Singapore: An incredible alternative to the welfare state

John Goodman

Lee Kuan Yew, Singapore’s first prime minister, died last week at the age of 91. [1] Almost every biographical account of him has commented on the radical transformation that began under his leadership. As John Fund notes in the National Review: “Through reforms toward free trade, capital formation, a strong meritocratic education system, low taxes, and a reliable judicial system, Lee raised his country’s per capita income from $500 to about $52,000 a year today. That figure is 50 percent higher than the incomes of Britain, the colonial power that ruled Singapore for 150 years. Since 1970, average annual income growth has been about 7 percent.”

Part of the reason for Singapore’s remarkable income growth is simply capitalism. In the Fraser Institute’s Economic Freedom in the World report, Singapore ranks second to Hong Kong as the world’s freest economy. As Fraser Institute analysts have shown year after year, economic growth and free markets go hand in hand.

But Singapore has done something even more remarkable than its economic achievements. It has built an alternative to the European-style welfare state. Think of all the things people look to the government for in other developed countries: pensions, housing, education, healthcare, and so on. In Singapore, people are required to save to meet these needs themselves.

At times, the mandatory savings rate has reached 50% of an individual’s income. Today, employees under the age of 50 are required to set aside 20% of their salary, and employers are required to contribute another 16%. These funds go into accounts, where they grow over time until the specific needs for which the account was opened arise. For example, one way these savings can be used is for housing. About 90% of households in Singapore own their own homes– the highest percentage of homeowners in the world.

The comprehensive health care system for individual accounts, Medisave [2], was introduced in Singapore in 1984—the year Richard Rann and I first proposed the medical equivalent of the U.S. Individual Retirement Accounts in the Wall Street Journal. Today, with a mandatory savings rate of 36 percent of individual income, 7 percentage points are set aside for health care, deposited into each employee’s individual Medisave account. In addition to this form of health savings, citizens are automatically enrolled in the government’s catastrophic health insurance, although they can opt out. When the balance in the Medisave account reaches about $34,100 (which is almost the median income in the country), any excess funds are transferred to another account and can be used for purposes other than health care.

For many years, the only two scholars in the Western world who paid much attention to Singapore were the University of Washington economist Michael Sheradon and I. Michael approached the Singapore experience from a left-of-center perspective, and I from the opposite. We both came to the same conclusion: it is an alternative to the welfare state that works.

Recently, a number of other scholars have “discovered” Singapore, especially the country’s healthcare system – again, both left and right find much to admire. It took almost three decades, but Singapore is now the subject of a book published by the Brookings Institution, a series of posts by Austin Fract and Aaron Carroll, and a good overview of the country by Tyler Cowen, with a bibliography of other studies and commentary.

Sheradon recently summarized some of Singapore's major social policy innovations as follows: "Step by step, Singapore has created a new social policy system that is based on asset building... In the world of social policy, it would be difficult to overstate the importance and scope of this innovation... Over the past 25 years, the country has taken important steps towards building lifelong individual assets, starting very early in life. These innovations include EduSave, [3] Baby Bonus, the Child Development Savings Account, and related asset building incentives."

For John Fund, Singapore's most significant achievement is avoiding the mistakes of other countries: "I believe that the most underrated part of Lee Kuan Yew's legacy is his method of ensuring that one generation does not bankrupt future generations by selfishly living beyond their means. It is a welfare state that works. It can always be used as an example to any political leader who has the courage to tell his people the truth about the government's ability to distribute goods."

Personally, I would summarize Singapore's philosophy as follows:

• Every generation has to pay for itself.
• Every family has to pay for itself.
• Every person has to pay for themselves.
• Only after someone passes through these three filters should they turn to the government for help.

If the US had adopted a similar approach to public policy, the country would not have deficit problems.

Translation: Maria Neeva

Editorial: Daniel Vassilev

The original text can be accessed here .

[1] 23.03.2015 – translation note

[2] Medisave – literally “medical savings”; “savings for medical needs” – editor’s note.

[3] EduSave – literally “saving for education” – editor’s note.

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