Importantly, the Melbourne Mercer Global Pension Index bases its assessment on the effectiveness and sustainability of the social protections at retirement. What’s not included in the analysis is whether the programme might have been successful at helping individuals (and the country of Singapore) achieve broader financial goals throughout their lives.
In developed economies with a maturing demographic, retirement savings need to take the centre stage in policy debates around social welfare. In developing economies with limited resources though, it’s all about how a long-term savings programme can provide the greatest bang for buck for all stakeholders.
When retirement fund experts Olivia Mitchell and David McCarthy evaluated the Central Provident Fund, the evaluation was in the context of how well the system addresses the economic challenges of population ageing. Their assessment: because of early, potentially sub-optimal allocation choices (say, towards housing at the expense of retirement savings), members of the CPF might find themselves asset rich but cash poor when they enter retirement. While the real return on that property may be close to 5.8%, the income replacement from the residual retirement savings might typically rise to a replacement ratio of only 28% of final salary.
While this criticism of the potential shortfall is valid, perhaps the measure of real value to the individual needs to cover their and their families’ whole financial journeys, not just the end-game of retirement7.
When development economists Amartya Sen and Michael Sherraden weigh in, the assessment has a decidedly different flavour to it. What they see embedded in the CPF model ties more neatly into what they would term asset-based development programmes. Asset-based development is all about formulating an integrated approach to building human, social and economic capital. As development economists describe it: “The theory behind asset-based development or welfare policies suggests that while income facilitates immediate consumption, social development over the long term occurs primarily through asset accumulation and investment. Assets may not only provide individuals with the ability to exert control over resources that can increase their financial security, they might also orient owners to future aspirations and be linked to positive economic, psychological and social effects”8.
The rising popularity of asset-based welfare programmes stems from a post-1990 shift in development thinking. What would be the most effective way to leverage an individual’s self-determination around their financial well-being? What Sherradan argued was that “people’s behaviour and attitudes are affected by access to assets, even minor ones. This in turn affects their ability to make choices and their human capability or human capital”9.Where welfare policies for the poor tend to focus on ‘income-for-consumption’, asset acquisition policies change the focus for families and communities from maintenance to capability building.
As Nobel prize winning economist Amartya Sen described it: it facilitates “the substantive freedom of individuals to achieve alternative functioning combinations” where functioning “reflects the various things a person may value doing or being”10.
Effectively structured, these types of savings programmes are designed to provide people with limited financial and economic resources with opportunities or knowledge to acquire and accumulate long-term productive assets – assets that can produce other assets such as housing, education, financial savings and income-generating opportunities10. These programmes tend to focus on deriving financing access from a savings model, as opposed to a credit model. Their most distinctive feature, though, is that they provide the funding or savings participant with guidance and knowledge on how to most effectively apply their new access to income leverage.
And this is where the concept links around to what we argued in Benefits Barometer 2015: 'The new language' as being an imperative for both policymakers and employers: achieving a level of financial stability and capability in individuals, whether today, tomorrow or the post-retirement future, means we have to start helping individuals solve problems and achieve aspirational goals that have the greatest meaning to them or their families.
The fact that the Singapore model has been put to the test since the early days of their independence in 1965 suggests that there is also something particularly robust about this model. But should the system necessarily be a role model for South Africa? Probably not, given its current form. To begin with, this is a 100% government-administered initiative. At this point in South Africa’s evolution there are too many other priorities on government’s plate to undertake a project this ambitious. Secondly, unemployment differences (2.5% for Singapore, 24%+ for South Africa, averaged over the last 20 years) and geopolitical differences create other challenges. A country can only function without social insurance or tax-financed redistribution when full employment is the effective operating model. South Africa doesn’t have that luxury.
But, if we could all agree that it is the spirit of what this model is trying to address that is powerful and not get caught up in trying to emulate the details of their programme, then we believe there’s much of the essence of their model that we could begin to capture through our private occupational funds.