Tharman gives assurance on CPF retirement savings

Dear DPM Tharman,

I refer to the assurance you gave in parliament on our CPF retirement savings [1].

You said most younger CPF members in the lower half by income will have a retirement income comparable to the average in OECD countries. The table below was constructed using data from OECD’s “Pensions at a Glance 2011” and “Pensions at a Glance Asia Pacific 2011”. It shows that the retirement income for an average Singaporean earner is lower than those of his counterparts in all but one of the OECD countries listed. So how can our retirement income be comparable to the average of OECD countries? Referring to the table again, the retirement income for the average earner in OECD34 is US$20,061 (PPP) compared to the retirement income of US$6,375 (PPP) for Singapore’s average earner.

Country average earning replacement ratio [2] average earning (US$ PPP) [3] average earner retirement income (US$ PPP)
Luxembourg 87.4 $53,300 $46,584
Netherlands 88.1 $51,700 $45,548
Austria 76.6 $45,600 $34,930
Denmark 79.7 $43,800 $34,909
Iceland 96.9 $34,100 $33,043
Greece 95.7 $34,100 $32,634
Switzerland 57.9 $47,500 $27,503
Norway 53.1 $50,700 $26,922
Spain 81.2 $32,100 $26,065
Finland 57.8 $40,400 $23,351
Sweden 58.4 $39,900 $23,302
Israel 69.6 $31,300 $21,785
Germany 42.0 $50,600 $21,252
Italy 64.5 $32,800 $21,156
OECD34 57.5 $34,900 $20,061
Australia 47.3 $40,900 $19,346
Belgium 42.0 $45,600 $19,152
France 49.1 $37,200 $18,265
Korea 42.1 $42,600 $17,935
United Kingdom 31.9 $53,100 $16,939
United States 39.4 $40,300 $15,878
Slovenia 62.4 $25,100 $15,662
Canada 44.4 $34,800 $15,451
Hong Kong 34.1 $45,000 $15,345
Japan 34.5 $42,700 $14,732
Hungary 75.8 $18,300 $13,871
Portugal 53.9 $25,100 $13,529
Turkey 64.5 $20,600 $13,287
Ireland 29.0 $43,400 $12,586
New Zealand 38.7 $31,300 $12,113
Poland 59.0 $18,300 $10,797
Czech Republic 50.2 $20,000 $10,040
Slovak Republic 57.5 $16,200 $9,315
Estonia 48.0 $18,100 $8,688
Chile 44.9 $15,900 $7,139
Singapore 12.7 $50,200 $6,375
India 65.2 $9,600 $6,259
China 77.9 $7,600 $5,920
Malaysia 30.4 $14,400 $4,378
Thailand 50.0 $7,600 $3,800
Mexico 30.9 $10,200 $3,152
Philippines 80.9 $3,600 $2,912
Sri Lanka 48.5 $4,500 $2,183
Pakistan 69.6 $2,800 $1,949
Vietnam 67.4 $2,800 $1,887
Indonesia 14.1 $2,400 $338

Although the percentage of CPF members meeting the minimum sum rose from 36% in 2007 to 45% in 2011, the reasons for this, as suggested by the CPF [4], were the increase in employers’ CPF contribution rate in 2007 and reduction in CPF withdrawal limit to 40% in 2009 and then to 30% in 2010. Employers’ CPF contribution rate is susceptible to downward revision in times of economic crisis while reductions in CPF withdrawal limits are one time boosts that will only recur up till 2013 when the withdrawal limit goes to 0%. Our strive towards having more CPF members meet the minimum sum cannot be based on the occasional improvement in employers’ CPF contribution rates or one time boosts.

You are optimistic that 70 to 80 percent of those who start work today will attain the minimum sum by the time they retire. That is provided those who start work today don’t get retrenched in the next 40 years or so, don’t become under employed in the later years of their working lives, no further upward revision to the minimum sum of $120,000 (2003 dollars), CPF interest rate can keep up with inflation and so on. But economic crises and retrenchments that go along with it are becoming more common place nowadays, employer bias against older workers is an entrenched culture, history has shown that the CPF minimum sum keeps getting revised upwards and inflation nowadays is even higher than CPF Special Account’s 4% interest rate.

Most Singaporeans, no matter how poor they are, prefer to pass on their homes to their children rather than sell it back to the government [5] which is why the take up rate for Lease Buyback is so low. So for most people, the appropriate retirement fund is the cash component of the minimum sum which is less than half the minimum sum.

[1] Straits Times, 6 Mar 2012, “Tharman gives assurance on CPF retirement savings”

DEPUTY Prime Minister Tharman Shanmugaratnam yesterday reassured MPs concerned about whether people have enough retirement savings, citing figures to show the Central Provident Fund (CPF) system meets the basic retirement needs of low to lower-middle income Singaporeans.

But two-thirds of those aged 65 and above receive family support and do not need to tap these schemes. As for younger CPF members in the lower half by income, most will have enough cash in their CPF accounts for a retirement income comparable to the average in Organisation for Economic Cooperation and Development countries.

On concerns that younger workers would not meet the rising Minimum Sum, Mr Tharman said the percentage of active CPF members who do rose from 36 per cent in 2007 to 45 per cent last year.

About 70 to 80 per cent of those starting work today should attain the current Minimum Sum level in cash by the time they retire, even after withdrawals for a home. Younger low-wage workers would also get ‘major boosts’ to their retirement savings through Workfare Income Supplement payouts and various housing grants. ‘So our CPF system with current contribution rates is broadly appropriate for most of the younger generation of Singaporeans,’ he said.

[2] Replacement ratios for OECD countries obtained from OECD’s “Pensions at a Glance 2011”, Page 119, “Gross pension replacement rates by earnings”. Replacement ratios for Asia Pacific economies obtained from OECD’s “Pensions at a Glance Asia Pacific 2011”, Page 31, “Gross replacement rates by earnings”.

[3] Average earnings for OECD countries obtained from OECD’s “Pensions at a Glance 2011”, Page 169, “Average earnings and points of the earnings distribution, 2008”. Average earnings for Asia Pacific economies obtained from OECD’s “Pensions at a Glance Asia Pacific 2011”, Page 24, “Average annual earnings”.

[4] CPF, Feb 2011, CPF Trends Minimum Sum Scheme, http://mycpf.cpf.gov.sg/NR/rdonlyres/957F7D54-B236-45EA-89FE-29890B6E0AB9/0/CPFTrendsMinimumSum_Feb2011.pdf

This downward trend was reversed in 2009. This could be due mainly to the changes in the withdrawal rule. Between 1 January 2009 and 31 December 2009, members who reached the age of 55 could only withdraw 40% (previously 50%) of their Special and Ordinary Account balances, as well as any balance after setting aside the CPF Minimum Sum and the Medisave Required Amount. The withdrawal percentage was further reduced to 30% in 2010. The increase in the employers’ CPF contribution rate in 2007 might also have contributed towards the increase in proportion of members meeting the required MS at age 55.

[5] Straits Times, 9 Mar 2012, “He earns $850 and owns a two-room flat”

He (Mr Mohammad Charlie Jasni) hopes to pass the flat – or a bigger one should they ever upgrade – to his children.

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