Brother Noriyuki Suzuki, General Secretary ICFTU-APRO
NTUC Central Committee Members
Seminar Participants
Distinguished Guests
Ladies and Gentlemen
1 Welcome to this regional seminar, organised by the Ong Teng Cheong Institute of Labour Studies with the support of the Lee Kuan Yew School of Public Policy.
2 We have participation of trade union centres from 11 countries. Each of you is here with varying concerns and priorities for social reform. The common thread in all this however is our shared aim as trade unions to improve the social security systems in our countries for the well being of our workers.
Retirement Financing
3 The subject of social security encompasses diverse and varied concerns from helping the unemployed to housing, healthcare, education, childcare, support for the disabled and many other areas. I will confine myself to retirement financing, or pensions as it is commonly referred to. In most Asian countries, retirement financing systems are not well developed. In line with development, each country will develop its own system. However, there are many lessons that we can learn from the experiences of others.
4 Broadly speaking, there are two distinct systems. One is the “defined benefit system”, while the other is the “defined contribution system”.
Pay-As-You-Go Pensions
5 Traditional state and company pension schemes are defined benefit schemes.
6 Typically workers and employers contribute to a common pension pool. Money from the pool is used to pay pre-defined pension benefits for existing retirees. For the present day worker, he will have his pension paid by a future generation of workers. This therefore is commonly known as the Pay-As-You-Go System.
7 The system works as long as there is a large pool of young workers and small number of retirees. It also works well when average life expectancy is short and people lived for a relatively short period after retirement from work.
8 This scenario has changed with falling birth rates and people living longer. Pay-As-You-Go systems are failing in many countries and are being reviewed, refined, reformed and in many cases supplemented by other schemes.
9 A recent World Bank study of pension policies earlier this year showed that the pension crisis is a global one. At the time when the pension systems of many countries were designed, it was not known that there would be huge demographic shifts facing the world.
10 Across the world, people are living longer and having fewer children. By 2050 for the first time in history there will be more people in the world over the age of 60 than under age 15. Within Asia, the United Nations estimates the number of elderly would more than triple by 2050.
11 There is another problem with the Pay-As-You-Go system. When the economy goes into recession, state finances are strained to pay for the defined benefits.
12 As for company pensions, some companies decline and are wound up, leaving pensioners stranded with no pensions, or the state takes up the tab. Today several companies are weighed down by pension liabilities, and if these liabilities are not resolved, the companies will sink into oblivion.
Defined Contribution Systems: Singapore’s CPF
13 Some countries have funded systems. Both employer and employee contribute into the employee’s retirement account. In Singapore, we inherited a mandatory individual savings scheme from the British. Our Central Provident Fund (CPF) system requires both employers and employees to contribute to individual accounts of workers. What a worker has accumulated in his account is what he gets. In our system each worker can draw on his CPF savings for purchase of housing, medical care and retirement expenses.
14 The CPF system has largely worked well for us. Still, many of those who are retiring now have not accumulated enough cash balances to see them through their retirement independently. In recent years it has been updated to deal with new realities in society. With the population ageing rapidly, changes have been made to enhance CPF savings for retirement and healthcare.
15 Chile also has a defined contribution system. However, instead of the state being responsible for the investment of the funds, workers savings are managed by private fund managers. This was hailed as a superior system. Now there is disappointment because the returns to workers are poor – the bulk of investment earnings have gone to administrative costs and profits of the fund managers.
Issues to consider for Pension Planning
16 There are many design issues to consider, whether it is the defined benefit system or the defined contribution system. But all planning for retirement savings struggle with three core uncertainties: the rate of savings; the rate of return on savings; and life expectancies.
The rate of savings
17 The savings rate depends on the level of earnings, and the propensity to save. It is difficult for the low income to save voluntarily. The level of earnings also fluctuate in the working life of the worker, and also the life span of companies (which funds defined benefit schemes).
The rate of return on savings
18 This largely depends on macro-economic forces globally, and within the country. The returns on investment of savings can also be eroded by high administrative costs.
Life Expectancy
19 Life expectancy has become longer, but the retirement age has not changed as much.
Reforms
20 Pension issues are highly emotional and politicised. But if people understand that changes to pension policies are really trying to manage the changes in the three core uncertainties, then they can focus their energies on solving the problems rationally. Managing financial security in retirement is not about politics; it is about economics and demography. However, it is not easy to be rational, when expectations are not met. Therefore many governments struggle over pension reform.
21 The general approach to addressing shortcomings has been to adopt a combination of one or more of the following:
• Increase pension contribution rates of existing workers
• Lower pension benefits for retirees
• Raise the pensionable age or retirement age, to defer pension payouts; and
• Encourage individual savings schemes for retirement
22 It is understandable that these changes in some instances have been met with protests and demonstrations since pensioners of the future will get less than the pensioners now. However, reform is necessary as governments realise that the status quo cannot be sustained.
Multi-Pillar Approach
23 Some countries began reform early. For example, Sweden has supplemented state pensions with compulsory savings plans.
24 In undertaking pension reform, it is clear that a combination of different policies are considered as being more effective than any single approach for retirement planning. This is the multi-pillar approach advocated by the World Bank.
25 I understand you will be examining the design of various social security systems over the next few days. There are several complex issues to consider when designing a proper pension system. Key questions that need to be asked include:
• Is the system adequate for the daily living for retirees? What is adequate?
• Does the system cover all of the population?
• Is it financially sustainable over a long period of time?
• Does the system have the capacity to absorb unforeseen shocks?
26 One issue spans these questions. It is the issue of wealth redistribution within the state. How much transfer should there be from the higher income to the lower income? In defined benefit schemes, the higher income earners shoulder the greater part of the burden. It is the same for defined contribution schemes, when the state has to top up the savings of the low income. How much redistribution there would be depends on the social contract within each country.
Working Longer
27 The OECD has recognised that ageing population is a global issue threatening to overwhelm public finance in many countries. It recommends that people remain in work longer. A number of countries including Austria, Italy and Germany are raising their retirement age. Working longer will be increasingly common. It is thus critical that older workers are able to support themselves for as long as possible, so that they can enjoy a good quality of life.
28 In Japan, the Re-Employment Law will require employers to offer re-employment to workers when they reach 60 years, not necessarily in the same jobs or at the same pay. The mandatory retirement age will also be raised to 65 or higher by 2013.
29 In Singapore, we are also examining how work arrangements and wage systems can be modified to increase the employability of older workers. Our unions have pushed for jobs to be redesigned to expand job opportunities for older workers. At the same time more performance-linked wage systems will provide greater scope for older workers to be rewarded based on their contributions.
30 With skills and knowledge obsolescence happening at a faster rate, the Singapore National Trades Union Congress (NTUC) advocates measures to encourage older workers to update their skills in a lifelong learning framework. These include realistic entry qualifications to training courses and the provision of training methods and programmes that take into account the needs of older workers.
Importance of Family Unit
31 Will the reformed pension systems stand the test of time? Studying the developments in pension systems of other countries, as well as our CPF system, has led me to the conclusion that pension plans are supplementary to old age care by children. Before pensions, or CPF in our case, parents raised their children, and children supported their parents when they grow old. This is a particularly Asian trait where it is common even now for the elderly to live with their children.
32 Pension plans or CPF-type plans support the family to look after the elderly, to lighten the load, but cannot replace the family. Therefore, national policies must aim to strengthen family bonds. It is notable that the World Bank, in its last review also recognised the importance of family support as part of the social security system for the elderly.
Conclusion
33 Much of the time and resources of trade unions are consumed by shorter term issues and challenges. But even as we tackle these, unions have to understand longer term socio-economic trends and their implications for workers. Some unions are better at doing this than others. By coming together, we can learn from each other what challenges lie ahead; and what works and what doesn’t especially in the area of social security.
34 This seminar has been organised with this goal in mind. It will provide an opportunity for regional unions to share experiences and ideas on social security from a labour perspective. We hope a key take away will be principles, policies and initiatives that trade unions can advocate for the further development of social security in our respective countries.
35 Helping in this task will be the experts from the Lee Kuan Yew School of Public Policy who will facilitate the various seminar discussions.
36 Last, I take this opportunity to thank the ICFTU-APRO and the Freidrich Ebert Stiftung for their generous contribution to help defray the cost of this seminar.
I wish all participants fruitful discussions and a successful seminar ahead.
For media queries, please contact:
Mr S. Thiagarajan
Director
Ong Teng Cheong Institute of Labour Studies
DID: 6213 8130
Email: thiaga@ntuc.org.sg
