In a previous article, I wrote about Singapore’s path to provide housing for all its citizens. In this article, I am going to introduce the method for the financing of all the apartments, and how the social security of citizens was ensured. Therefore, we will elaborate on Singapore’s Central Provident Fund (CPF), which enabled the accumulation of all social security payments, their competent managing and effective use to improve the living conditions of citizens.
Mongolians assume that their social insurance fund comes to benefit only at retirement, or for hospital visits. Whilst, Singapore’s government policymakers consider a social savings fund as the best way to meet the needs of housing, health, and the elderly. This fund is meant to be an individual’s savings rather than an insurance such as ours, and it is an assumption that a person and their family must get back in some form. The CPF allows anyone who pays their pension contribution to a nominal account, to get an apartment that matches their income.
Insurance is a concept of protection against risks that may or may not occur, such as an accident. Although, reaching retirement age is not a risk, it is a natural development.
Singapore’s Central Provident Fund
The philosophy of social protection in Singapore is fundamentally different from ours. The concept of social protection consists of four main components:
- To have work ethic, personal responsibility, savings and insurance
- Family support and support between members; transfers from savings fund to another member (especially transfers between spouses, parents and children’s nominal accounts)
- To encourage joint responsibility or volunteer work for the public good
- Additional payments of state care; assistance for housing and medical care.
Through this smart policy, citizens are able to benefit from their savings today, not in the future. Due to strict adherence to the principles, there is no discrimination against a specific group of the population, such as “canceling” the pension loans suddenly one day. Since it is impossible to evade the system, people trust the fund and pay their dues fairly and equitably.
The history of the fund began when the British colonial government first established a pension fund for the private sector in 1955. Since then, it has become a unique tool that provides a wide range of social security services. Fund governance is regulated by an independent, special law, and its activities are fall under the Ministry of Human Resources. The Board of Directors consists of 2 members each representing the employers, and taxpayers and the government, 7 other members, a chairman, and a deputy chairman.
Today, 3.9 million people, along with 149,000 employers, make monthly contributions to the fund and accumulate income in their nominal accounts. Employers pay 17 percent, individuals pay 20 percent, and a total of 37 percent from the salary income is paid to the fund. Every citizen pays the total contributions, which until the age of 35 goes into three accounts: 23 percent to the Ordinary (OA), 6 percent to the Special (SA), and 8 percent to the MediSave Account (MA). However, the percentage of the OA gradually decreases with growing age, while the percentage of SA increases by the age of 55 and decreases after 55; the percentage of MA keeps increasing gradually. The savings accumulated in this fund are used to finance pensions, health care, and housing in accordance with the law. This scheme only applies to income up to SGD 6,000 per month.
The pension is calculated as the sum of OA and SA balances. Today, one in two Singaporeans reach the age of 85, one in three reach the age of 90.
Table 1. Singapore social security contribution rates
Nominal account savings are being invested in risk-free government bonds with an interest rate of at least 4 percent and up to 6 percent. Singapore government bonds are rated AAA (the most reliable) by international agencies such as S&P, Moody’s, and Fitch.
OA and SA holders are able to invest their savings in other stocks and bonds of their choice. However, there are certain restrictions, such as that the account balance is required to stay above SGD 20,000 to cover any risks.
Singapore’s CPF model is a system of actual pension savings which is based on the deduction, ensuring that the payers will get a return. In other words, it is a takeback system. However, as the policy developed, the system has been expanded into a development policy and adapted to the needs of their society, and thus, became the unique, comprehensive system. The CPF is unique since it is guaranteed pension saving based on wage deduction, as well as a solidarity system (originally established in Germany by Otto von Bismarck) that takes a share of monetary devaluation risks upon itself. Singaporeans as well see this model as completely different from the free market principle of ‘leave it alone’. This fund pairs the individual and collective responsibilities and is a model that guarantees its citizens’ quality of life using the, government’s active support.
Mongolia’s mistake
In Mongolia, even since the socialist era, health and social insurance contributions have been considered part of the state budget. After the democratic revolution, M. Enkhsaikhan’s government had failed to introduce nominal accounts, and N. Enkhbayar’s government even legalized it as a part of the budget.
Our social insurance fund consists of 5 types of insurance: pension, allowance, health, industrial accident, occupational disease, and unemployment. Excluding the health insurance fund, the remaining four types of funds had a balance of MNT 1.1 trillion at the end of last year, according to Minister S. Chinzorig on ‘Defacto Debate’. The main issue is the pension fund. Currently, there is a deficit as the majority of the population is young, and the situation will worsen in the near future with an ageing population.
Since the turn of the century, these funds have relied solely on budget redistribution to expand the middle class, which is dependent on mining revenues through the budget. The government’s social policy has in fact not been targeted and became a widespread cash handout with an election promises. Although cash should be distributed where it is needed, Mongolia’s experience over the past decade has shown that we will bear inefficient costs if the policy is not targeted.
However, the experience of Singapore proves that the middle class expands if we focus on meeting the basic needs of its citizens through its social insurance fund. Evidently, we will not be able to continue the current system that raises the fee for the contributing part of the society and provides low quality services universally. Mongolia needs to transform its social insurance system into a centralized, nominal account savings system based on the Singapore experience. From 2021, it is time to renew our social insurance and pay the due payments from the Wealth Fund.
2020.05.07
Trans. by Riya.T and Sungerel.U