Do you feel that it may be more equitable to have a year-end exercise where excess premiums paid are refunded to the individual Medisave accounts in proportionate amounts including potentially immense amounts of interest that would have otherwise been incurred (and could have been incurred on compounding basis in future) had these funds not been withdrawn?
First of all, who said the premium surplus isn't collecting interest?
OK, stepping back for a moment here, Medisave alone -- especially but not only for less affluent Singaporeans -- cannot possibly cover catastrophic medical needs. If nothing else, insurance must cover those needs, the needs individuals themselves cannot bear alone. In the modern world, with modern medicine, and the reasonable medical expectations of a now developed society, $10 and an aspirin simply isn't enough. A program with individual savings alone, spent individually, can't work. There has to be at least a catastrophic insurance component.
So the government (rightly) juiced up the catastrophic medical insurance component, primarily with MediShield Life. But that wasn't/isn't free. So it mandated premiums, made those premiums only partially age and preexisting condition rated (young, healthy adults subsidize everyone else, including their older selves), subsidized premiums for certain groups (e.g. poorer Singaporeans), and required participation (to avoid adverse selection and "death spiral" problems). All of that makes public policy sense. We can quibble about levels -- I think MSL ought to be more generous, with a higher average premium, and with more progressive tax financing -- but the core principles are perfectly sound.
Another decision the government made was to set the premiums conservatively, with a forecast surplus, partly because they couldn't fully predict how medical consumers and providers would react and partly because of demographic destiny. That, too, seems prudent. If the government had mandated that you buy MSL (the base plan) from one of three designated private insurance carriers, then (more or less) you would have had the new U.S. system in basic construction. The private carriers expect profits, so that (and more) is where surpluses would go. But more importantly you'd get wild price fluctuations as the underwriters try to gain experience in the market, with associated difficulties especially for people on fixed incomes. And that's exactly what happened in the U.S., although the U.S. has more generous subsidies for lower income households in order to soften the sharp premium increases. (Insurers underpriced due to white hot competition, and now they're correcting. Much more turmoil is likely with the new Republican/Trump Administration since they're utterly fanatical and non-reality-based, but that's another topic.)
Anyway, Singapore didn't do that. Singapore set MSL premiums conservatively, and now a surplus is accumulating. It's accumulating in public hands, not in corporate profits eventually returned to private shareholders. Or, to borrow an earlier remark, the surpluses aren't going into a black hole. Once the government gains some more MSL actuarial experience, in order to get a more precise handle on the magnitude of the surplus, they have two basic options. One is simply to hold premiums to smaller price increases than realities would normally require. Indeed, that was planned all along, to do some of that. So instead of 7% average annual premium increases they might be 2%, or whatever. That's good for every MSL participant, but it's particularly good for elderly Singaporeans of more modest (but unsubsidized) needs, those who pay the highest premiums. Another possibility is to reduce that surplus in the form of more generous coverage benefits. And, I suspect, that was/is the plan, too. As people discover the ins and outs of MSL they're discovering where the gaps are, where benefits aren't generous enough. I expect some gap filling over time.
To summarize, if you value relative premium and benefit stability amidst a graying population (and most people do, especially the elderly), then having some premium surplus to start is a great way to start. I can't disagree with that. The U.S. analogy is instructive again, with U.S. Medicare. Medicare is enormously popular in part because it's more stable. Currently the Medicare trust fund has enough surplus to hold the whole program steady for another decade plus, with no benefit or premium changes (beyond what's already baked in). So participants can set their household budgets and live their lives without extra worry. The next administration threatens to upend that stability, but that's also another topic.