Four Principles of Intergenerational Equity for Managing the Reserves

Dec 04, 2018 at 12:09 pm | Hits: 210

By Drew Shih

During the 2018 Budget debate in Singapore, considerable time was dedicated to discussing the Net Investment Returns Contribution (NIRC) framework. Under the constitution, the NIRC framework allows the government to utilise up to 50 per cent of the expected long-term real returns from investing the reserves.

Central to the debate regarding NIRC was whether we should maintain the NIRC cap at 50 per cent, or if it should be raised. Both non-constituency Member of Parliament (NCMP) Leon Perera and public intellectual Donald Low asked if there was scope for the government to increase the cap, while Prime Minister (PM) Lee Hsien Loong and Member of Parliament (MP) Liang Eng Hwa opined that the 50 per cent cap provides for a “fair balance” between the claims of the present and future generations.

At the heart of both sides of the argument of raising or retaining the 50 per cent cap is the notion of fairness between generations — intergenerational equity, although each side had different opinions on how to achieve it.

In order to advance the discussion, it is important to first obtain more clarity on what we mean by achieving intergenerational equity; what we mean by “fairness” between generations; and what standards we should apply to determine if there is indeed “fairness” between generations.

This will provide the basis for a robust debate on whether the current policy on NIRC achieves our basic aims of intergenerational equity.

Through reviewing the literature on the theories of intergenerational equity, I propose four possible principles of intergenerational equity relevant to governing the utilisation of the returns from investing the reserves.

The first is that we should maintain a minimum threshold of resources for each generation. In practical terms, this will mean that each generation shall pass on an amount of reserves that allows the next generation to meet basic needs, to have the opportunities to pursue their aspirations and to uphold critical societal institutions.

Second, we should strive to move towards an egalitarian society within each generation. Fairness is about reducing the unequal access to resources in society. This will mean utilising returns on the reserves to alleviate inequality by improving the lives of the less well-off. Furthermore, because some level of inequality is usually replicated across generations, reducing inequality in the present generation also goes some way towards reducing inequality both within future generations as well as between generations over time.

Third, each generation should pass on what they had received from the previous generation; there should be a continuing reciprocity from one generation to the next. No generation should deplete the reserves.

Lastly, each generation should pay for what they benefit from — and hence, also benefit from what they have paid for.

This final principle has been adopted in the rhetoric of those in favour as well as those against the current NIRC cap. Some in the former camp argue that raising the cap would create a future generation of Singaporeans with a “trust fund kid” mentality — dependent on past reserves to finance their spending, whereas each generation should seek to pay for its own spending. The latter argue that, because the reserves were built up through the hard work of the older segment of the population, it would be equitable to tap on the reserves more to finance their social and healthcare expenditures.

At first glance, the idea that the older segment of the population had “paid for” Singapore’s substantial reserves may seem valid. Indeed, Singapore experienced large fiscal surpluses from 1965–84. Fiscal surpluses can be seen as taxes paid by residents for which they have not been “returned” an equivalent amount in benefits — and hence older Singaporeans are “owed” benefits for which they have already paid.

However, this ignores the role of the demographic dividend Singapore has experienced. The high ratio of workers to dependents was an important factor for the fiscal surpluses. It would be more accurate to suggest that it was the demographic dividend that “paid” for the reserves.

Not only do demographic dividends not last forever, they are also one-offs. In fact, in its aftermath, a demographic dividend also results in a “reverse dividend” as the workers to dependents ratio falls rapidly, causing a strain on public finances — which Singapore is now experiencing.

Therefore, because demographic dividends and its “reverse dividends” are intimately linked, any demographic dividend must be seen as a dividend to be enjoyed across a transgenerational community of Singaporeans, regardless of whether a particular generation is experiencing a dividend or “reverse dividend”. No generation can have a special moral claim to the reserves “paid for” by the demographic dividend.

Another line of discourse arguing for maintaining the current NIRC cap is found in Finance Minister Heng Swee Keat’s speech to round off the 2018 Budget debate. He stated that the current generation of Singaporeans must act as “responsible stewards” for future generations, just as “our forefathers had been for us”. Furthermore, he explained that Singapore’s “basic orientation” is to save and build for the future rather than “living for today”, suggesting that being a “responsible steward” means continuing in such a fashion.

This invokes the principle of reciprocity between generations, but it goes beyond merely not leaving things worse-off for the next generation. Reciprocity here involves each generation reciprocating the ideology of saving and building up for the future, above and beyond merely passing on the equivalent amount of resources it had received from the previous generation. Not only must we not deplete the reserves, we must also continue to grow it just as our forefathers have.

Is this a standard of intergenerational equity that we should be maintaining?

Ultimately, this is a question society must answer collectively. Moving forward, there will be other issues of intergenerational equity regarding the reserves that need to be debated as well.

I provide two questions to ponder here. First, can the principle that each generation should pay for what they benefit from be applied to the reserves, given the large role of the demographic dividend?

Second, how can we reconcile potentially conflicting principles of intergenerational equity — for example, between fairness as reducing inequality and fairness as maintaining a minimum threshold of resources for each generation?

There will be no easy answers to these questions. Nonetheless, setting out the principles of intergenerational equity and making sense of the sentiments regarding Singapore’s reserves provides us with a foundation on which we can discuss these issues.

 

Drew Shih is a Research Assistant at the Institute of Policy Studies, National University of Singapore. He wrote a paper on the topic titled “Fiscal Management of Reserves in Singapore: An Intergenerational Equity Perspective”.

Top photo from iStock.

 

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