Discuss whether increasing the retirement age in a country with an ageing population is the best policy measure to attain fiscal sustainability.
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(b) Discuss whether increasing the retirement age in a country with an ageing population is the best policy measure to attain fiscal sustainability. [15]
ASRJC 2024
Explain how increasing retirement age can help with fiscal sustainability
Increasing the retirement age is often seen as a viable policy measure for achieving fiscal sustainability, particularly in countries with ageing populations such as Singapore. Fiscal sustainability refers to a government’s ability to meet its current and future expenditure commitments without incurring unsustainable levels of debt. By progressively increasing the retirement age to 65 by 2030, Singapore aims to address longer life expectancy, manpower shortages, and concerns over fiscal sustainability. While this policy has several benefits in terms of sustaining government revenue, it is essential to evaluate whether it is the most effective measure when compared to other alternatives.
Raising the retirement age allows elderly workers to remain in the workforce for a longer period, which helps in several ways. First, as these workers continue to earn an income, they remain subject to income taxes, preventing a fall in government tax revenues. The continued collection of income taxes supports fiscal sustainability by providing the government with the necessary funds to finance public goods and services. Furthermore, with elderly workers earning wages, their disposable income enables them to continue spending on goods and services. This spending boosts the collection of consumption-based taxes such as the Goods and Services Tax (GST), ensuring that the government's overall revenue base is not eroded by a shrinking workforce.
Additionally, delaying the retirement age reduces the immediate fiscal pressure on the government to provide retirement benefits (note that this may not that bad a situation in SG). By postponing these payments, the government can free up resources for other critical areas such as healthcare and infrastructure, further contributing to fiscal sustainability.
However, there are limits to how much the retirement age can be raised. Political backlash is a major consideration, as workers may perceive an increase in the retirement age as a reduction in their expected benefits. Elderly workers, particularly those in physically demanding jobs, may also find it difficult to remain productive in their later years, leading to reduced efficiency and potential increases in unemployment among younger workers as jobs become scarcer. This political and social resistance could undermine the long-term success of the policy, requiring the government to seek other measures to complement the increase in retirement age.
Supply side policies as an alternative policy
In addition to raising the retirement age, supply-side policies aimed at improving the productivity and competitiveness of the economy can be an effective way to achieve fiscal sustainability. These policies are designed to enhance the economy’s capacity to produce more goods and services, thus generating higher levels of income and tax revenue. One example of a supply-side policy is the retraining and upskilling of workers. By investing in workforce development, the government can increase the productivity of its labor force, allowing workers to command higher wages. Higher wages lead to greater income tax collections, and increased disposable income results in higher consumption and consequently greater VAT(GST) collections.
At the same time, supply-side policies that attract foreign direct investment (FDI) can raise corporate income tax revenues, as multinational corporations increase their presence and profits in the country. For Singapore, maintaining a competitive edge in industries such as technology, finance, and healthcare is crucial for ensuring long-term economic growth. This, in turn, helps to maintain fiscal sustainability by expanding the government’s tax base. However, implementing supply-side policies can be costly and time-consuming. Retraining workers requires significant investment in education and vocational training infrastructure, and there is no guarantee that workers will be receptive to retraining efforts, especially if they are nearing retirement age.
Evaluative Conclusion
In conclusion, while increasing the retirement age is a logical policy response to an ageing population, it is not without its limitations. While it helps maintain government revenues and reduce fiscal pressures in the short to medium term, the policy is constrained by political resistance and the physical limitations of older workers. It is also not a complete solution to the broader challenges of fiscal sustainability, especially as the population continues to age.
Supply-side policies, particularly those focused on boosting productivity and attracting investment, provide a more holistic approach to sustaining fiscal health in the long term. Although these policies come with their own challenges in terms of cost and implementation, they have the potential to generate higher incomes, increase tax revenues, and improve the overall competitiveness of the economy. Therefore, while increasing the retirement age can contribute to fiscal sustainability, it should be complemented by broader supply-side reforms to ensure that Singapore remains fiscally sound in the face of its demographic challenges.