Assess whether increasing the retirement age is the most effective way to ensure fiscal sustainability in an ageing economy.
Singapore intends to gradually raise the retirement age to 65 by 2030, driven by rising life expectancy, labour shortages, and the need to ensure long-term fiscal sustainability.
b. Assess whether increasing the retirement age is the most effective way to ensure fiscal sustainability in an ageing economy. [15]
Introduction
As populations age globally, many governments are confronted with the growing challenge of fiscal sustainability—the ability to meet long-term public spending obligations without accumulating unsustainable debt. In Singapore, where life expectancy is rising and labour shortages are emerging in key sectors, the government has announced plans to gradually raise the retirement age to 65 by 2030. This measure aims to reduce fiscal strain associated with an ageing population, but it is important to consider whether this approach alone is sufficient, or if alternative macroeconomic strategies may offer more lasting and comprehensive solutions.
How Raising the Retirement Age Supports Fiscal Sustainability
Raising the retirement age helps to retain older workers in the labour force, which supports the government’s fiscal position in several important ways. First, continued employment extends the working life of individuals, which means income taxes continue to be collected. This helps to maintain or even grow the government’s revenue base, counteracting the decline in tax revenues typically associated with a shrinking and ageing workforce.
Secondly, as older workers continue to earn and spend, they contribute to consumption taxes such as the Goods and Services Tax (GST). This helps to ensure that domestic demand remains robust, and public finances are supported through sustained indirect tax collections.
Thirdly, by delaying retirement, governments can postpone pension payouts or retirement-related social spending, thereby easing short-term fiscal pressures. While this is less critical in Singapore due to the self-funded nature of the CPF system, it still offers fiscal breathing room, especially as healthcare costs for the elderly continue to rise.
Finally, from a macroeconomic perspective, keeping older individuals economically active mitigates labour shortages, improves labour force participation rates, and boosts potential output, helping to maintain economic growth despite demographic shifts.
Despite its benefits, increasing the retirement age is not a silver bullet. There are several constraints and limitations to its effectiveness:
Political resistance is a real challenge. Many workers view an increase in the retirement age as a loss of entitlements or a delay in enjoying the fruits of their working life. This can lead to public discontent or electoral backlash, particularly among lower-income or physically vulnerable workers.
Not all elderly workers are physically or mentally able to remain productive, especially in labour-intensive occupations such as construction, transport, or manufacturing. Prolonging retirement may thus lower productivity or increase reliance on medical subsidies and welfare, offsetting some fiscal gains.
Additionally, if older workers remain in jobs longer, this could potentially reduce job openings for younger workers, leading to higher youth unemployment or underemployment—a politically sensitive issue, especially in societies that value upward mobility and fresh talent pipelines.
Hence, while raising the retirement age provides a fiscal buffer, it has diminishing returns and social trade-offs if implemented in isolation.
Supply-Side Policies as a Complementary Strategy
To ensure longer-term and more sustainable fiscal health, the government can adopt supply-side policies that aim to increase productivity and competitiveness. These policies work by expanding the economy’s productive capacity, thereby increasing output and, by extension, broadening the tax base.
One key area is workforce upskilling and retraining. By improving the human capital of both younger and older workers, the government can enable them to command higher wages, boosting income tax revenue and consumption-based taxes. Singapore’s SkillsFuture programme is a strong example of such a policy in action.
Another area is attracting foreign direct investment (FDI) into high-value sectors such as technology, biomedical sciences, and finance. FDI contributes to corporate tax revenues, stimulates job creation, and enhances export competitiveness. As these sectors grow, they not only generate tax income but also position Singapore as a global economic hub, helping ensure fiscal strength through economic dynamism.
However, supply-side policies come with high upfront costs and long implementation lags. Infrastructure upgrades, training programmes, and R&D subsidies require sustained government investment. Their success also hinges on worker receptiveness and private sector cooperation, which cannot be guaranteed. For instance, older workers may be reluctant to retrain, while firms may continue to prefer younger, cheaper hires despite government subsidies.
Evaluative Conclusion
In conclusion, increasing the retirement age is a rational and necessary policy for ageing economies like Singapore. It helps to preserve government revenues, reduce the pace of retirement-related spending, and bolster labour supply. However, its effectiveness is limited by political, social, and demographic constraints, and it does not address the underlying need to grow the economy and broaden the tax base over the long term.
Therefore, while it is an important short- to medium-term measure, increasing the retirement age should be complemented by broader supply-side reforms. These include upskilling the workforce, improving labour market efficiency, and promoting innovation and investment. Such a multi-pronged strategy is more likely to deliver the sustained revenue generation, productivity growth, and fiscal flexibility required to keep Singapore’s public finances sustainable in the face of its demographic transition.
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