April 26, 1999
Singapore's hands off welfare state
The ideal of a cradle-to-grave welfare state has fallen on tough times.
Born in Europe in the 19th century, most governments in the developed world have embraced the concept as a central public policy goal. People looked to the political system to deliver them from the extremes of poverty and misfortune.
But our aging welfare state is showing its wrinkles. Our pay-as-you-go pensions are sitting on a demographic time bomb and premiums are skyrocketing. Free Medicare has produced lengthening waiting lists for service. Last-ditch support for the desperate has turned into lifelong entitlements that breed generations of dependency.
How can we guarantee personal security while avoiding these pitfalls? The answer lies in changing government's basic approach to achieving this goal. Throwing taxes into a big pot and then letting the state disperse benefits is not the only way to go.
Singapore offers a good example. In 1955, the city-state set up the Central Provident Fund, a publicly managed, mandatory program of private savings. Essentially, it requires all citizens to make provisions for their own income security.
Here's how it works. Most citizens are required to be members of the CPF. The accounts belong to individuals and consist of deposits by both employees and employers. In 1995, people had to deposit 40% of their wages up to a maximum of $S 6000 a year. All savings, at the points of deposit and withdrawal, are tax exempt.
Since CPF accounts belong to individuals, their holders enjoy options not available under centrally administered systems like annual account statements and a telephone hotline that allows members to check on their accounts' status at any time.
Members maintain three accounts with the CPF: Ordinary, Medisave and Special . The Ordinary account finances housing, approved investments, disaster insurance and loans for higher education. This account takes three-quarters of an individual's contributions. Six percent of income heads to the Medisave account, which pays for medical care; this rises to eight percent after the account holder reaches the age of 45. The remainder, four percent of income, lands in the Special account, for old age and contingencies.
This mandating of different accounts for "merit goods" lets the government avoid the complexity and politics of using the tax system to fund the welfare state. Members regard their CPF contributions as personal savings rather than as taxes, thereby minimizing the disincentive to work - perhaps our system's most fatal flaw.
At age 55, CPF members can withdraw from their accounts all but S$40,000. Two-thirds of CPF members reaching that age have accounts exceeding that amount, and most withdraw all but the minimum and apply the rest to more lucrative investments.
The CPF 's benefits have been tangible. The sick receive prompt, high- quality medical care. Singapore has the highest rate of home ownership in the world, 85%, and the highest rate of savings, 48% of GDP. The savings pool provides a long-term, predictable and large flow of funds for investment, and generated higher growth rates and income levels. Tax-funded pensions look after those who cannot work.
Because it's fully funded, the CPF avoids the distortions and welfare losses associated with systems that pay benefits to one generation by imposing taxes on another. The plan firmly establishes that individuals and families are responsible for their own social security and encourages a strong savings habit.
Singapore is a "hands off" welfare state. Its politicians don't pretend to run the schools or the hospitals through hugely inefficient "one size fits all" government monopolies. By simply requiring citizens merely to save money and buy services through a competitive, customer-driven framework, it has both better services and lower taxes.
And among the highest living standards in the world.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."