Aug 20, 2007

PM Lee & The Aging Population

How can Singapore deal with the financial challenges of an aging population? Sounds like a big problem. However, if you think about it, the available measures are fairly obvious:

(1) Pay higher interest on CPF savings
(2) Delay citizens’ withdrawal from their CPF savings
(3) Encourage Singaporeans to work longer and retire later
(4) Make everyone invest in annuities

Okay, that wasn’t too difficult. The devil is in the details, and the actual mechanics will take plenty of working out. But the “big picture” strategy is fairly clear, and PM Lee announced it in his Rally Speech last night. What Mr Wang will explore today are a few scenarios which PM Lee didn’t explicitly touch on.

During his speech, PM Lee mentioned “longevity risk”. This is the risk that you end up living longer than you expected, and therefore you eventually run short of money to support yourself. Furthermore, a high proportion of Singaporeans in their 20s, 30s and 40s today are choosing not to have children at all. Thus many of them will one day become senior citizens literally without any living relatives at all, to depend on.

Harsh as it may sound, the problem is its own solution.

PM Lee described a future where, thanks to advances in medical knowledge and healthcare, people will live longer and longer, with life expectancies climbing to, say, 90 or 100 years or perhaps even more. However, the implicit assumption is that you are able to afford living to such an old age, or that someone else (your relatives, or the state) will pick up the tab.

If you can’t afford this, and if no one else picks up the tab, well, you die. Death is the simple solution to living too long. That’s the brutal truth. (And it’s not so bad really, everyone has to go someday).

It is not necessarily the case that many old people will not be able to afford food and water, and therefore die alone, of starvation, in their little HDB flats. No, not so dramatic or tragic. A more likely scenario is that as they grow older and their savings gradually run out, they find themselves unable to afford the various medical treatments that would prolong life.

For example, let’s say that you are 75 years old. Your heart has developed a valve problem. The doctors recommend a $50,000 operation. They say that if you don’t go for the surgery, well, you are in no immediate danger, but your heart will probably fail sometime in the next five years. On the other hand, if you do go for the operation, they will plonk a new artificial valve into your heart, and it will probably last you another 20 years.

The question then is whether you can afford $50,000. If you can, you get to live longer, perhaps up to the age of 95 years. If you can’t, you’ll die sometime in the next five years.

So essentially your life expectancy (80 years or 95 years) has become a matter of money. Your life expectancy is a function of the medical care available to you, which in turn is a function of the amount of money you have. Ultimately you die, not of starvation, but of a curable heart condition which you could not afford to cure.

My next point is about the likely pattern of wealth distribution in an aging population. It is often said that in an aging population, the working population (that is, the young and the middle-aged) will end up bearing the heavy burden of supporting (either directly or through paying income taxes) the older retired folks.

This is no doubt true, but is there any silver lining for the younger folks? Let’s consider what happens to a person’s assets when he dies.

If you die with a will, then your assets will go, of course, to whoever you named as the beneficiaries in your will (and most people will name their own relatives as the beneficiaries).

If you die without a will, your assets will be divided according to a very specific order stated in the law. For example, if you have a spouse but no children, the spouse takes all. If you have a spouse and children, the spouse takes half the assets, and the other half is divided among the children. If you have no spouse and no children, but do have certain other relatives, then your assets will go, in a certain order, to your parents, siblings, nephews, nieces, aunts, uncles etc.

Now, assume that birth trends in Singapore don’t undergo any drastic change in the foreseeable future. So our population continues to age rapidly. In an aging population, a relatively high proportion of the general population are in the older age-groups.

This means that if in the year 2040 or 2050, you are a middle-aged working adult in Singapore, then the probability is that you will have many more old relatives than young relatives. In other words, the total number of your parents, uncles and aunties will probably exceed the total number of your siblings and cousins, and almost certainly exceed the number of your children, nephews and nieces.

Now as your older relatives start dying off, you will inherit their assets. You may not have been very close to your Auntie Ling (the one you never bothered to visit even during Chinese New Year). Nevertheless she will give you all her assets when she passes away. Why? Simply because she has no one else to give her assets to. After all, Auntie Ling was a typical Singaporean of her generation – she was an only child (or had only one other sibling, whom she outlived), married late (and also outlived her husband), and never had no children of her own. She was literally all alone in the world, except for you. So after she dies, you get everything.

As the population ages, the combined wealth of a relatively greater number of old Singaporeans will become concentrated (after they die) in the hands of a relatively lesser number of younger Singaporeans. This is in contrast to countries with a young population, where the wealth of the recently-deceased will be divided among a greater number of living people.

So in an aging population, there is some economic “silver lining” for the younger folks, after all. In a sense, this alleviates the economic hardship of the relatively younger section of the population, in supporting the relatively older section of the population.


Anonymous said...

Just one peeve with the Rally Speech; when livings have just become a struggle, a challenge to the average man in the street, the PM talked about comprehensive upgrading schemes. He certainly was awared that many have to downgrade to survive due to rising costs of living and falling wages on top of difficulties in finding employment. His dispensing of 'feel good' sentiments within a speech that contained many measures that Singaporeans must adopt in order to stay afloat(survive) just simply do not match reality.

Mr Wang Says So said...

Related post: Stray Dog ponders the difficulty of old people staying relevant to the workforce, in the age of outsourcing.

Anonymous said...

>Harsh as it may sound, the problem is its own solution.

You are absolutely right. But LKY has beaten you to it. He said that out loud years ago. In fact, it's his true reason for not having a welfare system - he want to wee out people who are "physically, intellectually and culturally anaemic" (the poor senior citizens whom you described, fit that description perfectly) -

"Free education and subsidised housing lead to a situation where the less economically productive people in the community are reproducing themselves at rates higher than the rest. This will increase the total population of less productive people.

We must... take the first tentative steps towards correcting a trend which can leave our society with a large number of the physically, intellectually and culturally anaemic."

The logical next "tentative step" is to raise medical fee and then withhold free medical care to old people. That will, as you aptly put it, allow the problem to be its own solution.

source: the quote is from here)

family man said...

The 1 percent rise in CPF will cost the government $700 million. I am not sure why it is hammered into us that it cost the government $700 million. Where is our CPF invested? With GIC / Temasek holdings? What are the returns from these investments. 8%?Should they not be given back to the CPF holders instead of enriching the 'reserves' which is never used to serve the people? Or should they be kept to bet on another Shin corp, IR, F1 race. For the poorer people, the CPF has become a sinking hole- cannot reach min sum, you cannot withdraw at 55 years old. Annuity is compulsory. In the end, I believe the reverse mortgage will also become compulsory for all citizens, while the players (managements /directors / employees / fund managers) in GIC / Temasek Holdings enrich themselves over the years.

Anonymous said...

All these years, CPF has been paying only 2.5/4% interest for their contributors' funds while on the other hand it was reported that Temasik has been making a very much higher return since inception. I would presume that the difference in these rates is now paying for the high salaries demanded by the MIW, financial fiascos made by Temasik & other Stat Boards, etc.,

So by implication, isn't the Gahmen now admitting that all this while they have been taking all the CPF contributors for a ride at their expense.

Sometimes it's very hard to fathom the fact that after squeezing the blood and sweat out of almost every Singaporean thro' a combined group of fiscal measures aimed at increasing Gahmen/GLC coffers such as fee/tax hikes like GST, COE, bus & MRT fare increases, etc., the Gahmen now has no other choice except to force Singaporeans to work longer. The option to retire early would now be accessible only to the rich & elite, especially the MIW what with their obscence salaries.

If in the first place, had the Gahmen been not so obsessed with making profits at the expense providing the very basic & necessary services to the ordinary citizen, I'm sure we wouldn't have ended up in such a sorry state of affairs.

Remember "Get out of my elite uncaring face".

Anonymous said...

Humanity is lost in Singapore.

BACTS said...

"As the population ages, the combined wealth of a relatively greater number of old Singaporeans will become concentrated (after they die) in the hands of a relatively lesser number of younger Singaporeans."

When the CPF money is been used to buy annuity, what is there left which we can call assets, not forgeting that the HDB flat will be melted down with the introdution of reverse mortgage. When that Auntie is gone, what is left may only be enough to pay for the estate duty and her funeral.

darnit said...

Dear Mr Wang,

I seriously believe that whatever the acturial table says, the average Singaporeans livespan will not go very much beyond the mid-seventies. As you have pointed out, one reason is health-care cost. Another factor, may I point out, is stress. With so many families having dual incomes, out of necessity, husband and wives are equally subject to stress. Stress gives rise to a host of diseases - cancer, cardio-vascular diseases, other occupational diseases etc. One more factor is the haze. I am made aware that the incidences of lung cancer have shot up lately, including in people who don't smoke. Do you recall what the experts said at the time when the haze as we know it now, first started? There was some forecast that singaporeans will suffer such serious respiratory diseases several years down the road when those micro level dusts which can penetrate your masks start and settled at in your lungs starts to affect you.

You doubt what I say? You can do a very simple 'survey' just keep track of the ages in the obituary pages of all the papers here. It may be an imperfect but nevertheless a rough guide. Better still if you have the resources or contacts at the ROBD (Registry of Birth and Deaths. check it up.

Frankly, IMO, many many Singaporeans will end up not eing able to enjoy the cash they have been forced to buy annuties. Another scheme by the govt to collectively keep a huge sum of citizens in its coffers for reasons only known to the politicians in power.

FrauP. said...

BACTS said...

"When the CPF money is been used to buy annuity, what is there left which we can call assets, not forgeting that the HDB flat will be melted down with the introdution of reverse mortgage."

Excuse me...but HDB property doesnt belong to you. It is ultimately still the govt's property. Only 99yrs lifespan remember?

Anonymous said...

There was no mention of CPF contribution rates now that economy has improved. In other words, conveniently no response to what unions asked for in return for taking CPF contribution rate cuts. This has been sidestepped. So what are the real returns for the glowing growth rates?

With GST 2% hike, where has the $$ gone to? Certainly not back into ppl's pockets.

The 4th Uni sounds like a last minute idea, thus the 12 mths for deliberation. The present Unis will pay some more for this.

Kai Jie said...

I like your comment on wealth distribution. Interesting! ^^

Anonymous said...

Everyone, go check up the Singapore Constitution, Article 22A and onwards. And refer to the fifth session. Talks about how GLCs and Temasek can get their funding source from CPF.

It was some years ago, as I remember vaguely, that they quietly sneaked in this law. An article in the newspaper talked about it, but it was only buried along with other Parliament session snippets, and the article's title was nothing related to the law change.

But nobody cared. They just want to go about their lives in blissful ignorance. Politics is a taboo converation topic for many.

So now Ho Ching loses money, then under the pretext of caring for an ageing population, going to impose compulsory annuity (when the main objective was to plunder).

Even the foreigners whom I know can see through the deceit.