SINGAPORE (Mar 4): The Merdeka Generation, born from 1950 to 1959, lived through Singapore’s tumultuous early years, and gained a perspective of Singapore’s place in the world that many younger people probably lack. And, like the Pioneer Generation, consisting of Singaporeans born up to 1949, they deserve some extra help to cope with rising medical costs as they approach their twilight years. At least, that is the narrative the government has been weaving over the past year.

“They understood instinctively what was at stake,” said Prime Minister Lee Hsien Loong, at his National Day Rally speech last year, when plans for the Merdeka Generation Package were first unveiled. “The men were among the earliest batches called up for National Service. They were the first of the [Singapore Armed Forces] — the Army, Navy and Air Force,” he added. “Many, especially the girls, didn’t complete their education. They came out to work early, to support the family and younger siblings.”

Yet, the story of the Merdeka Generation is far more richly textured than that simple narrative. In many ways, they defined modern Singapore. And, they could well continue making an impact for many more years.

Even though the Merdeka Generation started their lives amid uncertainty, they were also early beneficiaries of Singapore’s success. Many of them would have been in their prime working years in the 1970s and 1980s, when Singapore’s growth momentum really got underway and wage levels soared. Many of them would have also purchased HDB flats in those decades, when prices were still relatively low. And, the flats at the time were getting larger rather than smaller — in the 1980s, HDB introduced executive and maisonette flats in response to demand.

With their rising wealth, the Merdeka Generation contributed much less to Singapore than the Pioneer Generation when it came to making babies, beginning a trend that has led to an ageing population and an unhappy reliance on foreign talent. From 1970 to 1990, the key childbearing years for the Merdeka Generation, Singapore’s total fertility rate fell from 3.07 to 1.83, below the rate of 2.1 required for the local population to replace itself. The government abandoned its “two is enough” policy in 1987, and introduced its Baby Bonus Scheme in 2001. But Singapore’s fertility rate continued sliding, to just 1.16 in 2017.

The Merdeka Generation also witnessed first-hand the stagflation that beset the global economy in the 1970s, and the rise of neoliberal thinking that followed through the 1980s. Over the last four decades, industries were deregulated, taxes were cut and free trade was promoted. It served small, internationally oriented Singapore well. But the gains were not evenly shared. Professionals in high-value jobs saw their incomes rise quickly. Workers without much education saw their wages stagnate. Even as recently as last year, some 26.5% of Singapore residents, likely comprising older people, had only been educated up to primary school level. Not surprisingly, inequality and social stratification are now big issues.

Targeted, cohort-based help

The government has been addressing the issue of stagnant wages at the low end in a targeted way. Notably, it has introduced the Progressive Wage Model in the cleaning, security and landscape sectors. The PWM maps out a clear pathway for workers in these fields to enjoy higher wages through training and improvements in productivity and standards. The government has also been restricting the inflow of foreigners, and setting foreign labour quotas for various sectors. At Budget 2019, in a surprise move, the government said the foreign worker “dependency ratio ceiling” for the services sector would be cut to 35% by 2021, from 40% currently.

Then, there is the Merdeka Generation Package. Some $6.1 billion has been set aside under Budget 2019 to fund outpatient subsidies and Medisave top-ups, among other things, for Singaporeans now in their 60s who may not have earned much during their working lives.

Some argue that the government should not adopt such industry-specific and cohort-based approaches in lifting wages and subsidising healthcare costs. Instead, they want the government to introduce a minimum wage and provide permanent universal healthcare subsidies for older Singaporeans. It is a debate that will probably continue for some time.

Yet, the government sees its current approach to be more efficient. The PWM focuses on sectors where wages are generally low, and where a lot of older people are employed. By contrast, an across-the-board hourly minimum wage would benefit people who are not necessarily in need of support — for instance, a young person from a wealthy family choosing to work part-time.

Meanwhile, the Merdeka Generation Package, like the Pioneer Generation Package before it, has the advantage of not committing the government to an open-ended programme for successive cohorts of ageing Singaporeans, who might have very different needs as time goes by. Instead, it involves a fixed amount of funds and a specific group of beneficiaries.

More help coming?

So, will the government dole out similar packages for successive cohorts of ageing Singaporeans in the future? Certainly, the Merdeka Generation and Pioneer Generation packages have set very obvious precedents. But Finance Minister Heng Swee Keat noted in Parliament this past week that younger Singaporeans have benefited from better education opportunities and various government schemes that have set them up for retirement. “For the younger cohorts, they too will have needs, but they [will not be] of the same nature as the Pioneers’ or [the Merdeka Generation’s],” Heng said.

As it is, the government has been tapping a larger proportion of the returns from Singapore’s reserves over the past decade to fund its soaring expenditure as well as hefty special transfers and top-ups of various endowment and trust funds. Up until FY2008, under the Net Investment Income framework, the government could only spend investment income comprising dividends and interest. Now, the Net Investment Returns Contribution (NIRC) item in the budget comprises up to 50% of the Net Investment Returns (NIR) on the net assets invested by GIC, the Monetary Authority of Singapore and Temasek Holdings, and up to 50% of the NII derived from past reserves from the remaining assets.

For Budget 2019, the NIRC is estimated to be $17.17 billion. That is more than the government expects to collect from corporate income tax ($16.72 billion), personal income tax ($11.8 billion) or Goods and Services Tax ($11.69 billion).

Will returns be sufficient?

The big question is whether Singapore’s reserves will keep generating sufficiently high returns to support an expanding budget. And, what if GIC or Temasek are hit by an occasional big loss along the way?

Second Finance Minister Indranee Rajah addressed exactly this question in Parliament last year. She said, “The NIR framework spending formula is based on expected long-term real returns. It is driven by an overall portfolio approach, taking into account the long-term expected returns of different asset classes, factoring in the diversification benefits, and adjusting based on the long-term investment outlook.” She added, “From this perspective, the outcome of individual investments or the state of markets from one year to the next do not have a significant impact on our spending levels.”

It could be a different story, however, if returns persistently undershoot expectations. Members of the Merdeka Generation who spent their careers in financial markets will know that interest rates have been in a secular downtrend for nearly 40 years, with each cyclical peak lower than the one before. One reason for this is that inflation has been declining. In fact, global inflation has remained surprisingly subdued over the past decade, even as major central banks around the world pursued aggressively loose monetary policies and the US economy was growing faster than its potential rate.

Some analysts attribute the currently low inflation to structural factors, including the declining consumption by ageing baby boomers in the US, and lower production costs brought about by globalisation as well as general technological advances. Whatever the case, low borrowing costs have stoked a boom in leverage. By some estimates, total global debt as a percentage of global GDP had climbed to 320% last year, up more than 100 percentage points since 1999. That could now be making economic growth ever more vulnerable to higher borrowing costs and soft asset prices.

Tellingly, in October, with the federal funds rate at only 2.25% and US economic data still looking reasonably strong, the markets suddenly seemed unable to stomach US Federal Reserve chairman Jerome Powell’s comment that “we’re a long way from neutral”. As the markets tumbled, the Fed allowed itself one more widely expected hike to 2.5% in December, and then turned much more dovish. Two more hikes are now expected this year, down from three previously. With the change in the Fed’s tone, markets have staged a rebound since the beginning of the year. Even so, some analysts see the US falling into recession by 2021.

Is it no longer possible to sustain growth without very loose monetary policy? Have economic reflation and asset price reflation become the same thing? What impact will excessive debt have on investment returns over time?

For many ordinary investors, a world that is choking on debt is a potentially risky place. Deleveraging — whether it comes suddenly or gradually — would probably weigh on returns. On the other hand, patient and strategic investors such as GIC and Temasek may well be able to seize opportunities to unlock value by helping companies optimise their balance sheets, make acquisitions and grow their businesses. Indeed, the story of how these government-owned investment institutions navigate the global markets to support future cohorts of ageing Singaporeans could be as interesting as the story of how the Pioneer and Merdeka generations survived and thrived.

This story appears in The Edge Singapore (Issue 872, week of March 4) which is on sale now. Subscribe here