the average monthly household income
of the top income decile increased by 2.8 percent and that of the second-highest decile by 2.4
percent. In other words, the income of the 30 percent poorest population actually declined at the
same time as was going up for the richest. These trends are reflected in Singapore’s Gini
coefficient, which rose from 0.49 in 2000 to 0.52 in 2005 which makes it one of the most
unequal counties in the world in terms of income distribution
(http://www.infoplease.com/ipa/A0908770.html). As the welfare state literature has
acknowledged for a long time, wealthy democracies find it difficult to justify highly skewed
income distribution.
 Ramesh, Singapore# 21

The Singapore government has itself begun to recognize that the existing programs are
insufficient to address the problem of increasing income disparities and thinning economic
opportunities for a significant proportion of the population. Recently, the Prime Minister called
for “tilting the balance in favor of low-income Singaporeans” and helping them “over many
years, not just once in a while”. (The Straits Times, November 25, 2006). This is a substantial
departure from the government’s earlier position, reflected in a statement by the Minister of
Finance Richard Hu as recently as 1997: “Instead of providing large unemployment benefits and
price support schemes, we prefer job creation and market competition (Quoted in Cheung,
2000).”

In 2001, the Government established several schemes providing education subsidies for
needy children, long-term support for the elderly or disabled, and cash subsidies and job-
matching for low-income families. It has also handed out large ad hoc benefits, especially before
elections. Just before the 2006 elections, for instance, the government offered S$150 million as
“workfare bonus” to about 9 percent of the population. But these have not been sufficient for the
growing problem and the government is looking for more substantive and enduring alternatives.

Yet the government is not willing to seriously compromise its belief in self-reliance and
family support for those in need of income support. Recently, the Second Finance Minister
Tharman Shanmugaratnam, laid out the following three principles for government support for
the poor: “…firstly, it [the government] will focus on training and preparing workers to get jobs
rather than protecting a job in particular industry. Secondly, the government will seek to create
opportunities for families to move up the social ladder and it will not stint on educational
subsidies. Finally, personal savings will continue to be a key feature in helping low-income
families to meet future medical and retirement needs.” (The Straits Times, November 24, 2006).
Nowhere in this statement is there a suggestion of a state-financed zero-pillar benefits for those
unable to derive income from market sources. The government believes that it is possible to look
after people with no or insufficient income through family and community organization. In
November 2006, President Nathan in his speech to the Parliament called for expanding the
“many helping hands approach”, with employers, families and community and voluntary welfare
groups working together to help the needy in their midst. The approach is imbued by a spirit of
paternalism and noblesse oblige. As the Prime Minister noted in a recent speech: 'Just like
 Ramesh, Singapore# 22

parents have responsibilities to give hongbao to their children, a society too has its
responsibilities for its less fortunate members …. We must help Singaporeans who are
experiencing difficulty, and who are willing to work hard and try, to get back on their feet.”
(Almenoar, 2005)

The government is particularly concerned about the rise of the “welfare mentality” if the
state became an alternative source of income for a significant proportion of the population. As
the Prime Minister said in his clarification of the government’s recently announced intention to
do more for the poor: "I would like to caution members that we should proceed with care ... it is
a real slippery slope. And many, many social-welfare schemes which have ended up in serious
trouble have started off with good intentions." He went on to elaborate: "Don't over extend
subsidies to people who are not poor. Once we've made a mistake, unwinding is impossible,
because once people have been given welfare benefits, it becomes an entitlement, it's permanent,
there'll be budget deficits, taxes will have to keep on going up and we'll be in a Scandanavian
situation (Quoted in
http://www.channelnewsasia.com/stories/singaporelocalnews/view/241076/1/.html). Recent
surveys by mainstream international organizations showing the Scandinavian countries as having
some of the most competitive economies in the world had done little to allay the PAP leaders’
fears of the welfare state.
 Ramesh, Singapore# 23

Table 1: CPF Co0ntribution Rates for 2006

Employee Age Contribution By Employer Contribution By Employee Total Contribution

(years) (percent of wage) (percent of wage) (percent of wage)
35 & below 13 20 33
35 - 45 13 20 33
45 - 50 13 20 33
50 - 55 9 18 27
55 - 60 6 12.5 18.5
60 - 65 3.5 7.5 11
65 & above 3.5 5 8.5

Source: http://mycpf.cpf.gov.sg/Employers/Gen-Info/cpf-Contri/ContriRa.htm (Last Accessed:

October 23, 2006)

Table 2: CPF Contribution and Allocation Rates, 2006

Credited Into
Employee Age Total Contribution
Ordinary Account Special Account Medisave Account
(years) (percent of wage)
percent percent percent
35 & below 33 22 5 6
35 - 45 33 20 6 7
45 - 50 33 18 7 8
50 - 55 27 12 7 8
55 - 60 18.5 10.5 0 8
60 - 65 11 2.5 0 8.5
65 & above 8.5 0 0 8.5

Source: http://mycpf.cpf.gov.sg/Employers/Gen-Info/cpf-Contri/ContriRa.htm (Last Accessed:

October 23, 2006)
 Ramesh, Singapore# 24

Figure 1: CPF Contributions and withdrawals, Various Years

Source: CPF Board (2005), Annual Report.

Table 3: Singapore’s Public Assitance Scheme

Source: Pai, 2006.

 Ramesh, Singapore# 25

Table 4: Aged Receivinig Public Assistance in Singapore

Source:. Legislative Council Secretariat document

Table 5:

Source: Hong Kong Legislative Council Secretariat

 Ramesh, Singapore# 26

Table 6: Public Expenditure on income support for the elderly poor

 Ramesh, Singapore# 27

Table 7: Average Monthly Household Income from Work in Singapore

Source: Singapore, Household Survey 2005. Table A4

References

Almenoar, Maria “PM Lee's Assurance: Ready to work hard? You'll get help”, The Straits Times,
January 31, 2005

Asher, Mukul G. and Amarendu Nandy (2006a) ‘Mandatory Savings for Asset Enhancement:
The Case of Singapore’, Social Development Issues, 28, 2, pp.57-70.

Asher, Mukul G. and Amarendu Nandy (2006b) ‘Health Financing in Singapore: A Case for
Systemic Reforms’, International Social Security Review, 59, 1, pp. 75-103.

Cardarelli, R. (2000) Singapore: Selected Issues, IMF Staff Country Report No. 00/83,
Washington DC: IMF.

Catalan, Mario et al. (2000) Contractual Savings or Stock Market Development-Which Leads? -
Part of the Pension Primer, World Bank Policy Research Working Paper No: 2421.
 Ramesh, Singapore# 28

Charlton, Roger and Roddy McKinnon (2001) Pensions in Development, Aldershot, Hampshire:
Ashgate.

Cheung Wai-lam (2000) Unemployment-Related Benefits Systems in Singapore, Research and

Library Services Division Legislative Council Secretariat, Hong Kong)

Chua Beng Huat (2000) 'Public Housing Residents as Clients of the State', Housing studies, 15: 1,
pp. 45-60.

Datta, G. and P. Shome (1981) ‘Social Security and Household Savings: Asian Experience’,
Developing Economies, 19: 2.

Ho Ai Li “Poverty: Generation Next” The Straits Times , May 27, 2006.

Jones, Gavin (1990) Consequences of Rapid Fertility Decline for Old Age Security in Asia,
Working Papers in Demography #20, Canberra: Australian National University.

Lee Hock Lock (2001) Financial Security in Old Age: Whither the Employees Provident Fund of
Malaysia, Kelana Jaya: Pelanduk.

Lim Kim Lian (2002) 'Enhancing the Financial Security of Older Singaporeans', Ai Tee Koh et
al. (ed.), Singapore Economy in the 21st Century: Issues and Strategies, Singapore:
McGraw-Hill, pp. 66-94.

Lim, Kim-Lian (2001) 'Implications of Singapore's CPF Scheme on Consumption Choices and
Retirement', Pacific Economic Review, 6: 3: pp. 361-382.

Low, Linda and T. C. Aw (1997) Housing a Healthy, Educated and Wealthy Nation through the
CPF, Singapore: Times Academic Press for the Institute of Policy Studies.

McCarthy et al, David (2002) 'Asset Rich and Cash Poor: Retirement Provision and Housing
Policy in Singapore', Journal of Pension Economics and Finance, 1: 3: pp. 197-222.

McKinnon, Roddy (1996) 'The Public Management of National Provident Funds for State-Led
Development: The Case of Malaysia's Employees' Provident Fund', International Journal of
Public Sector Management, 9: 1: pp. 44-60.

Parrott, A. (2000) 'The Singapore Social Security Experience: Is There a Lesson for the Uk and
the Rest of the World?' Insurance Research and Practice, 15: 2, pp. 14-27.

Peebles, Gavin (2002) 'Saving and Investment in Singapore', Ai Tee Koh et al. (ed.), Singapore
Economy in the 21st Century: Issues and Strategies, Singapore: McGraw-Hill, pp. 373-400.

Singapore Department of Statistics (2001) Singapore Census of Population 2000, Advance Data
Release No. 6, Households and Housing, http://www.singstat.gov.sg/papers/c2000/adr-
housing.pdf.
 Ramesh, Singapore# 29

Singapore Department of Statistics (2001) Yearbook of Statistics, Singapore 2000, Singapore:

Author.

Singapore Ministry of Health (2000) Annual Report 2000, Singapore: Government Printing
Office.

Singapore, Central Provident Fund Board (2001), Annual Report, Singapore: author.

Singapore, Economic Review Committee (2002) Report of the Sub-committee on Taxation, CPF,
Wages and Land (http://www.mti.gov.sg/public/ERC/frm_ERC_Default.asp?sid=109)

Tan, Theresa, “POOR IN SINGAPORE: The Left Behind Class”, Straits Times, Jan 29, 2005

Whiteford, P. and E Whitehouse (2006) 'Pension Challenges and Pension Reforms in Oecd
Countries', Oxford Review Of Economic Policy, 22 (1): pp. 78-94.

i
CPF members who are below age 55 and want to put aside more cash for old age can transfer their CPF savings
from the Ordinary Account to top up the Special Account to $90,000, which is the prevailing Minimum Sum amount.
The transfer is irreversible. With the transfer, CPF members will enjoy a higher interest rate paid on their CPF
savings in the Special Account, which is currently 4%. In 2005, 20,798 CPF members transferred $234.80 million to
their Special Account for their retirement.
M Ramesh

Singapore’s Multi-Pillar System

of Social Security

KDI-World Bank Conference on

“Multi-Pillar Model of Social Safety Net”
Held in Seoul, 6 December 2006
Ramesh #1
Introduction
I will describe the different pillars of social security in
Singapore
I will argue that Singapore has
an elaborate social security system for the middle and
upper classes, and
inadequate arrangement for the poor.
The weak support system for the poor is due to the
government’s aversion towards “welfarism”,
But this has changed somewhat recently due to changed
circumstances.

Ramesh
Ramesh #2#2
Multi-Pillar System

The notion of multi-pillar system popularized by the World

Bank’s 1994 Report (Averting the Old Age Crisis)
It proposed three pillars.
In 2005 a group of World Bank’s senior staff members
published “a policy note” (Old-Age Income Support in the
21st Century)
It proposes an expanded and more flexible social
security system consisting of five complementary
pillars.
I will use the 2005 document as a template for discussing
Singapore’s social security system

Ramesh #3
 The Five Pillars of Old Age Income Security
Objective Financing Program Features

Poverty
• Mandatory • Publicly managed • Means tested
0 alleviation. Government’
• Minimum Benefits
Redistribution
Income
Contribution – • Mandatory • Publicly managed • Defined Benefits or
replacement.
1 PAYG or partially Notional Defined Contributions • Earning-related
Some
funded benefit
redistribution
Tax-Preferred
Income • Mandatory • Privately managed • Defined
private savings or
2 smoothing, Contributions • Benefits equal contribution plus returns
insurance. Fully
through savings on investment
funded.
Income
Tax-Preferred • Voluntary • Privately managed • Fully Funded
smoothing,
3 private saving. Defined Benefits or Defined Contribution • Benefits
through enhanced
Fully funded. equal contribution plus returns on investment
savings
Continuing • Voluntary • Privately and informally managed
Financial and
4 protection where • Informal intra-family or inter-generational financial
other assets
possible and non-financial help. Eg. Housing, healthcare Ramesh #4
Zero and First Pillars
Zero Pillar
Meant to provide a minimal level of protection to all
those without sufficient income.
Eligibility conditions are meant to be flexible so as to
include all those who need support.
Government funded, as contribution requirement would
may exclude some potential beneficiaries.
First Pillar is a new proposal
Targeted at the working poor, those who don’t or can’t
save, and those who face unusually high longevity or
market risks
Benefits tied to income – but scope for some
redistribution to those who need additional support.

Ramesh #5
Second, Third and Fourth Pillars

The Second Pillar is a compulsory savings arrangement

The Third Pillar is a voluntary savings arrangement
The Fourth Pillar is a new proposal.
Recognizes that informal mechanisms a vital source of
income protection.
Prominent examples include Family and Home
ownership

Ramesh #6
The Pillars Old Age Income Security in Singapore

Program
Pillar
• Public Assistance.
0
• Ad hoc financial relief.
1st • Nil
2nd • Central Provident Fund (CPF)
3rd • Supplementary Retirement Scheme (SRS)
• High level of Family support.
4th
• High level of home ownership.

Ramesh #7
Zero Pillar in Singapore

Consists of
Public Assistance
Welfare programs run by the Community Development
Councils (CDCs) and the Ministry of Community
Development, Youth and Sports (MCYS).
Ad hoc grants and fiscal reliefs
Tax incentives for encouraging private donations to
charities by individuals and firms.
Encouragement for social services to be delivered by
volunteers.
The government calls these disparate measures ‘many
helping hands’ approach to social welfare

Ramesh #8
Public Assistance (PA)

PA is intended to benefit “… financially distressed

Singaporeans who by reason of age, illness, disability or
unfavourable family circumstances, are unable to work
and have no means of subsistence as well as no one to
depend upon.”
PA is only for those who have a good reason for not
working and have no other source of income or family
support.
PA monthly benefit amount is S$260 for an adult and
S$825 for a family of four.
Equivalent to 8% of average GNI for single adults and
6% of per capita GNI for a family of 4.
Compared to OECD average of 29% of GNI.

Ramesh #9
Public Assistance

PA recipients form 0.07% of the population.

Approximately 85% of all PA recipients are “aged
destitutes”.
Yet, only 0.8% of the elderly receive it.
There are many other small schemes to help families with
education, housing, and utility bills.
They usually require one or more family members to be
working.

Ramesh #10
Ad Hoc Benefits

Government frequently gives out ad hoc benefits

Just before 2006 elections, the Government distributed
S$3.6 billion in Progress Packages and Workfare
Bonuses
In recent years, billions of dollars have been given out
through various assistance schemes, including New
Singapore Shares, Economic Restructuring Shares and
CPF Top-Ups.
Significantly, these do not impose binding obligation on
the government and are purely discretionary basis.

Ramesh #11
CPF

Established in 1955.
Participation is compulsory for all employed persons,
except for foreign workers and casual and part-time
workers
Contribution rates have ranged 5 – 50% of wages.
Current combined contribution rate is 33% of wages.
Employee contributes 20% and the employer 13%.
Members’ accounts are divided into 3 sub-accounts,
reflecting the different functions of CPF
Ordinary: holds 60-75% of funds
Special: holds 10-20%
Medisave: holds 15-20%

Ramesh #12
CPF
Ordinary Account
Funds in this account may be withdrawn for a range of
purposes, including housing and approved investment.
Withdrawal for housing and investment form >75% of all
CPF withdrawals.
Special Account
Fund in this account is for retirement and may only be
withdrawn at the age of 55 years.
Members are required to leave a minimum sum in the
CPF: US$ 46,728.
The amount is released in instalments from the age of
62 years until it is exhausted.
Withdrawal for retirement formed only 14% of all
withdrawals in 2005.

Ramesh #13
CPF

CPF is estimated to provide replacement income of

27-30% of the last pre-retirement income.
Compared to OECD average of 57% for 2nd Pillar
programs
Projected that 60-70% of the 50-55 years age group will
not have sufficient funds in their CPF account to meet the
minimum sum requirement.
Low replacement is due to
Withdrawals for housing
Low returns -- 1.2% 1987 and 2004, the CPF provided
average annual real returns of only%
Most importantly, absence of risk-pooling

Ramesh #14
Supplementary Retirement Scheme (SRS)

Established in 2001.
It allows employees (but not employers) to make voluntary
contributions up to S$11,475 (S$26,775 for foreign
workers) a year into their personal accounts, which can be
invested in a variety of financial instruments excluding
property
Contributions and investment gains are exempt from
taxes, but half of the withdrawal amount at retirement is
subject to tax.

Ramesh #15
Family support
Family is the main source of income for 80% of aged male
and > 50% of aged females.
Children provide > 75% of income for three-fifths of the
elderly.
Yet 79% of elderly had monthly income of below US$ 584,
(approximately 1/3rd of per capita GDP).
The income support the aged receive from their family
members is reinforced by common living arrangements.
93% of elderly live with at least one non-elderly person
alone.
Tthe family support system is hard to maintain due to:
Declining family size
Growing share of aged
proportion of population 65+ years old will rise from 6
in 1990 to 15 in 2020 Ramesh #16
ng Hou
s
Approved Housing Scheme allows members to use their CPF
to buy public (1968) and private (1981) housing.
Buyers of public housing flats are eligible for loans up to
80% of the selling price for up to 30 years.
Interest rate is slightly above the rate offered by savings
account – currently 2.5%.
Most home owners in Singapore are able to service their
mortgage loans entirely from their CPF contributions
Home ownership in Singapore is 90%, up from 30% in 1970.
People may be over-investing in housing
A typical worker at the age of 50 years and above in
Singapore has 73-77% of her/his financial assets in
housing and only about 20% in CPF
Sluggish housing prices a concern – affects retirement
income
Ramesh #17
Conclusion
Singapore has
robust Second Pillar – CPF
strong Fourth Pillar -- widespread home ownership and
family support
reasonably strong Third pillar – SRS
Its main shortcoming is the absence of a meaningful Zero
and First pillars capable of adequately protecting those not
covered by other arrangements.
Government is increasingly aware of the problem and is
looking for alternatives.
Concerns triggered by:
Economic fluctuations
Stagnant and declining wages for the less skilled and
older workers
Growing income inequality.
Ramesh #18
Conclusion

But efforts to establish a genuine Basic Pillar of income

security hindered by the government’s antipathy towards
Western welfare state and its commitment to tying welfare
benefits to work.

Ramesh #19