ACJC H1 Prelim 2024 CSQ2 Solutions

Question 2: Economic Impact of an ageing population Source: Singapore Department of Statistics & Statista, accessed on 23 July 2024 Extract 5: The costs of ageing The number of people aged 65 years or older worldwide is projected to more than double, rising from 761 million in 2021 to 1.6 billion in 2050. The number of people aged 80 years or older is growing even faster. Population ageing is an irreversible global trend. It is the inevitable result of the demographic transition – the trend towards longer lives and smaller families – that is taking place even in countries with relatively youthful populations. As fertility levels fall, the share of younger people declines, while the shares of working age adults and, eventually, older people go up. Further population ageing is driven by more people living longer, healthier lives. Ageing societies may face fiscal challenges due to rising costs in healthcare, long-term care, retirement and other old -age support, combined with a potential reduction in government revenue from fewer working-age taxpayers. Projections indicate that typically these programs will be unsustainable unless taxes are raised, benefits are reduced, or both. Ageing societies tend to experience slower economic growth. However, economists are worried that even as Central Banks drive interest rates to fall, some firms may choose to cut investment spending in the domestic economy. Should firms become pessimistic, economy could have zero growth with high unemployment for many years. Source: United Nations, Jan 2023 and: Cost of Ageing, Finance & Development, March 2017, Vol 54, No.1 Extract 6: Can ageing spark a surprise economic boom? An ageing population could spur economies to adopt the use of greater technology alongside higher life expectancy to increase productivity the working population. This could potentially -5 0 5 10 15 20 2017 2018 2019 2020 2021 Figure 1: Population and Labour data of Singapore (in %) % of Residents aged 65 years and older as share of resident population in Singapore Labour force growth rate (aged 15 and above)

2 ©ACJC2024 Preliminary Exam 8843/01 offset losses from a shrinking labour force. Some analysts predict that while ageing might slow down the country’s Gross Domestic Product (GDP) growth rates, it may be unlikely to affect real income per capita – which is what matters most to people. As a country’s population growth slows or declines, a lower GDP growth doesn’t necessarily mean that per capita income growth is slowing down. In addition, the population in such economies would have the chance to accumulate lots of capital for investment in their own health and education, since they have fewer dependents to spend on. This leads to a country which has more knowledgeable and experienced people. If governments are forward-looking and act early, encouraging such behaviour, this can potentially lead to improved productivity over longer lifespans. This could better prepare them for better jobs with higher pay in the future. Some research has suggested that ageing societies adopt labour-saving technologies more rapidly than younger societies, leading to them being more capital -intensive, hence, possibly earning higher per capita income than other countries. Source: Adapted from Al Jazeera, Old is gold: Can ageing spark a surprise economic boom? 6 Jun 2023 Extract 7: Raising government revenue in Singapore as demographic changes To keep up with increased spending in areas such as healthcare, the Singapore government faces some delicate trade-offs if it decides to raise revenue through higher personal income taxes, on top of the Goods and Services Tax (GST) hike. The structure of personal income tax in Singapore is generally progressive, which helps with income distribution. However, the trade-off includes balancing any possible increase in personal tax for higher -income earners with the need for Singapore to remain attractive to foreign talent. This higher level of government spending is mostly being driven by increased spending in healthcare due to an ageing population. Proponents of a tax hike said that raising taxes is a “necessary evil” for Singapore if it wants to keep looking after the needs of an ageing population and improve its infrastructure. If revenue growth cannot match the spending pace, then something has to give – usually that’s when governments run persistent budget deficits or pile up debts, which could lead to a debt burden on future generations. Among potential sources of additional revenue, the GST is attractive in that it is an efficient tax, with a relatively low cost of collection and administration. Compared with income and wealth taxes, GST is imposed on all expenditure and its revenue is less correlated with business cycles and is therefore more stable and predictable. This is why most countries, developed and developing, have adopted a GST or value -added tax, many at rates higher than Singapore’s. The drawback is that GST is a regressive ta x. However, it is important to assess a fiscal system in its totality. The regressive impact of the GST is offset by progressive income taxes and significant fiscal transfers including subsidies on groceries and wage supplements which tops up the salaries of low-income workers to save for retirement. In fact, the expansion of these transfers has increased the overall progressivity of the system over the past two decades. Source: Today, 10 February 2023 and Channel News Asia, 23 Jan 2022

3 ©ACJC2024 Preliminary Exam 8843/01 Extract 8: Possible solutions to challenges due to ageing population In recent years, many governments have taken on an added urgency to deal with their manpower and talent issues due to falling birthrates and a rapidly ageing population – which will add up to a drop in the number of working-age adults. In Singapore, some suggest a need for foreign manpower and talent, amid its ageing and shrinking workforce. Foreigners are useful, especially in certain high skilled areas where there are just not enough Singaporeans and not enough time to train the Singap oreans to take advantage of the economic opportunities. However, there are Singaporeans who feel unhappiness, citing increases in competition for jobs, and prices of essential goods and services. To reduce the immense pressure on welfare systems and the ratio of working -adults supporting a higher number of elderly people, governments are also raising the retirement age. For example, in Singapore, the retirement age is currently 63 years old and is expected to increase to 64 by 2026. Below is a Table showing the percentage of residents aged 65 and above who are employed or actively looking for a job across the years. 2018 2019 2020 2021 2022 27.8 28.7 30.1 32.9 32.1 Another solution is to raise productivity, which has been dragged down by inadequate investment in public infrastructure. Productivity could also be enhanced by cutting red tape to encourage investment and starting new businesses. For example, it takes 120 days to obtain a business license, more than double the OECD average. Digitalizing g overnment services could also speed up processes. Singapore emphasizes greatly on the transformation of businesses, workers skills and embracing technology. Sources: Channel News Asia, 10 June 2024, and: Business Times, 28 Feb 2024 and: World Economic Forum. 27 Apr 2017

4 ©ACJC2024 Preliminary Exam 8843/01 Suggested Answers (a) With reference to Figure 1, state the change in size of labour force from 2018 to 2021 and explain how this change could affect the labour market in Singapore. [5] The labour force growth rate had decreased from 2018 to 2021 to below 0%. This would mean that the size of the labour force has decreased. A decrease in labour force size would mean that the supply for labour will decrease. At current