In this section we paint the picture of one highly successful country programme around savings that appears to tick all the boxes for promoting fiscal responsibility, self-sufficiency, social mobility and social protections. Our example is the Central Provident Fund of Singapore. We flesh out exactly what has made this programme such a success and ask serious questions about whether there are aspects of it that could work in South Africa. We believe there are. We spend Part 2: Fleshing out the vision a better model describing exactly why saving for housing, education, health and risk protections is very much on a par with saving for retirement – more because of what they contribute to social mobility than what they offer as a social protection. We show how employers could facilitate the inclusion of these savings priorities into a broader employee benefit offering.
Most important, though, we show that when individuals try to solve for these lifetime savings imperatives as separate savings challenges, our chances of success on all counts are fairly low.
As defaults become more widely employed, decisions around employee benefits are tending to fall into the ‘set and forget’ mode of financial engagement. It’s not surprising then that employees are neither invested emotionally in the process nor any more financially savvy because of the process.
But what if we completely reframed the question – and in so doing, reframed the potential answers?
What if we said to employees: “We want you to engage in a long-term savings programme. It’s good for you, your families and the economy. But let’s widen up the opportunity set for you as to how you could use these savings for things that are more relevant to your life at each step in your financial cycle.” We believe individuals would start paying more attention then. A programme like that could help us address the most difficult balancing act of all: How responsible should the government be for its citizens’ well-being, and how much should we hold our citizens accountable for their own well-being?
Shifting our focus to developing higher levels of fiscal responsibility and financial knowledge will surely also have the knock-on effect of alleviating a dependency on government?
In grappling with these questions, we found one other country that has successfully tackled exactly these issues.
Singaporeans may seem worlds apart from South Africans and the types of trials that have affected us over the last few generations. But there’s one aspect in Singapore’s economic success story that is worth noting. Just before Singapore achieved self-government in 1959, it looked set to introduce a social insurance or public assistance plan similar to a number of other post-colonial government-funded social security systems. But wiser minds prevailed, and the view emerged that these limited government resources could be better applied elsewhere. Retirement savings were simply not the highest priority for an emerging economy fiscus1.
When it came to determining how to cope with the social consequences of a highly diverse population with deep ethnic divides and a potentially explosive housing problem, Singapore made the conscious decision that it was not in their interests to become a welfare state. As such, the central tenet of their compulsory savings vehicle, the Central Provident Fund (CPF), was that “the individual was responsible for determining how best to secure the future of their financial well-being”2. That meant that, although both saving and preservation in the fund were compulsory for citizens of Singapore until the age of 55, there was still an extraordinary amount of latitude given to individuals on how best to apply those funds to secure their financial protections. As the CPF evolved through the years, the fund expanded to the point where individuals could determine whether to use their savings to fund their housing, their (or their children’s) further education, their health (with options for basic medical coverage, additional hospital coverage for emergencies and post-retirement frailcare demands), their investments, their income protections, a top-up of other family members’ retirement or medical coverage, longevity insurance and, of course, their retirement income.
What was particularly bold about the Singapore model is that while it acknowledged that saving for retirement was indeed important, it was not seen as the only important priority for a developing economy or the citizens of that economy who were still battling to acquire the basic necessities to maintain a viable financial existence. It turned out to be the right decision for the country at that particular stage. Where developed countries have used social welfare to promote social rather than economic goals, Singapore was singular in its efforts to employ social security and a housing policy to serve economic development. This transformed Singapore both physically and socially.
As Vasoo and Lee point out, “It also differed from the pooled-risk system of Western welfare states where social security benefits are not directly linked to personal contributions. The CPF has been designed to help people become more self-reliant. The idea is that the financial burden of social security should remain within a generation and not be shifted to the younger generation. The advantage of such a system is that, when a society ages, the increasing burden of care of the elderly will be borne by individuals and families with savings, and not shifted to the state”3.
Singapore’s benefits model provided social protections, but migrated the problem from a more typical tax-based system of funding welfare to a savings-investment model of asset accumulation. The net effect was that Singapore eventually evolved into one of the lowest tax bases in the world, a feature that was particularly attractive to foreign investors.
At the same time, the CPF model also provided the government with an attractive self-generating pool of savings that they could tap into for special development funding.
By underpinning the system with a socio-economic model that promoted “self-reliance, a traditional family support system, thrift and a positive incentive to work, and non-inflationary economic growth”4, the Central Provident Fund provided a powerful impetus for ingraining many of the values around fiscal responsibility that have helped make Singapore the economic powerhouse it is today.
The idea is that the financial burden of social security should remain within a generation and not be shifted to the younger generation.
How much of this financial success story can we attribute to the Central Provident Fund model? This is a difficult question to answer with any degree of certainty. The development economists who evaluate the programme would argue that this has been one of its greatest achievements – and we will get to that point shortly5.
But pension fund experts have a different assessment. From the perspective of the Melbourne Mercer Global Pension Index, Singapore currently ranks only one grade higher than South Africa at a C+ score6.
Importantly, the Melbourne Mercer Global Pension Index bases its assessment on the effectiveness and sustainability of the social protections at retirement. What’s not included in the analysis is whether the programme might have been successful at helping individuals (and the country of Singapore) achieve broader financial goals throughout their lives.
In developed economies with a maturing demographic, retirement savings need to take the centre stage in policy debates around social welfare. In developing economies with limited resources though, it’s all about how a long-term savings programme can provide the greatest bang for buck for all stakeholders.
When retirement fund experts Olivia Mitchell and David McCarthy evaluated the Central Provident Fund, the evaluation was in the context of how well the system addresses the economic challenges of population ageing. Their assessment: because of early, potentially sub-optimal allocation choices (say, towards housing at the expense of retirement savings), members of the CPF might find themselves asset rich but cash poor when they enter retirement. While the real return on that property may be close to 5.8%, the income replacement from the residual retirement savings might typically rise to a replacement ratio of only 28% of final salary.
While this criticism of the potential shortfall is valid, perhaps the measure of real value to the individual needs to cover their and their families’ whole financial journeys, not just the end-game of retirement7.
When development economists Amartya Sen and Michael Sherraden weigh in, the assessment has a decidedly different flavour to it. What they see embedded in the CPF model ties more neatly into what they would term asset-based development programmes. Asset-based development is all about formulating an integrated approach to building human, social and economic capital. As development economists describe it: “The theory behind asset-based development or welfare policies suggests that while income facilitates immediate consumption, social development over the long term occurs primarily through asset accumulation and investment. Assets may not only provide individuals with the ability to exert control over resources that can increase their financial security, they might also orient owners to future aspirations and be linked to positive economic, psychological and social effects”8.
The rising popularity of asset-based welfare programmes stems from a post-1990 shift in development thinking. What would be the most effective way to leverage an individual’s self-determination around their financial well-being? What Sherradan argued was that “people’s behaviour and attitudes are affected by access to assets, even minor ones. This in turn affects their ability to make choices and their human capability or human capital”9.Where welfare policies for the poor tend to focus on ‘income-for-consumption’, asset acquisition policies change the focus for families and communities from maintenance to capability building.
As Nobel prize winning economist Amartya Sen described it: it facilitates “the substantive freedom of individuals to achieve alternative functioning combinations” where functioning “reflects the various things a person may value doing or being”10.
Effectively structured, these types of savings programmes are designed to provide people with limited financial and economic resources with opportunities or knowledge to acquire and accumulate long-term productive assets – assets that can produce other assets such as housing, education, financial savings and income-generating opportunities10. These programmes tend to focus on deriving financing access from a savings model, as opposed to a credit model. Their most distinctive feature, though, is that they provide the funding or savings participant with guidance and knowledge on how to most effectively apply their new access to income leverage.
And this is where the concept links around to what we argued in Benefits Barometer 2015: 'The new language' as being an imperative for both policymakers and employers: achieving a level of financial stability and capability in individuals, whether today, tomorrow or the post-retirement future, means we have to start helping individuals solve problems and achieve aspirational goals that have the greatest meaning to them or their families.
1 Singapore Ministry of Finance, 1964
2 Ng, 2000
3 Vasoo and Lee, 2001
4 Tan, 2004
5 Sherraden, 2009
6 The Mercer Melbourne Global Pension Index, 2015
7 McCarthy, 2002
8 Loke and Cramer, 2009
10 Ssewamala, Sperber, Zimmerman & Karimli, 2010