Economic Society of Singapore Post-Budget Dialogue 2014 - Assistant Professor Walter Theseira Division of Economics, NTU Honorary Secretary, ESS

Economic Society of Singapore
  Post-Budget Dialogue 2014
  Assistant Professor Walter Theseira
      Division of Economics, NTU
        Honorary Secretary, ESS

A Tale of Two Countries
• It was the best of times, it was the
  worst of times…

• The Nation had grown prosperous
  beyond the dreams of the early
  immigrants who crowded to its shores.

• People were richer and living longer
  and healthier lives than ever before.

The Gathering Storm
• But several factors threatened the happy
  retirement of those who had given so
  much to develop the Nation so far.

• A great financial crisis sweeping the world
  decimated assets and economies.

• Long life expectancies proved both a
  blessing and a curse for workers facing the
  prospect of outliving their savings.

• Rising incomes meant that those savings
  bought less and less each passing day.

A New Hope
• In response, the Nation embarked on a wide-
  ranging plan to ensure that the elderly, the
  pioneers, need not fear poverty in their old
  age. This plan would provide to the pioneers
  substantial financial benefits for the rest of
  their lives…

Lessons for Singapore?
• I am referring, of course, to the United States, which
  signed into law its Social Security system in 1935.

• What of Singapore? I do not claim that Budget 2014
  represents such a radical shift towards nationalized
  social insurance.

• But the parallels are there. Budget 2014 continues a
  steady trend of fundamental change in the way
  Singapore addresses retirement and health risks.

The Shift in Singapore Social Policy
• Shifting of policy from
  – Individual/family based risk bearing
  – Within-generation risk bearing
  – Across-generation risk bearing

The 1st Generation of Social Insurance
          Policy in Singapore
• Pre-CPF: No policy!
  – Informal risk-sharing within the household
  – Employer-provided pensions for a lucky few

• CPF (1955) + Medisave (1984)
  – Introduction of formal protection for retirement and
    health risks.
  – However, CPF and Medisave only provide protection
    within a family, and only against the risk of being
    shortsighted. They provide no protection against
    other risks.

The 2nd Generation of Social Insurance
         Policy in Singapore
• The fundamental risks of aging are:
   – Risk of living longer than expected
   – Risk of being sicker than expected

• These risks cannot be insured against on an individual
  basis. Private markets also do a poor job of protecting
  against these risks because of adverse selection.

• Medishield (1990) + CPF Life (2009)
   – Although these cover different policy areas, they have in
     common the sharing of risk across policyholders.

Budget 2014: A step into the 3rd Generation (or
       2.5G?) of Social Insurance Policy?
• Simple risk sharing across policyholders has people who live shorter
  lives (or less sick) cover costs for people who live longer (more sick).

• But what if everyone starts to live longer lives on average, or if
  medical costs rise on average?

• Solvency requires changing policy benefits, or increasing insurance
  loadings (Medishield premiums). But what if the older generation
  doesn’t have enough money to pay for it?

• The 3rd Generation of Social Insurance Policy therefore relies on
  inter-generational transfers to share risks across different
  generations of Singaporeans.

Measures in Budget 2014 Supporting
    Inter-Generational Risk Sharing
• Pioneer Generation Package
    – Additional 50% discount on top of regular subsidies for specialist outpatient clinics and
      polyclinics
    – Universal CHAS eligibility
    – $1,200 annual cash assistance for those with disabilities
    – $200 - $800 Annual Medisave top-ups for life
    – Additional Medishield Life subsidies

• 5-Year CPF Medisave top-ups for ‘gap generation’ (55+ not qualifying for
  PG)

• Other measures also support inter-generational risk sharing to some
  extent:
    – Medishield Life subsidies for lower and middle-income Singaporeans
    – Enhanced subsidies for specialist outpatient clinics
    – 1% Increase in Employer CPF Medisave contribution rates (50% co-funded for one year)

Shifts in Policy Frames
• These shifts in risk-sharing policy are
  accompanied by fundamental changes in policy
  framing.

• First, benefits have become more strongly
  aligned with payments.

• Second, benefits are now increasingly
  represented as entitlements.

Aligning Benefits with Payments
• Medishield Life is a good example of how benefits are being
  tied increasingly to payments (the funding source).

• The ‘traditional’ approach to making healthcare affordable
  in Singapore was to combine subsidies with Medisave, to
  minimize out-of-pocket costs.

• This leads to the perception that:
• a) Health system benefits come magically from the
  ‘government’ or the general taxpayer – there is no obvious
  connection between health benefits and health ‘taxes’
• b) Medisave is a personal savings account and not a
  payment system for healthcare.

Aligning Benefits with Payments
• The proposed Medishield Life policy will change this
  dramatically by significantly enhancing Medishield
  coverage and paying for it with increased Medishield
  premiums.

• Therefore, Medisave is conceptually changing from an
  ‘individual health savings account’ to an insurance
  contribution pool.

• Going forward, a greater part of the risk-sharing in
  health expenses will therefore fall on policyholders
  (Medisave contributors) rather than general taxpayers.

Recasting Safety Nets or Benefits as
             Entitlements
• Medifund (1993) already exists to address the
  needs of the needy with health issues.

• However, Medifund is designed as a safety net
  and not as an entitlement.

• The Pioneer Generation Package, in combination
  with enhanced Medishield Life, will potentially
  provide health benefits as an entitlement that
  previously existed as a safety net.

Conclusion
• Singapore is moving towards a social insurance policy framework
  that has certain commonalities with the ‘welfare state’.

• Specifically, by spreading risks across generations, by formally
  increasing the level of insurance in the medical system, and by
  recasting benefits in terms of entitlements, we have moved
  significantly away from our previous emphasis on individual and
  family-based responsibility.

• These moves will substantially reduce the burden of risk for old age
  and healthcare faced by individuals and families.

• However, the significance of these policy changes is generally
  downplayed. It is also unclear whether the public recognizes the
  depth and magnitude of this policy shift.