S’pore rises in retirement income index

Dear Straits Times,

I refer to the 22 Oct 2010 Straits Times report of Singapore’s rise in the Global Pension Index 2010.

You forgot to mention that:

1. Singapore has been given the ‘C’ grade and that only two other countries have obtained a worse grade. It would be good for Singaporeans to know that a ‘C’ grade means that there are major risks and shortcomings that should be addressed, failing which the efficacy and long-term sustainability of our retirement provision becomes questionable.

2. Singapore scored a dismal 43.7% in the most important sub-index of ‘adequacy’ and that we are next to bottom in this sub-index.

3. Singapore scored a dismal 0.2 for the important indicator of ‘minimum retirement income as a percentage of average income’ when all the other countries scored between 4.5 and 10.

4. Singapore scored a dismal 0.0 for the most important indicator of ‘net replacement rate’ when 8 out of the 14 countries scored at least 7.8 and another 4 countries scored at least 4.1

Dear Mercer and the Australian Centre for Financial Studies,

I refer to your Global Pension Index 2010.

1. Within the ‘adequacy’ sub-index, the indicators A1, A2 and A3 are based on a percentage of income which may not be adequate for comparing countries. For a more complete comparison, we should also take into consideration differences in wage levels and cost of living.

For example, country A and country B may be paying the same minimum of 20% of average income as retirement income but if country A’s average income is $5,000 while country B’s average income is $3,000, country A’s minimum retirement income will be $1,000 whereas country B’s minimum retirement income will only be $600. As such, country A’s minimum retirement income seems better.

But if we are also told that the minimum cost of living in country A is $1,500 whereas that in country B is $500, then the picture becomes totally different. Country A’s minimum retirement income ends up being short by $500 ($1,000 – $1,500) whereas country B’s minimum retirement income is surplus by $100 ($600 – $500).

2. Similarly for net household saving rate, a higher saving rate doesn’t mean more money is being saved for retirement. For example, John saves 10% of his $10,000 salary while Peter saves 50% of his $2,000 salary. We would end up rating Peter higher for having saved a higher percentage of his income but in actual fact, both saved the same amount.

This is important when you consider the UBS Prices and Earnings report which puts Singapore’s wages at about a third to a quarter of those in Western cities. So even if we save a higher percentage of our salaries, our much lower wage means that we may not save much in absolute terms compared to people living in the Western cities.

3. The definition of home ownership must be looked at more carefully. Even though Singapore scored 9.9 on home ownership, the high cost of home ownership, even for public housing, means that around half of the 90% Singaporeans who purportedly ‘own’ their houses are still mired in huge debts that may take a lifetime to clear. Since they have yet to clear their debts, they have not fully owned their homes, we cannot consider them home owners. At best, we can consider them partial home owners.

The notion that home ownership contributes to financial security in retirement should also be examined carefully. While a house may yield rental income, it also locks away a substantial portion of our hard earned money which then becomes unavailable for retirement use unless we sell the house away. But where are we to stay if we sell the house away? In the context of Singapore where everyone ‘owns’ homes, the high cost of home ownership severely eats into our retirement funds.

4. It might be useful to include another indicator in your sustainability sub-index that takes into consideration the effects of an aging population. For already ‘aged’ societies like France and Japan, future retirement needs would not be far worse than current retirement needs. However, for relatively younger countries like Singapore, the problems of an aging population will impact us more heavily many years down the road. Current sustainability levels will therefore be inadequate for future needs.

Dear CPF,

I refer to your comments on the Global Pension Index.

You can’t count CPF money withdrawn to pay for houses as retirement money regardless of how substantial they are because money locked in a house cannot be used for retirement needs unless you sell the house and live in a tent on the beach. But in Singapore, the police will chase you away if you set up a tent home on the beach.

While the government has recently allowed HDB flats to be monetised, the terms of monetising is terrible so the take up rate is very low. If a person sells his flat in the market, he gets back 100% of the value of his flat. But if he sells back to the government, depending on the number of lease years left, he only gets back a portion of the value of his flat.

Indicator P3 of the Global Pension Index does take into account potential losses by retirement funds by asking the question of protection or reimbursement in situations of fraud and mismanagement.

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