EXTRACT OF DEPUTY PRIME MINISTER AND MINISTER FOR FINANCE MR THARMAN SHANMUGARATNAM S BUDGET DEBATE A FAIR SYSTEM: NOT JUST FOR TODAY, BUT THE NEXT

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1 EXTRACT OF DEPUTY PRIME MINISTER AND MINISTER FOR FINANCE MR THARMAN SHANMUGARATNAM S BUDGET DEBATE ROUND-UP SPEECH 2015 A FAIR SYSTEM: NOT JUST FOR TODAY, BUT THE NEXT GENERATION Progressive and Sustainable CPF and Silver Support 1. I go on now to a second set of issues concerning sustainability, which concerns the CPF system and Silver Support. 2. Let me first explain, and this is quite important, how the CPF system is different from the main systems that we see abroad, the commonly known systems abroad. And in particular, how we have sought to avoid the major disadvantages of these other systems, whilst being able to take some of their advantages. We actually have a system that is quite different from the main systems that you see abroad. 3. There are basically two main types of retirement savings systems. The first are collective pension schemes, where everyone pays taxes or regular contributions into a common pool while working, in return for a promised regular payout in retirement. They are usually state-run; some are actually employer-run. But they are basically collective pension schemes. Everyone pays into the common pool and you are assured of a certain payout in retirement. That s the first type of system. 1

2 4. The second type of system comprises individual retirement accounts. They are not collective. An individual retirement account, where an individual puts his savings into his own account and draw on his own account in retirement. People have to choose how their own monies are invested, and they take the investment risk. The example of these schemes in the US is what they call the 401(k) schemes. In Hong Kong, the Mandatory Provident Fund (MPF) scheme is designed this way; it is purely about individual retirement accounts. You choose your investment plan and you take your investment risks. The Australian Superannuation system is another example. 5. Within the industry, the first type of scheme that I spoke about, the collective pension schemes, are often known as defined benefits schemes because the benefits are determined in advance and they are not linked strictly to your contributions. The second type, the individual retirement accounts are called defined contributions schemes because the benefits are not known in advance - it depends on your investment returns - but your contributions are determined in advance. 6. So those are the two main types of schemes. Both have their pluses and minuses. 7. The collective pension schemes promise individuals a regular payout throughout retirement, without them bearing investment risk. They also involve redistribution, which is done in two ways: a) Typically, there is a minimum level of benefit in retirement, which helps the lower income group. It involves a transfer within the state pension scheme itself 2

3 - a transfer from the higher and the middle income groups to the lower income group within the pension scheme. b) Second, there is a transfer across generations. In particular, from the younger, working population to the current elderly. These are Pay-As-You-Go schemes, where the benefits for today s elderly are funded by the contributions of today s working population. 8. Hence, there are some advantages to the collective pension schemes. They provide some certainty to the retiree, and they involve some necessary redistribution to the lower income group. 9. But there are major disadvantages in the way these schemes have been run. The benefits have been made more generous over time, and can no longer be afforded by the current working population, as I spoke about earlier. Countries are now making major reforms, one after another, to cut back on the future benefits of today s working population. The benefits promised previously are unsustainable. And people who start work today have to contribute more, but will receive lesser benefits compared to current retirees. 10. As a result of this unsustainability, there is a shift in most countries away from the emphasis on collective pension schemes towards individual retirement accounts. But the individual retirement accounts still remain quite small compared to the collective pension schemes. They are a small layer on top of what is really a system of collective pooling of contributions - mainly through the state, and sometimes through the employer. 3

4 11. The individual retirement accounts, likewise, have their pluses and minuses. The plus is that the schemes are financially sustainable, because what payout you get depends on what you put in. It does not depend on intergenerational transfers. The big disadvantage is that the investment risk is borne by the individual, and this risk can be substantial. We have learnt especially over the last 10 years that the risk is substantial on the individual. I explained this in Parliament last year, how in general, the investment returns of these individual retirement accounts in the US and in Europe have substantially underperformed the market averages. a) First, because they do not time their investments well; they make wrong investment decisions; or they are poorly advised. b) Second, because of the timing of their retirement, or the luck of when you retire. If you retire during a crisis, you have much lower retirement payouts for the rest of your life compared to someone who retired during a boom. 12. The CPF system is neither of these two approaches: a collective pension scheme or a pure, individual retirement account. It is both individual and collective. 13. It is first and foremost built on individual s savings and responsibility. But there is a strong element of collective responsibility built into the CPF scheme. The Government provides support, through the Budget, to lower income members and provides assurance to all. And through CPF LIFE, we are pooling risks to support one another in the face of life s uncertainties throughout retirement. So there is a collective 4

5 responsibility that is built into the CPF system, both through the Government and through members pooling risks in retirement through CPF LIFE. 14. The whole purpose of the CPF is to avoid the major disadvantages seen by the two schemes that I spoke about, whilst incorporating some of their advantages. It is progressive, like most of the collective pension schemes. But it is financially sustainable, unlike the collective pension schemes. It places no investment risk on the individual, unlike the individual retirement accounts (or defined contribution schemes). 15. Let me emphasize this: that the reason why the CPF system is both progressive and sustainable, which is a rarity, is because the transfers that take place in the CPF are essentially from the Government Budget. They are not transfers from one generations to the next or promises made to the current generation which eventually have to be funded by the next generation. They are transfers that are achieved through the Government Budget, and by a government that has a triple-a rating. 16. That is the strength of the CPF system. It is sustainable, it is progressive, but it achieves its progressivity through transfers from a triple-a rated government. And it is important that we retain the whole system of fiscal discipline, prudence and planning for the future that keeps the CPF system both progressive and sustainable. 17. How do we inject this Government support? Through Workfare, which is a very significant infusion into the accounts of lower- 5

6 income workers; through housing grants for lower- and middleincome members; through Medisave top-ups, which are now a permanent annual feature for the Pioneer Generation, throughout their retirement years; and through Extra Interest on smaller balances. In each of these elements of progressivity, there have been significant enhancements since To illustrate how significant the Government s role in the CPF is, this aspect of collective responsibility, let us consider a young lowincome worker today, who benefits from our schemes in the CPF, all the enhancements we have made. A young low-income worker, someone who is at the 10 th percentile of incomes today. By the time he retires at age 65, he would have received $200,000 of government support in his CPF - through Workfare, the housing grant (and I am not counting interest earned on the housing grant, just the original housing grant) and Extra Interest. $200,000 over the course of his working career till 65. It is not a small sum. 19. So when Mr Gerald Giam described the CPF system as a defined contributions scheme that is the way it is sometimes referred to theoretically, but it is in fact not just an individual savings scheme. It is a scheme that comprises the individual s savings and significant injections of Government support. It is individual and collective. 20. We have enhanced the system by providing additional flexibility as recommended by the CPF Advisory Panel, while keeping its basic strengths keep it fair, keep it sustainable. 6

7 21. The CPF Advisory Panel recommended allowing for the flexibility of a 20% lump sum withdrawal of retirement savings at the payout eligibility age. Quite an important recommendation. We had to think very hard about this, because we know there is a trade-off in retirement payouts. You take out 20%, you get lower payouts for the rest of your life. But we decided that this was the right approach, to provide a degree of flexibility. And on top of this, in the Budget, we are enhancing interest for lower-balance members, starting from age 55, to help them accumulate more and get higher payouts in their retirement years. 22. It is not a perfect system. But it avoids the big disadvantages of the major schemes that we see in the rest of the world, and it has some significant advantages. It is fair, it is sustainable, and it takes risk away from individuals who cannot bear that risk. Not a perfect system, but it is working quite well and is internationally recognised by the experts as one of the better systems around. 23. The Workers Party members have proposed further flexibility. In addition to option of 20% withdrawal at age 65, they ve suggested an option of earlier payouts starting from the age of Looked at in isolation, any proposal for flexibility appears reasonable. When you look at each proposal in isolation, it appears reasonable to provide more choice and flexibility. 25. However, there is a real risk in offering this flexibility that we have to be honest about. It is not a crazy idea, but it is unwise because there is a real risk when we offer this flexibility. It has been tried in other countries, and everywhere it has been tried, the result 7

8 has been that those who take up this option of early payouts end up less prepared for retirement. Less prepared because they stop work earlier and less prepared because they would have lower payouts through the rest of their lives. And the upshot of it, or the real outcome, is the rest of society eventually has to take on larger responsibility to support them, as Ms Chia Yong Yong reminded us. 26. The countries that have tried introducing this option of early payout are after some years now reversing course. Denmark was an example. In fact they introduced it very early on - in They called it a voluntary early retirement scheme. In fact the real aim at the time - they were having a bit of an unemployment crisis - the real aim was to persuade older workers to exit the workforce and make way for younger workers. Over time, the pressures of an aging population began to take hold; and the weaknesses of allowing for the early payment become apparent. So first in 2006 and then in 2011, they passed reforms to reverse course, with the aim of phasing out this early retirement option. It was supported by the opposition at the time. 27. They changed, because the early retirement and pension payout option was a wrong move for the individual and for the rest of society, which would have had to end up paying a higher burden. The Finnish are another example; they introduced it and they have had to reverse course 1. 1 The abolishment of the early old-age pension also led to a rise in the effective retirement age. This pension type is no longer granted to persons born in 1952 or later. Source: Finnish Centre for Pensions ( ng_effective_retirement_age&date= &tab=notices) 8

9 28. The French, more recently, just two years ago in 2012, introduced a scheme for some workers to get an earlier payout from age 60. It went against the grain of the times, but was only for some workers - those who start work at 18 years old and have made the minimum contributions of almost 42 years into the system. A small group. 29. But even for this group, they realised just two years later, last year, that it was a mistake. So they now have to take steps to reverse the decision. They are bringing the minimum contribution period up from 41.5 years to 43 years. So they are extending the minimum contribution period you need, to 43 years, before you can have an early payout, which very few people will qualify for. 30. The UK has also gone against the grain, allowing retirees to take out their retirement savings early. They previously mandated that members put their monies in an annuity - it is a bit like CPF LIFE but you can choose your annuity. Now they will allow you to take it out, mainly because the annuities in the market were offering very poor returns, far poorer than what we offer in the CPF. It has also been seen as a political gesture. It has been viewed negatively by the experts; the OECD has warned that the move is detrimental to both retirement income adequacy and incentives to work, and has urged the UK to make a move back to an improved annuity system. 31. The reasons cited by the OECD are the same all over the world. It is good to offer choice, but part of the human predicament is that we will all place greater priority on what happens today and the benefits we can get today, rather than what we get well into the 9

10 future. And we all underestimate how long we will live. It is true all over the world: in Japan, in Europe, in the UK and elsewhere. All experience shows that people place more priority on what they get today, rather than well into the future, and they underestimate how long they will live. That is the human predicament. 32. These countries face the same challenges of rising life expectancies that we do, except that in our case it is even longer life expectancies than most. And their whole priority has been to encourage people to work for as long as possible, to save more wherever possible and to defer drawing down on their pensions so that they have enough savings to last through their retirement years. That is the way in which most of the more mature societies are moving: encouraging people to work more, to save more and to defer payouts where possible. 33. Indeed, in countries like the Netherlands and some of the Nordic countries, they have gone a step further than the norm. The norm is to link the pension age to the retirement age. In those societies, they have gone a step further. They are now linking it automatically to life expectancy. So as life expectancy goes up, the pension age and retirement age will automatically go up. They have agreed on a formula and it is now automatic; they have gone further. 34. We are not planning on that move ourselves, but these international trends illustrate the challenges that all maturing societies face. We should recognize these challenges honestly and not take positions for their populist appeal, when we know fully that putting such proposals into practice, 10

11 will merely set us back in tackling the larger challenge of ensuring adequate incomes throughout the retirement years. 35. But we do have to find every way of helping Singaporeans in their 50s and early 60s to get by and support their families, especially if their children are not yet in their working years. We do have to help them. 36. Fortunately, the majority owns their homes, and these people have fully paid up their loans by the time they are 65. In Singapore, 90% of our elderly households own their homes. In fact, even amongst our lower-income households, the vast majority own their homes. 37. Very different from other societies. In Germany and Denmark, barely 20% of those in the bottom quartile who owns their homes. In our case, the vast majority, over 80%. In Hong Kong, less than 50% of those in the bottom 20% of incomes own their homes. So we are in quite a unique situation. That is the real strength of our system. 38. Typically, someone in a 3-room flat would have $300,000 in housing equity today. We have provided options and will continue to make sure that the options are friendly and available to them, to help them to unlock part of the equity in their homes if they wish to. Mr Ismail Hussein has asked for more to be done in this regard and Mr Vikram Nair had suggested, what in effect, amounts to a reverse mortgage scheme which we have studied carefully. The Minister for National Development will address this at the Committee of Supply. 39. It is not just about them being able to unlock the equity in their homes, it is about saving on rental costs which is a major burden 11

12 in retirement in most advanced societies. So, that is a starting advantage, a major advantage home ownership. 40. But besides home equity, we want to provide maximum support for individuals to continue working while they can, at a different pace if they wish. We have facilitated employment of older workers through re-employment legislation, and we are providing substantial support through Workfare and the Special Employment Credit. It is not often recognized how powerful that support is. 41. For someone at 65, who is a low wage worker, earning between $1,000 and $1,500, the Government is effectively paying 20-40% on top of what the employer is paying through Workfare and the Special Employment Credit. Special Employment Credit of 11.5%and Workfare of 10-30%, depending on his income. If it is a worker earning $1,000, basically it is a 40% top up that the government is giving through Workfare and the Special Employment Credit. A very significant incentive to help them. That is why our employment rates are high and are increasing. 42. For those who are unable to work due to medical conditions, we have to be sympathetic. We allow them to apply for earlier withdrawal of their CPF. That is important. 43. Thirdly, we must remain as supportive as possible through our schemes on the ground, through our Social Service Offices, so that individuals and families in financial difficulty get help. 44. So that is our approach. Help people gain the rewards from home ownership; help them stay in the workforce by providing an additional support, and making sure that all of 12

13 us give them the dignity they deserve when they remain in work; help people who are unable to work for medical reasons for them, there is a special scheme in the CPF; and very importantly, help people on the ground through our social network and the various other Government transfer schemes. 13

14 CLARIFICATIONS ON THE BUDGET DEBATE ROUND-UP SPEECH Mr Gerald Giam: 1. Madam, I want to thank DPM for taking the time to explain why he disagreed with our proposal for an early payout eligibility age. I just wanted to clarify a few points just to make sure that the whole house is clear on what our proposal was. 2. Firstly, we also did not propose that proposal in isolation. That means, we weren t just saying that just lower the payout eligibility age. Just to clarify, this is not the same as asking for an entire lump sum withdrawal at age 60. So, it s really just stretching out the period which the payouts from CPF are given to members, so instead of starting at age 65 until their death, it s from age 60 until their death. 3. Secondly, this is an option, it s not saying that everybody has to start at age Thirdly, I did propose also that there should be more personalised public education on the CPF scheme especially if our proposal is taken up. It must be explained to the members that there will be consequences for an early withdrawal, we did say that there will be a 6 7% decrease in the payout. 5. So, really, the terms of the early withdrawal/payment will really only be attractive to those who really need the money at that point of time. Like I explained in my speech it could be because they are out of work and they cannot find work or they are not able to work for whatever reason. So our main point is that life is unpredictable and we cannot presume to know the financial situation of every 14

15 person at age 60. So there might be some members who really have a need too and we should give them that flexibility. DPM Tharman Shanmugaratnam: 6. Madam Speaker, I thank Mr Gerald Giam for that clarification and let me say once again, and I didn t mean this rhetorically, it is not a crazy idea. But it would be unwise to move in this direction, because we do have to learn from the experience of other countries that have introduced it. 7. There is something in human nature that none of us fully understands, but we will always place more emphasis on what we can get early. We will take advantage of an option to get something early, even if it is at the expense of what we need later on. And that has been the experience in Denmark and several other countries that have had to reverse course. 8. So it is not a crazy idea, it is just that we have to be honest about the risks and find ways to help people address their needs, because I agree that there is a need. Life is unpredictable as you say, and if you are medically unable to work, we ll make sure you are able to draw on your CPF. 9. But (we must) find every way in which we can help people stay at work and save for longer, because the monumental challenge that faced in every maturing society, every aging society, is helping retirement savings stretch throughout life. It s a huge challenge and we are doing it through the CPF system as well as through the Government Budget with the advantage of being a triple-a rated government, that gives assurance that this would be continued. 15

16 10. That is the big challenge. So you have not proposed a crazy idea at all. As Ms Chia Yong Yong has said she has great unease about it. I think basically we have to take lessons from the rest of the world and we only learn what happens many years after we introduce schemes. 11. In Denmark, it took 30 years before they reversed course and with great political difficulty, but they are doing it with both opposition and government agreeing that they have to do it. 12. So when it comes to flexibility and choice, we should make haste slowly. Mr Png Eng Huat: 13. Thank you, Madam. I like to seek clarification when you say that they reverse course in Denmark. That means what? They are not going to continue with early retirement? Because from what I know they have early retirement at 60. And what s going to happen is that they are going to peg the early retirement to life expectancy. So it moves, so by 2022 it moves, means early retirement age would be probably 62, 63. Not that they are reversing and they are not going to allow early retirement. They have a normal retirement and they have an early retirement, just that the early retirement currently is 60 but they are just going to peg it to life expectancy. So it moves after DPM Tharman Shanmugaratnam: 14. I am not the Danish Finance Minister and I do not want to get into a detailed discussion on Denmark but let me assure you that they realised that their early decision made in 1979 to allow for early 16

17 retirement was a mistake; they realised that it was going to impose a cost on the individual as well as the rest of society; and they want to phase it out And that is the trend that s been taken in several societies. Every society is trying to find the way in which the pension age, pension drawdown age, as well as the retirement age can move up. 16. It does not mean doing so solves all our problems. Some individuals would be in difficulty. Some individuals will be in difficulty, and all pension schemes have to deal with these tradeoffs. Some individuals will be in difficulty, and we have to find ways of helping them. But do not compromise the basic features of the system. Find ways of helping them and in Singapore, we can do it, we can help them. 2 For new workers, the increase in the legal age of voluntary retirement has been raised to