by Patrick Byrne and Brendan RodwayNews Weekly
Policy 3: Boosting national savings
, June 13, 1998
History will record that Lee Kuan Yew got it right in Singapore with his Provident Fund (self-funded social welfare benefits), while Bismarck got it wrong in Germany with his social welfare system of intergenerational transfers.”
— Lester Thurow, Professor of Economics at the Massachusetts Institute of Technology in “The Future of Capitalism
Australia needs a national savings policy to boost the dangerously low level of savings and to provide a large pool of reserves which makes the nation self-sufficient in its capital needs.
To this end, Australia needs an equivalent of Singapore’s Central Provident Fund into which the compulsory superannuation levy contributions can be directed.
Singapore’s compulsory savings system has helped transform the island-state from a Third World nation 40 years ago into a modern thriving economy with a standard of living equivalent to that of Australia’s.
Begun in 1955, Singapore’s Central Provident Fund (CPF) has achieved a high national savings rate, and more. It is a highly efficient social security system whereby each person saves to provide an individual social security net, rather than being reliant on the welfare state.
The contribution rate in Singapore’s CPF is 40% of a worker’s gross salary, with workers contributing 22.5% and employers 17.5%. Interest on deposits is about 4.5%. However, all contributions, interest and payouts are tax free. This means that while interest on deposits is small, it is not diminished by taxes and other charges as happens to superannuation in Australia.
Most importantly, it also means that investment loans made from this huge pool of savings can be made at very low interest rates. For example, top-up housing loans from the fund are only 0.1% above the interest paid on CPF deposits.
In Singapore, a CPF member holds three accounts:
- An Ordinary Account can be used for housing, approved investments, life insurance and transfers to top-up a parent’s Retirement Account;
- A Medicare Savings Account for meeting hospitalisation expenses and medical insurance premiums;
- A Special Account which is reserved for retirement contingency purposes.
There are no entrance fees, a negligible administration charge, and contributions are immediately vested.
As the CPF is government-guaranteed, individual insecurity about loss of capital because of negligence or incompetence is minimal. Unlike Australia’s compulsory superannuation scheme which is directed solely at providing for one’s retirement — and which has a fairly low contribution rate — Singapore’s CPF provides important social benefits across a whole lifetime. Whereas Australia has more than 150,000 separate super funds with associated high administrative costs, Singapore has one fund with negligible administrative costs.
The CPF provides a fully owned home with a built-in area of about 60 square metres. Singapore’s home ownership rate is over 90% compared to Australia’s which is now below 70%.
Thanks to the CPF, Singapore has a savings rate of about 30% of Gross Domestic Product, compared to Australia’s less than 6%.
During the 1980s, the Singapore economy grew at an average of 8% compared to Australia’s 3%.
Singapore provides three important lessons for Australia.
First, Singapore’s high savings rate has been a fundamental factor in its phenomenal economic development. It was able to provide long-term low interest capital for investment, particularly for infrastructure, without having to go cap in hand to foreign financial markets.
Second, when the Asian economic meltdown occurred, Singapore was only indirectly affected. Its indebted neighbours suffered from a sudden loss of confidence from the international financial markets. Singapore did not face this problem because, with its high savings rate and restrictions on foreign investment, there is no risk of a sudden flight of foreign capital.
Third, people save for themselves, in a government-guaranteed savings system allowing individuals to provide their own safety nets. High contribution rates over working lives provide a substantial savings pool that grows with the benefit of compound interest.
This is most important when a nation like Australia has an ageing population which is set to place intolerable demands on a taxpayer-funded, government-provided pension, health and retirement system.
As Professor Lester Thurow points out, Singapore has solved this problem. It is the only country with an ageing population that is not facing a welfare and taxation crisis.