Thursday, February 27, 2014

Uniquely Singapore way to fund needs

Feb 27, 2014

By Chia Ngee Choon, For The Straits Times

BUDGET 2014 is elder-centric and, in particular, pioneer-centric. It sends a clear assurance to Singapore's pioneering generation that, having made significant contributions to Singapore when it was a Third World country, they can now retire with health-care security in a First World nation.

The Budget, announced last Friday, has set aside a whopping $8 billion in a Pioneer Generation Fund to finance health-care costs. This is the largest one-time capital injection to a single fund, and exceeds expectations in terms of its initial start-up capital and its comprehensiveness and inclusivity.

In terms of fund size, the Pioneer Generation Fund dwarfs Medifund and Medifund Silver, both of which were also introduced to address concerns of health-care financing. It also offers benefits across all income groups, unlike the two other funds which offer only targeted assistance to the needy.

Medifund, a social safety net to help Singaporeans who are unable to pay their medical expenses, was set up about 20 years ago with a start-up capital of $200 million. As of financial year 2012, the capital sum had grown to $3 billion. Medifund Silver was launched in 2007, in response to an ageing population, with an initial capital sum of $500 million.

Given the large quantum of the Pioneer Generation Fund, is its financing sustainable? Singapore is unique in that our budgetary position allows us to pay for the whole fund from a single Budget, with only a small projected deficit of $1.2 billion. This is equal to just 0.3 per cent of gross domestic product.

Part of the reason is that Singapore's unique method of financing social protection programmes by setting up funds reduces the need for higher taxation. Funds are established with capital injections of government monies as principal. For endowment funds, only incomes generated from the fund's principal amount are used, whereas for trust funds, the principal can also be drawn down. The Pioneer Generation Fund is a trust fund.

Year by year, the returns from the fund and a portion of the fund will be withdrawn to meet these obligations. As long as the fund yields good returns, and if surplus returns are reinvested when returns exceed drawdowns, the fund will be able to support the subsidies. The Government will not have to draw on past reserves or future taxes to finance the Pioneer Generation Fund.

This is enviable as many nations have to struggle to enhance social security through raising taxes. For example, Japan is in the process of raising its current consumption tax from 5 per cent to 8 per cent in April, and then to 10 per cent in October next year. The rise in revenue has been earmarked to finance social security expenditures, particularly pension, medical care and long-term care. Funding social security in this manner puts more burden on the current young Japanese taxpayers.

So the current Pioneer Generation Fund is sustainable.

But could more have been done to give pioneers more peace of mind?

Currently, the average premium for seniors aged 65 and above is about $856.

Under the new enhanced inclusive MediShield Life, premiums are expected to be higher. Let us assume the new average premium for seniors is $1,113, a conservative jump of 30 per cent or so over today's premium.

Taking into account the mortality experience of the elderly and life expectancy improvements over time, I estimate the cost of subsidising MediShield Life premiums fully for those aged 80 and above to be about $3 billion to $5 billion, depending on how much premiums increase over time.

To put this amount in perspective: The overall Budget surplus was $5.82 billion in FY2012, and another $3.92 billion in FY2013.

Expanding full premium subsidies to the whole pioneer generation for life will double the financing cost. Whether this will be fiscally sustainable would depend on Singapore's demographic landscape, economic growth and the global economic situation.

These have a direct impact on Singapore's fiscal revenue capacity and the expected returns of the fund. As Singapore's population ages and becomes superaged, and if the economy slows down, can the Budget surpluses of FY2012 and FY2013 be repeated?

Fortunately, the programme will become less costly over time as the pioneer generation cohort shrinks. In 2025, the premium subsidies will be enjoyed by 65 per cent of the initial 450,000 pioneers. In 2030, about half of the pioneers will be left. In 2035, only about a third of the pioneers will remain.

Financing for an ageing population is indeed challenging. Singapore is lucky that there are resources to set aside to meet the long-term medical needs of the pioneer generation.

Moving forward, perhaps this financing framework can be expanded. One area worth looking at is giving a basic pension to older pioneers. To keep costs manageable, this can be means-tested, and given to those with low savings and no cashable assets.

Paying for MediShield Life premiums and helping to subsidise outpatient-care costs are good moves. If fiscal strength permits, an allowance will add an extra layer of protection for financially frail pioneers.

The writer is associate professor at the department of economics and a steering committee member of the Singapore Centre for Applied and Policy Economics at the National University of Singapore.

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