Mukul Asher: I would like to take this opportunity to briefly discuss how Singapore is performing and to address what I think is the central issue in the worldwide debate on pension reform: how to structure a system that will produce sufficient benefits for retirees while simultaneously minimizing adverse effects on economic incentives and international competitiveness.
I think Singapore’s case is quite interesting, because Singapore is one of the few countries that never had a pay-as-you-go system. Instead, its retirement system consists of state-mandated and state-managed individual retirement accounts.
Before I go into a detailed analysis of the system, let me tell you that Singapore is not doing well at providing an adequate replacement rate. And that suggests that just because a system is supposedly centered around "individual retirement accounts," it isn’t necessarily desirable and sustainable. If the system is still regulated heavily by the state—or, indeed, managed almost wholly by the state—it could encounter many of the same problems that a pay-as-you-go system encounters. In this case, the devil really is in the details.
The retirement system in Singapore is administered by the Central Provident Fund, which is a government statutory body. In addition to retirement benefits, the CPF also administers housing and health care schemes, educational loans, various investment schemes, and a number of other programs. So the system is really not a pure retirement system. The multiple-objectives character of the CPF reduces transparency and makes it difficult for participants and policymakers to assess its full impact.
As you would expect, to cover those numerous schemes, you have to have very high contribution rates. Currently, the contribution rate is 40 percent—20 percent is paid by the employee and 20 percent by the employer.
Because the CPF administers so many different programs, there are substantial preretirement withdrawals. Indeed, such withdrawals averaged 71 percent of total contributions annually during the period from 1992 to 1996. Obviously, that reduces the amount available for retirement and substantially dilutes any net impact of high contribution rates on aggregate domestic savings. Indeed, an econometric study done in 1995 by the International Monetary Fund found that the CPF had virtually no impact on aggregate savings in Singapore.
Now let me focus a little bit on the system’s return on investment. There are three separate pools of investible funds under the CPF system. The net value of the largest is equivalent to about 55 percent of gross domestic product. At the end of 1996, 99 percent of the assets in that pool were in nonmarketable government bonds, issued specifically to the CPF Board to meet their interest obligations. The interest on these bonds is identical to what the CPF Board pays its members. This in turn is the average of short-term deposit rates of four local banks. The bonds do not have quoted market values.
For the last decade, the effective real rate of return on the bonds has been close to zero. And that is the primary reason why the Singapore system is failing, because no accumulation fund that provides such a rate of return can provide a proper replacement rate at the end.
And that isn’t the end of the story. Although the government of Singapore has been running a budget surplus since 1968, it has, of course, also been issuing the retirement bonds. And as a result, there is, in fact, a very large internal public debt. Currently, it is equivalent to about 80 percent of GDP. The money raised from issuing bonds to the CPF Board is invested by the Singapore Government Investment Corporation. Its portfolio and investment performance are not made publicly available. Thus, CPF members do not know the ultimate deployment of their funds.
So what you have in Singapore is a retirement system with little transparency in the investment function and a bad replacement rate. The system consists of retirement accounts that are individual in name only. Countries that are contemplating pension reform based on individual accounts may find it necessary to undertake the investment functions differently. The CPF system, however, is quite efficient in its housekeeping functions.
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