Web viewPension Distribution Crisis: The Right Scheme between Defined Benefit and Defined Contribution in Solving Inadequate Pension Coverage in Singapore. A

Pension Distribution Crisis: The Right Scheme between Defined Benefit and Defined

Contribution in Solving Inadequate Pension Coverage in Singapore

A Thesis Presented to the

College of Commerce and Business Administration

University of Santo Tomas

In Partial Fulfillment

of the Requirements for the Degree

Bachelor of Science in Commerce and Business Administration

Major in Business Economics

By

Lao, Princess Chezica T.

Cruz, Carla Felize C.

Kim Eun Hyun

1

ABSTRACT

Within the past years, the pensions systems around the world have experienced inadequate

pension distributions. More and more of the retiring workers and elderly fear of old – age

poverty. The pension distribution crisis was clear and evident for more developed countries like

the OECD countries. However, this is fast approaching to other parts of the globe. In South –

East Asia, these countries were labeled to be ‘youthful countries’ where much of its population

was much relatively younger. Unexpectedly, the sudden changes in the countries’ demographic

profiles now pose as an economic and social challenge, calling for policy attention regarding its

pension distribution. Singapore faces this public concern known as the pension distribution

crisis. There are several distinct factors that continue to deter this crisis namely, the unanticipated

sudden increases in life expectancies, the continuous decline in fertility rates, and mortality rates.

All these factors which have been looked upon are now seen as a threat for economic and social

stability of workers and pensioners.

The intent of this thesis is to serve as an eye – opener. The research provides different points

concerning on the matter of pension distribution crisis. This aims to raise the level of awareness

for future social and economic policy formations which could be adaptable to one’s home

country. Thus, in the long run, one’s home country can learn from and prepare for the impacts of

pension distribution crisis.

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TABLE OF CONTENTSPage

Title 1.Abstract 2.Table of Contents 3.List of Tables 4.List of Figures 5.

CHAPTER 1 INTRODUCTION 6Background of the Study 6Key Issues / Trends 6Objective of the Study 7Significance of the Study 7

CHAPTER 2 REVIEW OF RELATED LITERATURE 8Pensions 8Defined Benefit Scheme 8Defined Contribution Scheme 8Pension Distribution Crisis 11Life Expectancy 12Women and Fertility Rates 14Medical Care and Mortality Rates 15Synthesis 17Simulacrum 19

CHAPTER 3 RESEARCH METHOD 20Econometric Model 20Statistical Treatment 20Data Gathering Procedure 22

CHAPTER 4 RESULTS AND DISCUSSIONS 23Life Expectancy 23Fertility Rates 24Mortality Rates 24

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 27Life Expectancy 27Fertility Rates 27Mortality Rates 28

BIBLIOGRAPHY 31APPENDICES 36ABOUT THE AUTHOR 46

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List of Tables

Table 1A. Central Provident Fund (CPF) Contribution Rates and Allocation Rates 38

Table 1B. CPF Contributions Credited to each Account for each Age Bracket 38

Table 2A. CPF Members by Age Group 41

Table 2B. Active CPF Members by Age Group 41

Table 3A. Withdrawals of CPF by Type (In Million Dollars) 42

Table 3B. Withdrawals of CPF by Type (In Numbers) 42

Table 4.Total CPF Savings at Age 55 among the Elderly who were Age 59 – Above in 1999 43

Table 5. Median Age for Singapore in 1911 – 2000 44

Table 6. Medical Research in Singapore in 2006 – 2012 44

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List of Figures

Figure 1. Simulacrum 19

Figure 2A. Life Expectancy Regression Output 39

Figure 2B. Fertility Rates Regression Output 39

Figure 2C. Mortality Rates Regression Output 40

Figure 3. Singapore’s Dependency Ratios in 1960 – 2011 43

Figure 4. Singapore’s Health Expenditure (Thousands), PPP (Constant 2005, International $) 45

5

Introduction

People all over the world are living longer than before. The progressive fall in fertility

and greater longevity are changing the structure of the world’s population (UN, 2005).

According to the World Health Organization, global life expectancy at birth, now 66 years, is

projected to reach 73 years by 2025. Many thousands of people born at the end of the 20 th

century will live throughout the 21st century. For example, France is projected to have 150,000

centenarians by the year 2050 compared to only 200 in 1950 (see The World Health Report

1998). Thus, it is imperative for the worker to retire later than the usual retirement age of 65 to

have sufficient income when retirement comes.

Better medical care aggravates longevity risk. The pressures placed on national health –

care systems by the recent demographic and epidemiological transitions are amplified by the

growing demands of an increasingly educated and affluent population for high – quality health

care and the supply of the latest medical technology. (Chongsuvivatwong, et. al, 2011).

Increase in female education induces Asians to have fewer children and to participate in

the labor force, leading to a decline in the fertility rates. For example, in Indonesia, Singapore,

South Korea, Taiwan (Province of China) and Thailand—where modern contraception has been

widely accepted, many girls are educated, and family sizes have declined dramatically—the

number of women who have moved into professional, technical, and administrative positions

have increased substantially in recent decades. The decline in fertility rates translates to fewer

young workers. Thus, financial, economic and social problems regarding adequate pension

6

funds, equitable pension distribution, and sufficient retirement income is at stake (see Labour

Force Participation and Employment under Women’s Empowerment and Reproductive Health).

Old age income support will be one of the biggest social and economic challenges facing

developing Asia (henceforth Asia) in the 21st century. In contrast to industrialized countries,

most Asian countries do not yet have mature, well functioning pension systems. As a result, they

are ill prepared to provide economic security for the large number of retirees who loom on the

horizon (Park & Estrada, 2012).

Because of the emergence of the pension distribution crisis in South – East Asia, the main

goal of this research is to show how life expectancy, female participation, and medical care can

help better reshape Singapore’s pension system by taking all these factors into account. The

researchers highlight on the principle of horizontal equity and pension wealth in terms of

pensions received and how the chosen pension scheme may affect workers. Therefore, this paper

serves to provide fresh insights by looking at the issue on a different perspective because the

significance of doing so could mean a brighter retirement scene for elderly workers and for

future workers. In connection, this paper focuses solely on Singapore.

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Review of Related Literature

Pensions are a form of compensation deferred or delayed until the worker decides to

leave his or her job (Friedberg & Webb, 2005). The retirement decision of the worker revolves

around two things: difference on derived utilities between work and leisure – which is retirement

in this sense – and net present value between current and expected rewards and future

compensation in the form of pensions (Friedberg & Webb, 2005). How the worker receives his

or her pensions is resolved through a pension scheme. A pension scheme can be thought of as a

long - term medium wherein resources are transferred from the current young workers to retiring

ones. The two key types of funded pension schemes are known to be either a Defined Benefit or

a Defined Contribution scheme (Duval, 2003; Blake, 2000).

Defined Benefit schemes (DB scheme hereafter) are traditional. Typically, retiree

benefits from this scheme depend on the number of years of service and his or her final

occupational salary. Defined Contribution schemes (DC scheme hereafter) on the other hand are

characterized by the firm’s promise of contributing a certain amount for the worker annually

(Blake, 2000; Kapinos, 2009). As to what type of pension scheme the rational worker should

choose from is based on several factors. At the bottom line, this is where he or she can derive

stable income sources for retirement when all costs and benefits for each pension scheme have

been looked upon (Sundali, Westerman, &Stedham, 2008). These sources of income are usually

referred to as “pillars” of the pension scheme (Hogler& Hunt III, 2008).

8

Both pension schemes incur economic costs and benefits but they differ in kind. In a DB

scheme, the pension provider accumulates assets held in trust. The uncertainty it brings are the

pension fund’s investment rate of return and final occupational salary. The latter is daunting

since employers do not know the progression of its workers. Also, the promise of the DB scheme

provider can be indeterminate since final cost is not known until the worker’s retirement (Eaton

&Nofsinger, 2008). A DB scheme can provide a reasonable replacement ratio – the ratio of

annual benefits to earnings just prior to retirement (Duval, 2003; Blake, 2000) – to workers who

only opt to use the DB scheme over his or her career. Thus, frequent job changers would be

worse off since these workers would experience large portability losses. This is because

employers give different schemes when workers shift from one job to another (Friedberg &

Webb, 2005; Friedberg, Owyang, & Sinclair, 2006). As a result, these workers lose their pension

entitlement.

With DC schemes, it is important to distinguish between accumulation and decumulation

stages. Starting from the accumulation stage, a DC scheme – sometimes referred to as a personal

pension scheme – would be more ideal for the frequent job changer since the portability losses

here do not take any effect. However, following a DC scheme is often connected with higher

charges since DC schemes are frontloaded. This means that the initial charges are drawn from

the start of the scheme rather than having it dispersed evenly throughout – leading to higher

operating costs. From the decumulation stage known as annuities, DC schemes would prove to

be reliable if it were only able to provide adequate pensions in retirement. Unfortunately, this is

impeded by the cases of annuities. Annuitants and annuity providers both face several serious

problems. The major reason behind this blockage is the adverse selection bias connected to

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mortality risk. This is the risk where workers who believe that they would live longer would

purchase annuities. Apparently, annuities markets are known to be relatively thin. Another is the

uncertainty of assumptions on mortality risks. It would be consequential for annuity providers to

update their mortality assumptions (Blake, 2000; Byrne & Winter, 2009). Furthermore, while

there is the presence of portability of jobs in the DC scheme, this is not the case between pension

scheme providers. Transfers from DB schemes to DC schemes translate to greater economic

costs. DB plan users transferring to DC plans forego the accrued benefits – the ’backloading

loss’ – and incur portability loss. The marginal benefit derived from an additional year from the

newly chosen scheme (DC scheme) only equals the return of that year’s contributions (Blake,

2000). Despite the numerous flaws of the DC scheme, much of the private – sector pension

provision still has shifted away from using the traditional DB schemes (Kiosse & Peasnell, 2009;

Kapinos, 2009).

The declining popularity of DB schemes to pension providers directly stem from:

longevity risk – employees, on average, have longer life expectancies – which is the most

significant risk borne by DB schemes (Byrne & Winter, 2009) – interest rate risk – interest rates

might fall, increasing the risks associated from long – term liabilities, inflation risk – final

salaries might increase higher than predicted, and investment return risk – employer’s rate of

return from contributions to the plan are lower (Kiosse&Peasnell, 2009). Default risks are also

associated with a DB scheme due to the incidence of the adverse selection problem where

employers are likely to default on their obligations (Kiosse&Peasnell, 2009). In retrospect, the

DB schemes are ultimately linked with higher net losses than DC schemes (Banks, Blundell,

10

Emmerson, 2005) and are seen to be unsustainable during today’s economic conditions

(Sundali, Westerman, Stedham, 2008).

One prominent issue found on pension is its distribution. Specifically, it is tied to the

recurring thought of inadequate coverage. There is a widespread fear that retiring workers are not

saving enough for their future consumption and public awareness has elevated the concerns on

the adequacy of retirement savings (Kiosse&Peasnell, 2009).

The pension distribution crisis has been evident throughout the OECD countries whereby

international organizations raise concerns on the sustainability of these pensions systems. The

two principal concerns are maintaining the level of economic activities of older workers and

preserving their living standards. In other words, these organizations see the need to raise or

delay the effective retirement age of older workers and secure them from poverty during old –

age (Pestieau, 2003). However, increasing the pensionable age creates inconsistencies regarding

their reduced competitiveness in the labor market. Older workers are also more prone to health

issues. Thus, these workers could not compete as extensively as they did during their younger

years (Bredt, 2008). Transition economies are now facing the same social and economic

challenges of pension distribution. Countries coming from Asia are now left with the same crisis

– but at a greater cost. Singapore’s pension system is not tailor – fitted to the rapid changing of

demographics and economic conditions that continue to deter the already imperfect pension

schemes and its distribution (Salditt, Whiteford, &Adema 2008; Brodjonegoro&Simanjuntak,

2002).

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The ongoing trend of increasing life expectancy of the population has been the most

popular dominant factor of pension distribution crisis. This trend of a longer life expectancy has

accelerated in a way not previously anticipated (Everness, 2001). Life expectancy risk relates to

the projected length of life of a cohort or generation while longevity risk relates to individuals.

Though the increasing life spans are seen to be wonderful and worth celebrating, it challenges

the economic and social stability of pensions systems. In line with the risks that life expectancy

bears against DB and DC schemes are the regrettable decisions which have been based on

miscalculated estimates. Most Asian countries still follow an unrealistic retirement age ranging

from 55 – 60. Many were set during the onset of world war. Perceptively during the 1950’s, life

expectancy would be much lower than today. Indeed this was the case since Asian life

expectancy was at 41 back then. However, more recent is the fact that many Asians are now

living longer – experiencing longer life expectancies – ranging from 60 – 80. This happens to be

the case for women since women live longer than their counterparts. Since women live longer

than males, they are more prone to the risk of poverty since they would accumulate fewer

resources (Dordea & Popovici, 2008). With this understanding, pension payments would be

much more expensive since retirees live longer than expected for pension providers. In DC

schemes, benefits received by the worker would be lower due to higher life expectancy. This is

because there is a longer duration for pension payments. This also verifies the asset

decumulation of the elderly (De Nardi, French, & Jones, 2009). In DB schemes, there is a fixed

amount regardless of life expectancy (Whitehouse, 2007) which causes a shift from DB schemes

to DC schemes.

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On a different light, population ageing is occurring more rapidly in Asia than in Western

countries. Population ageing induces ‘greying’ of the working – age population. Given that these

workers have weaker labor market attachment as compared to prime – age workers, the tendency

is that old – age dependency ratios will rise which is caused by the decline in aggregate

participation levels and employment rates of these workers. Simply stated, the serious effect of

population ageing due to longer life expectancies reduces workers in the labor force (Goh, 2005).

Eventually, it all adds pressure to the current pensions systems and living standards of the

retiring workers (Duval, 2003). Population ageing is a classic demographic transition. It

increases adult longevity and thus, increases life expectancy. It becomes evident that pensions

become expensive as the number of workers for every retiree falls since pensions for these

retiring workers are taken from young workers. Raising the effective retirement age could help

alleviate the burden of ageing populations since they would be able to compensate for reduced

pensions (Ghilarducci, 2010). However, some distinct factors greatly affect the retirement

decision of the worker and thus, the supply of labor. The two major components are the strong

preference of the worker for leisure and the increased wealth effects which are associated with

rising living standards (Duval, 2003; Ghilarducci, 2010; Roberts, Rice, & Jones, 2010). Also,

work is not necessarily good for the older workers. In fact, more time for retirement could be the

cause of longer lives assuming that retirement produces healthier outcomes (Ghilarducci, 2010;

Roberts, Rice, & Jones, 2010).

H 0: The increase in life expectancies in Singapore does not affect the pension distribution crisis

H a: The increase in life expectancies in Singapore affects the pension distribution crisis

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Fertility rates are defined as birth rates per female (Blake & Mayhew 2006). The

dramatic increase on population ageing due to longer life expectancies is concurrent to a

decrease in fertility rates. Thus, the replacement level of young – to – old needed for the

sustainability of old age pensions becomes problematic. Taken differently, declining birth rates

per woman results to fewer workers contributing to the pensions system; and labor force

participation of the young workers would be relatively lower (Hogler& Hunt III, 2008). Thus,

the decline in fertility rates raises the ratio of the elderly to the working age (Brooks, 2005).

There are several factors that affect the decline of total fertility rates and one of which is

the higher participation rates of women. Women were underrepresented in the labor market.

These women were mostly found in the informal sector and this displays inequality in labor

outcomes (Caceres – Delpiano, 2012). But now, more women are given brighter opportunities in

their career and changes in preferences must have increased the female participation rate too

(Euwals, Knoef, & van Vuuren, 2011). The increase of female participation in the labor market

occurs when females consider the opportunity cost of income foregone from disregarding paid

employment. Another form of opportunity cost is the career path the female worker has set for

herself. She forgoes future higher income, recognition and awards, and other benefits. These

females would put off having children when opportunity cost is relatively higher (Mishra,

Nielsen, & Smyth, 2010). The increase in female employment induces the female worker to

delay her childbearing which causes the decline in fertility rates (Caceres – Delpiano, 2012). In

addition, they have greater control over their fecundity (Cesaratto, 2006). Since more women are

now participating in the labor force, women’s role has changed.

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As times have changed, family ties and work for women became more optional as well.

The fertility decision – in short – offers a negative impact on the increase of female participation

(Caceres – Delpiano, 2012). Moreover, the choice between the two results to a trade – off. Since

this is the case, this leads to lower levels of fertility. The introduction of family planning

contributed much to the decline as couples have used such method during the formation of their

family. The dramatic decline of fertility rates – in effect – causes demographic transitions too or

what can be referred to as a ‘demographic dividend’ (Blake & Mayhew, 2006). The impact poses

a great threat to Asia since 60% of the world’s population is Asians (Goh, 2005).

H 0: The declining fertility rates in Singapore do not affect the pension distribution crisis

H a: The declining fertility rates in Singapore affect the pension distribution crisis

The impact of new medical technologies (NMT’s) in Asia has increased the financial

insolvency in their healthcare systems. This is due to the insurgence of high demand for

technologically advanced medicine and medical services of the receiving population. The high

demand for medical care services and healthcare is due to the increased awareness of the benefits

of better health status (Grosskopf, Self, & Zaim, 2006; Sheiner, 2007) and creation of wider

access to health care systems (Sheiner, 2007). In addition, medical advances have contributed

much in the decline of mortality rates. There are two contradicting theories that matter on the

mortality of persons. The theory on compression of morbidity – disabilities would appear at

shorter periods before death – suggests that medical progress and healthier lifestyles cause a fall

in mortality rates (Shiu& Chiu, 2008; Espigares, Torres, & Munoz, 2008). States with lower

mortality rates lead to healthier populations (Thornton & Rice, 2008). This confirms the

15

importance of societal health which is growing than ever (Shaw, Horrace, & Vogel, 2005). The

theory on expansion of morbidity – reduction of risk associated with healthier lifestyles –

explains the zero effect of appreciable health gains to the elderly, which is also true since more

of the elderly experience old age sickness and diseases (Shiu & Chiu, 2008; Espigares, Torres, &

Munoz, 2008). The deterioration of health of the elderly means more medical costs to incur

especially for the cohort ages 65 and above as compared to lower cohorts (Thornton & Rice,

2008). As a result, the disability prevalence of these workers reacts negatively to the fall of

mortality rates (Espigares, Torres, & Munoz, 2008). This also proves to generate adverse

consequences on the funding of pension schemes since pensioners would have to pay longer.

Relatively speaking, older workers would consume more of health care than with younger

workers since they are more exposed to health problems (Shaw, Horrace, & Vogel, 2005;

Sheiner, 2007).

Many believe that health care expenditures rise along with life expectancy. However,

research has found that population ageing is not the primary factor of rising health care

expenditures. Rather, it highlights the time of death and health status of these workers which is

explained by mortality rates. In fact, most empirical evidence suggests that longevity or longer

lives of people does not necessarily entail higher health care expenditures. It is argued that

economic development is the root cause of such longer natural life spans and medical progress

(Shiu& Chiu, 2008). This simply means that there are improvements in mortality risk because of

the technological advancement in medical technology.

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An individual has two stages in life: working period and retirement period. This is

important to note in understanding the declining mortality rates of workers. This is shown when

the certain worker chooses a health investment on the first or second stage. If health investment

was placed on the preceding stage, it is imperative to conclude that this worker would reduce his

or her probability of death and thus, improve his mortality. If the health investment of the worker

is placed on the second period, then he or she becomes less susceptible to chronic diseases since

the worker has benefited from the fruits of more efficient medical technology. These fruits are

known to be the worker’s resiliency against sickness and better health. These both contribute to

the decline of mortality risk (Zhang, Zhang & Leung, 2006).

Much of the pension providers use mortality tables to calculate scheme valuations for the

retiring workers. Mortality tables are set out on the probability of the certain worker’s death

period. These tables are based on historical data on death rates (Byrne & Winter, 2009;

Espigares, Torres, & Munoz, 2008) and unfortunately, mortality assumptions are considerably

underestimated (Blake, 2000; Byrne & Winter, 2009).

H 0: The declining mortality rates in Singapore do not affect the pension distribution crisis

H a: The declining mortality in Singapore affects the pension distribution crisis

In totality, the pension distribution crisis is further intensified by the differing factors of:

unexpected increases in the life expectancies of workers where many workers fear that they are

not saving enough for retirement. The continuing decline of fertility rates due to the increased

participation rate of women in the labor force since there would be less of resources to pass on to

17

retiring workers since there would be relatively fewer marginal additions to the working – age

population. The declining mortality rates of workers make people less susceptible to chronic

diseases because of the innovation of medical technology due to its high demand. Apparently,

these workers fear of old age poverty considering too of longer pension payments and high

medical costs.

This is known to be the cases of OECD and other developed countries in the world where

pensions systems are known to be inadequate in coverage. Hence, the researchers came to test if

this is also true for Singapore that happens to find difficulties in their pension distribution.

18

(+)

(-)

(-)

Simulacrum – Figure 1.

19

Life Expectancy

Fertility Rates

Mortality Rates

Pension Distribution Crisis

Research Method

Censored Normal Regression (Tobit) Model: Maximum Likelihood Method

Y i={Y i¿ ,∧if Y i

¿>00 ,∧if Y i

¿≤ 0

Y i¿=α+γ ' LifeExpectancy¿+e¿ Y i

¿=α+γ ' MortalityRate¿+e¿

Y i¿=α+γ ' FertilityRate¿+e¿

Where:

Y i¿= Required sufficient amount of pensions (in constant LCU)

γ ' x = Vector of regression coefficients on independent variables, x

i = ith country observation

t = tth time observation

Econometric Model:

In this model, the variable of interest, Y i¿ is left – censored at zero. Left – censoring

indicates that all values that fall below or from the left of 0 will be cut – off. When the latent

variable takes up the value of 0, it is therefore, left - censored while values taking up 1 are still

observed and therefore, are uncensored.

Binary values (0, 1) represent our latent variable. Thus, γ=max (0|y¿ ). These values have

been used as an indicator wherein 1 = Pension Distribution Crisis or 0 otherwise (See

Appendix I; pp.29-30). The required sufficient amount of pensions (in constant LCU) is

20

solved through the use of Singapore’s current pension structure. In order to properly

determine whether pensions accrued for future consumption is sufficient; retirement

income must equal or go beyond Singapore’s living standards (See Appendix I; pp.29-

30). This makes life more promising for the retiree in financial and social security terms.

Pension computations were patterned to Singapore’s current pension system as reference

for the binary values (See Appendix I; pp.29-30). Therefore, if pensions computed fall

below the required amount for sufficient retirement income, then it will take up the value

of 1 as this indicates that pensions received by current and future retirees is and will

experience pension distribution crisis. If pensions computed exceed the required amount

for sufficient retirement income, then it states otherwise. Thus, pensions are compared to

Singapore’s GDP per capita or prices (constant, LCU) of Singapore’s living standards.

This is a useful indicator of standard of living or quality of life. Its significance is deemed

necessary to understand how the current pension structure becomes obsolete and thus,

creates an air of old age financial insecurity.

Life Expectancy is defined as expected number of years of life of the worker which

quantifies for Life Expectancy. Fertility rate is defined as birth per woman during her

reproductive years which quantifies for Female Participation Rate. Mortality rate is defined as

incidence of death in a population which quantifies for Medical Care.

Maximum Likelihood (ML) is more appropriate since OLS estimates can cause bias in

interpretation and can provide inconsistent estimates of the parameters. The time – series, t, and

cross section data, i , were gathered from year 1960 – 2011 for Singapore – where pension

21

distribution crisis is arguably evident and troubling. The data were taken from IndexMundi, and

Social Security Association: Office of Retirement and Disability Policy of the United States.

In order to simplify the process of determining pensions, several basic assumptions must

be formulated:

a.) the retiree is eligible and entitled to receive pensions

- This means the pensioner for Singapore has passed all qualifications necessary for

pension entitlement and eligibility

b.) Pensioner has started accumulating resources at the age of 35 years old up to the

retirement age of 55 years old. 35 years old is the youngest age necessary for

eligibility and pension entitlement. 55 years old is the retirement age mandated by

each of the country’s social security laws

- This information is useful in pension computations for Singapore’s Defined

Contribution scheme

22

Results and Discussions

Singapore uses 3 types of accounts: Ordinary Accounts, Special Accounts, and Medisave

Accounts. Ordinary Accounts can be used for housing and investment schemes, Medisave

Accounts can be used for hospitalization expenses and catastrophic health insurance while the

Special Accounts can be used solely on retirement and other purposes. The pensioners can

choose among the 3 types depending on their preferred contribution rate or where their pensions

are credited to based solely on the pensioner’s level of preference (See Appendix II: Table1A;

p.31). Thus, the final pensions accrued do not depend on whether it should be under an Ordinary,

Special, or Medisave account. It simply states that under any of the 3 accounts, there is a certain

credit rate from the estimated contributions for each age bracket.

I. Ordinary Accounts, Special Accounts, and Medisave Accounts

Pensioners who have invested in an Ordinary Account, Special Account, and Medisave

Account are all collectively reflected in the regression outputs (See Appendix III: Fig.2A,

Fig.2B, & Fig.2C; pp.32-33). Tobit coefficients are all statistically significant at 5%.

Analysis and Interpretation

Life Expectancy

Life expectancy positively affects our latent variable, which is the required sufficient

amount of pensions (in constant LCU) that will cover the pensioners from financial insecurity. In

the case of Singapore, for every 1 year increase in the life expectancy of a Singaporean pensioner

who invests in any of the 3 accounts, there is a corresponding 0.267030 Singaporean dollar

increase required to sufficiently cover the pensioners’ future. The intercept, on the other hand, -

23

negatively affects our latent variable. This is the case when the regressor, LE, is equated to zero.

With this, there is no need for an increase of -20.40154 Singaporean dollars. Simply stated, when

a Singaporean is not expected to live (LE = 0), then there is no needed requirement of an

additional -20.40154 Singaporean dollars.

Cohort differences in the CPF coverage are important. Table 2A (Appendix IV; p.34)

clearly depicts that during 2012; 30% of the age bracket 56 – above are actually covered by the

CPF as compared to 18% of the age bracket 31 – 40. However, this is not truly the case because

the active CPF members depicted in Table 2B (Appendix IV; p.34) clearly shows that only 18%

of the age brackets 56 – 60 and 60 – above are truly covered and are actively contributing against

26% of the age bracket 31 – 40. In connection to CPF savings shown in table 4 (Appendix IV;

p.36), 30.7% of the elderly has accumulated less than the ordinary wage ceiling of S$5,000 while

24.9% have none at all (See Appendix IV: Table 4; p.36). Because of low coverage rates among

the elderly, this will result to low reliability on the CPF savings overtime.

Fertility Rates and Mortality Rates

Fertility rates and Mortality rates negatively affect our latent variable, which is the

required sufficient amount of pensions (in constant LCU) that will cover the pensioners from

financial insecurity. In the case of a Singaporean pensioner who invests in any of the 3 accounts,

for every 1 increase in birth per woman and 1 increase in incidence of death, a -4.815733 and -

1.634027 Singaporean dollar is not needed respectively (See Appendix III: Fig.2B, & Fig.2C;

pp.32-33). The intercepts of Fertility Rates and Mortality Rates, on the other hand, both

positively affect our latent variable. This is the case when the regressors, LOG(FR) and

LOG(MR), are both equated to zero. With this, there is a need for an increase of 2.158468 and

24

2.411387 Singaporean dollars respectively. Simply stated, when there are no births per female

during her reproductive years(LOG(FR) = 0) and no incidence of death (LOG(MR) = 0) in

Singapore, then there is a needed requirement of an additional 2.158468 and 2.411387

Singaporean dollars respectively.

Because of low replacement levels due to a decline in the fertility rates, the continuous

decline exacerbates the ratio of the elderly to the working age. This is depicted in figure 3 (See

Appendix IV; p.36) where the increasing old age dependency ratio also leads to the decreasing

support ratio as well. Since less of workers are entering the labor force, then there are less of

workers contributing to the pension systems. A smaller resource base unfortunately, makes

pensions relatively more expensive. This can also be portrayed in table 5 (Appendix IV; p.37)

where the total median age in Singapore has risen and is projected to further increase until 2030.

Because of this, Singapore will continue to experience a demographic dividend.

Singaporeans continue to put emphasis on better health status that leads to a growing

demand for new medical technologies (NMT’s) and its continuous innovation shown in table 6

(Appendix IV; p.37). Because of this thinking, pensioners face to live a life full of old age

disease and sickness (theory on expansion of morbidity) or an extended healthier life (theory on

compression of morbidity). Figure 4 (Appendix IV; p.38) also shows Singapore’s rising total

health expenditure. In addition, Singapore’s healthcare systems place the responsibility of

ensuring better health on the pensioner through the Medisave account (if chosen). This is also

known as the national medical savings scheme where 80% of primary care is delivered by

private practitioners while the remaining 20% is provided by public polyclinics. However,

hospital care is mainly delivered by public hospitals (80%) while the remaining 20% is delivered

by private hospitals.

25

V. Conclusions and Recommendations

26

A step forward for the Singaporean pension system is to analyze the labor market

attachment of their workers. This can provide one solution to address its inadequate pension

coverage. If Singaporean workers tend to keep their jobs up until their retirement then it would

be best to use a Defined Benefit scheme since pensioners would accumulate more of resources. If

Singaporean workers tend to shift from one job to another (job portability), then it would be wise

to use a Defined Contribution scheme since job portability losses here do not take any effect.

The Singaporean government needs to address the longevity risk associated with

retirement. Apparently, there is less emphasis on how rapid Singaporeans spend their

accumulated balances. There is significance in knowing since if the pensioner has too few of

resources due to longer life then there is a need to address the income received especially by the

older workers. On average, women live longer than men yet they experience lower exposure in

the labor market and receive relatively lower income as well. In this case, gender equality plays a

huge part. This policy relates to delaying the formal effective retirement age from 55 – 65 years

old. With this, formal discussions will arise between the employer and employee regarding the

terms and conditions on work and employment. Because there would be more of elderly workers,

workplace arrangements and services should then be conducive for them as well. Social risk

pooling arrangements is one way for Singapore’s pension structure to cover all pensioners from

different socio – economic and demographic classes. This means creating public pension systems

that is available for Singaporeans of different walks in life.

In order to induce female workers not to delay their childbearing in the short run, it is

imperative for Singapore to provide family – friendly services and workplace environments

through financial incentives. This means that workplace policies and other discussions that may

arise between the employer and the female worker relating to this matter should be formally

27

given attention to. In order for female workers to be further encouraged in childbearing in the

short run, daycare centers, childcare centers, and other infant and children – based services

should be considered. Since childcare centers are privately – run, these centers become

expensive and thus, add up to their cost of living. In order to help ease the financial burden, the

government may subsidize for a certain period of time as well under licensed infant care and

childcare centers.

Since Singaporeans do place a huge value on staying healthy and having healthier

lifestyles, unfortunately and even so, healthcare systems are actually relatively more expensive to

the elderly as compared to younger workers. This is the case since the elderly consume more of

these goods than the younger population. There is an increase in the use of Medisave Accounts

and other elderly – based schemes like ElderShield Accounts. However, not much attention is

given to these since most of the pensioners choose the Ordinary Accounts where housing and

investment schemes take place (See Appendix, Tables 3A & 3B; p.35). Therefore, our 1 st policy

will focus on expanding medical services in order for ‘medical accounts’ to be more competitive

in nature. The Singaporean government should issue more licenses to approved institutions or

qualified institutions of medical services and the like to make healthcare systems more

affordable and more redistributive to all Singaporeans. At the same time, the Singaporean

government should continue to fund medical research in order to combat popular and deadly old

age diseases. In this case, top old age diseases will be shouldered under Medisave accounts and

similar accounts. This will meet the demand of the elderly who are experiencing old age diseases

who are users of Medisave accounts. The 2nd policy will focus on the estimated actuaries where

annuitants buy life annuities. This is needed in order to reduce the adverse selection bias

connected to mortality rates. The Singaporean government should also consider the mortality

28

rates between a male and a female since there are certain health risks and lifestyles that are

distinctive between the two categories.

References

29

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35

Appendix I

Tables of Statistical Figures, Regression Outputs, and Graphs

SingaporeData Summary

Year Life Expectancy

Fertility Rate, Total

Mortality Rate, Infant

GDP per Capita, constant, LCU

Accounts Pensions

19601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994

65.6666.0966.4366.7066.9167.0967.2667.4567.6767.9568.2868.6669.0769.4869.8970.2770.6270.9371.2171.4571.6871.9172.1672.4572.7873.1673.6074.0774.5775.0875.5876.0576.4876.8676.30

5.455.265.205.014.854.704.503.953.563.253.093.043.052.802.362.082.111.821.761.791.741.721.711.611.621.611.431.621.961.751.871.771.761.781.75

35.6033.6031.8030.2028.8027.5026.3025.1024.0022.9021.7020.3018.7017.2015.9014.7013.9013.1012.4011.9011.5011.0010.509.909.308.808.307.807.306.706.105.505.004.604.30

3,8814,2724,1534,4104,3214,7975,1895,6966,3617,1227,9798,7799,784

10,66711,17011,51712,20812,93813,88815,00116,30417,20417,64618,91520,20020,03920,32022,16824,00825,69727,21628,16729,25631,79934,077

00000000000000000000000000000000000

848.131,848.132,848.133,848.134,848.135,848.136,848.137,848.138,848.139,848.13

10,848.1311,848.1312,848.1313,848.1314,848.1315,848.1316,848.1317,848.1318,848.1319,848.1320,848.1321,848.1322,848.1323,848.1324,848.1325,848.1326,848.1327,848.1328,848.1329,848.1330,848.1331,848.1332,848.1333,848.1334,848.13

36

19951996199719981999200020012002200320042005 200620072008200920102011

76.4076.7577.0577.4077.5578.0578.3578.7079.0479.4979.9980.1480.4480.7981.2481.6481.89

1.711.701.641.491.481.601.411.371.271.261.261.281.291.281.221.151.20

4.103.803.603.403.102.902.702.602.402.402.302.302.202.202.102.102.00

35,46336,64738,45236,36138,30741,05339,50040,78543,28746,66448,93951,58853,86651,94349,90656,26957,801

00111111111111111

35,848.1336,848.1337,848.1338,848.1339,848.1340,848.1341,848.1342,848.1343,848.1344,848.1345,848.1346,848.1347,848.1348,848.1349,848.1350,848.1351,848.13

Source: IndexMundi

37

Appendix II

Singapore’s Defined Contribution Scheme Valuation

Table 1A. Central Provident Fund (CPF) Contribution Rates and Allocation Rates

Employee Age (Years)

Contribution Rate(Ordinary wage ceiling: S$5,000)

Credited to

Employer (% of wage)

Employee (% of wage)

Total Contribution (% of wage)

Ordinary Account

(% of wage)

Special Account

(% of wage)

Medisave Account

(% of wage)35 – below 16 20 36 23 6 736 – 45 16 20 36 21 7 846 – 50 16 20 36 19 8 951 – 55 14 18.5 32.5 13.5 9.5 9.555 – 60 10.5 13 23.5 12 2 9.560 – 65 7 7.5 14.5 3.5 1.5 9.565 – above 6.5 5 11.5 1 1 9.5Sources: Social Security Association: Office of Retirement and Disability Policy of the United States;

mycpf.cpf.gov.sg

Equation: (employee – employer contribution in current year) x (no. of years contributing) x (adjustment factor)*

*adjustment factor: assumed rate of return on the contributions and also adjusts for the growth in contributions over the years contributing

Given:Ordinary Wage Ceiling: S$5,000Adjustment Factor: 2.5%0 = No PDC 1 = PDC where;Total Contributions > GDP per Capita = 0; Total Contributions < GDP = 1

Table 1B. CPF Contributions Credited to each Account for each Age Bracket

Employee Age (Years)

Total Contributions per Age Bracket (S$)

Ordinary Account (S$)

Special Account (S$)

Medisave Account (S$)

35 – below 1,845 1,178.75(23% / 36%)

307.5(6% / 36%)

358.75(7% / 36%)

36 – 45 18,450 10,762.5(21% / 36%)

3,587.5(7% / 36%)

4,100(8% / 36%)

46 – 50 9,225 4,868.75(19% / 36%)

2,050(8% / 36%)

2,306.25(9% / 36%)

51 – 55 8,328.125 3,459.375(13.5% / 32.5%)

2,434.375(9.5% / 32.5%)

2,434.375(9.5% / 32.5%)

Total 37,848.125Sources: Social Security Association: Office of Retirement and Disability Policy of the United States;

mycpf.cpf.gov.sg

38

Appendix IIIRegression Outputs

Figure 2A.Life Expectancy

Figure 2B.Fertility Rates: log(fr)

39

Figure 2C. Mortality Rates: log(mr)

40

Appendix IV

Life Expectancy, Fertility Rates, and Mortality Rates Tables and Figures

Table 2A. Central Provident Fund (CPF) Members by Age Group Thousand

Age Group (Years)

2006 2007 2008 2009 2010 2011 2012

Total 3,099.6 3,163.0 3,234.4 3,291.3 3,343.3 3,376.3 3,418.6

20 – below 94.5 105.5 104.5 101.3 106.0 110.4 112.821 - 25 197.2 198.0 210.3 214.8 220.5 229.4 236.626 – 30 249.8 256.5 265.3 271.4 267.8 257.6 252.631 – 35 303.5 299.8 299.4 303.4 305.1 301.8 303.7

36 – 40 336.2 334.2 336.6 340.0 335.6 333.9 326.841 – 45 416.7 404.7 389.8 372.5 359.4 349.6 346.646 – 50 410.6 417.9 425.0 428.2 425.7 419.6 407.3

51 – 55 336.8 349.2 359.6 369.5 379.3 384.9 390.556 – above 727.5 770.9 818.1 864.8 919.0 965.2 1,018.1Not Specified

26.8 26.3 25.8 25.4 24.8 24.1 23.7

*Includes self – employed persons who had made CPF contributionsSource: Social Security Association: Office of Retirement and Disability Policy of the United States;

mycpf.cpf.gov.sg

Table 2B. Active CPF Members by Age Group Thousand

Age Group (Years)

2006 2007 2008 2009 2010 2011 2012

Total 1,461.9 1,545.0 1,610.1 1,644.6 1,700.4 1,735.4 1,788.820 – below 38.9 44.0 40.5 38.9 43.9 42.5 45.721 - 25 107.1 108.2 110.3 109.7 115.5 118.6 122.426 – 30 193.2 200.9 207.8 211.7 209.3 202.2 199.831 – 35 217.6 220.0 222.8 227.5 231.1 229.4 232.2

36 – 40 203.1 213.3 222.4 229.3 232.0 234.3 233.241 – 45 201.0 206.7 209.0 208.0 210.6 214.0 220.946 – 50 183.0 191.6 198.0 201.8 206.9 210.4 212.6

51 – 55 144.0 157.3 168.1 174.2 182.7 188.1 194.456 – 60 95.4 105.9 116.1 122.3 132.0 142.6 153.960 – above 78.7 97.0 115.0 121.3 136.2 153.3 173.5Not Specified

- - - - - - -

Source: Social Security Association: Office of Retirement and Disability Policy of the United States;mycpf.cpf.gov.sg

41

Table 3A. Withdrawals of Central Provident Fund by TypeWithdrawals of Central Provident Fund by Type

2006 2007 2008 2009 2010 2011 2012Million Dollars

Total1 14,351 11,562 10,966 10,719 9,617 10,437 11,727

Housing Schemes1

Public Housing 4,957 4,679 4,500 4,058 4,007 5,464 5,703Residential Properties

3,398 1,189 1,347 1,769 846 1,347 2,291

Reached 55 Years of Age2

2,357 2,404 2,061 1,800 1,771 1,940 2,048

Leaving Singapore & Malaysia Permanently3

367 391 436 443 455 506 542

Death 284 269 286 359 378 435 488Medisave Scheme 445 517 558 601 678 722 767

Private Medical Scheme

136 173 195 234 286 336 385

Others 2,406 1,940 1,583 1,446 1,196 -312 -497Source: Social Security Association: Office of Retirement and Disability Policy of the United States;

mycpf.cpf.gov.sg

Table 3B. Withdrawals of Central Provident Fund by Type (Numbers)Withdrawals of Central Provident Fund by Type

2006 2007 2008 2009 2010 2011 2012Number

Housing Schemes5

Public Housing4 12,904 11,059 15,016 15,349 14,154 37,608 46,690Residential Properties

40,576 48,512 32,355 47,222 49,617 43,560 46,789

Reached 55 Years of Age2

274,246

204,808 189,610 199,552 207,868 227,540 245,645

Leaving Singapore & Malaysia Permanentl y3

10,479 10,848 11,130 12,255 13,454 14,619 15,038

Death 23,358 17,075 17,258 19,802 18,544 19,869 18,472Source: Social Security Association: Office of Retirement and Disability Policy of the United States;

mycpf.cpf.gov.sgNotes:1 – Refers to net amount withdrawn (gross amount withdrawn less amount refunded) by members in the year2 – Includes first and subsequent withdrawals3 – Includes Malaysians leaving Singapore permanently4 – Includes withdrawals by persons who are physically / mentally incapacitated and under the various CPF schemes – Minimum Sum, Medishield, Home Protection, Dependants’ Protection, Education, Non –

42

Residential Properties, Investment, Delgro Shares (ceased Feb 04), Special Discounted Shares and Eldershield Scheme5 – Refers only to members who joined the scheme this year6 – Data refer only to the increase in membership size for the year

Table 4. Total CPF Savings at Age 55 among the Elderly who were Age 59 and above in 1999

Total CPF Savings (S$) Percent4,999 – below 30.75,000 – 9,999 7.810,000 – 19,999 12.020,000 – 29,999 5.630,000 – 39,999 4.740,000 – 49,999 3.250,000 – 99,999 6.1100,000 – 149,999 2.7150,000 – above 2.4None 24.9Total 100.0

Source: 1999 Transitions in Health, Wealth, & Welfare of Elderly Singaporeans: 1995 – 1999; mycpf.cpf.gov.sg

Figure 3. Singapore’s Dependency Ratios

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

0

10

20

30

40

50

60

70

80

90

100

Singapore Dependency Ratios: 1960 - 2011

Support RatioOld - Age Dependency Ratio

Source: IndexMundi

43

Table 5. Median Age for Singapore (1911 – 2000)

Census Year Median Age1911 281921 281931 261947 231957 191970 201980 241990 292000 342010 372020 392030 41

Source: Singapore Census Population 2000 and the Inter – Ministerial Committee Report on Ageing Population (1999)

Table 6. Medical Research in Singapore

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 20124

Medical Research Grants committed under National Medical Research Council

(NMRC) ($M)

53.5 125.7 94.4 121.3 95.0 116.0 213.4

% of Medical Research Grants:a. Enabling Grants / Centre / Program

Grants157.9 22.3 30.7 21.0 10.0 - -

b. Individual Research Grants 32.1 24.4 33.0 28.2 42.6 29.2 -c. Exploratory / Developmental Grants - 4.5 5.4 4.6 6.0 4.7d. New Investigator Grants - 4.2 5.6 4.2 5.4 4.7 -e. Singapore Translational Research

(STaR) Investigator Awards3- 4.2 5.6 4.2 5.4 4.7 -

f. Talent Development 2 10 14.4 25.3 18.5 26.0 28.5 13.4g. Enablers & Infrastructure - - - - - - 4.4h. Individual PI – Initiated Research

Grants (inclusive of New Investigator Grants)

- - - - - - 40.6

i. Strategic Research Grant Programs - - - - - - 37.1Source: Social Security Association: Office of Retirement and Disability Policy of the United States;

moh.gov.sg/content/moh_web/home.htmlNotes:

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1 – There was no commitment in FY2011 because NMRC is in the process of revamping the centre grants framework for the new tranche of funding (RIE2015)2 – Awards are only given to established researchers (local & international). No award will be given if NMRC cannot find any suitable researchers3 – Includes Clinician Scientific Award, Master Clinical Investigation, NMRC fellowship, etc.4 – NMRC programs have ceased and transited to new funding initiatives FY2012

Figure 4. Health Expenditures (Thousands), PPP (Constant 2005, International $) in Singapore

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110

500

1000

1500

2000

2500

3000

Helth Expenditure in Singapore

Health Expenditure

In T

hous

ands

Source: IndexMundi

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ABOUT THE AUTHOR

Princess Chezica T. Lao ([email protected]) is currently a fourth year Business Economics student in the College of Commerce and Business Administration. She is a member of 3 organizations namely, Thomasian Writer’s Guild, UST Scarlet Commerce Organization, and UST – Economics Society. She had her internship program in the Philippine National Bank head office under the Corporate Planning and Economic Research Department where she had utilized her skills and knowledge that she acquired in UST.

Carla Felize C. Cruz ([email protected]) is currently a fourth year Business Economics student in the College of Commerce and Business Administration. She was a Student Coordinator of the College of Commerce Student Council (2010-2011) and is a member of UST Scarlet Commerce Organization, RCYC Red Cross Youth Council, and UST Economics Society. She also offered her services in the Guidance Office as a Peer Facilitator. In addition, she took her internship at the Philippine

National Bank where she had applied what she had learned from UST.

EunHyun Kim ([email protected]) is currently a fourth year Business Economics student in the College of Commerce and Business Administration. She finished her secondary education in Miriam College High School Quezon City (S.Y. 2010). She is a member to a total of three school organizations namely, The UST Economics Society, UST International Student Association, and UST Red Cross Youth Council. She had her practicum at the Philippine National Bank Delta branch where she had applied

what she had learned from UST.

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