Thursday, 22 March 2012

Retire on CPF savings? Think again

Economist warns there will be little money left after paying for a flat
By Radha Basu, The Straits Times, 21 Mar 2012

YOUNG graduates, take heed. If you began work recently with a starting pay of around $2,560 and plan to buy a five-room flat by the time you're 30, do not count on your Central Provident Fund (CPF) savings to take care of your retirement needs, warns labour economist Hui Weng Tat.

A new study he has done shows that tertiary-educated Singaporeans who entered the workforce in 2010 with a pay of $2,560 - the pay of many fresh graduates - and go on to buy a five-room flat worth about $560,000 from the Government, could get monthly CPF payments of only 22 per cent of their last-drawn pay when they retire at age 65.

That would be only one-third of what is required to maintain their lifestyle prior to retirement.

An income replacement rate of 66 per cent is the international benchmark of retirement adequacy for homeowners - that is, the amount a retiree needs in order to sustain the same basic consumption patterns he had before stopping work.

Meanwhile, a fresh polytechnic graduate who earns around $1,500 a month and buys a flat worth $310,000 will likely get 45 per cent of his last-earned pay in monthly CPF payments upon retirement.

Prof Hui's projections assume that both spouses work and contribute to the flat payments, that they get regular salary increments, and that their CPF wage ceiling is raised by around $500 per decade - a generous assumption, given past trends. The wage ceiling is the maximum amount of wages on which CPF contributions are payable every month.

After inflation-proofing the CPF salary ceiling - and currently the $5,000 ceiling is not inflation-proofed - he says retirement adequacy could rise to around 40 per cent for the graduate cohort earning $2,560, which still falls short.

'My findings are worrying as they imply that the majority of tertiary-educated people may find it hard to sustain their lifestyles post-retirement if they rely solely on CPF savings,' he says.

He gave an interview in the wake of the recent debate on retirement adequacy in Parliament. His paper was cited by the labour movement's Nominated Member of Parliament Mary Liew on Feb 28. That day, one in four parliamentarians who spoke up asked the Government to relook how CPF funds could be boosted.

Deputy Prime Minister Tharman Shanmugaratnam assured MPs last week that CPF savings were enough for retirement for low- to lower-middle income groups, but added that CPF was not designed to meet the needs of higher-income earners, who often had private savings.

Indeed, Prof Hui's study shows that poorer Singaporeans are better off than the more well-off when it comes to depending on CPF payouts during retirement.

His calculations show that low-wage workers earning $800 should be able to buy a flat worth $120,000 - with the help of Workfare payments and government housing grants - and still get 66 per cent of their last-drawn pay in monthly CPF payments.

But he worries about how the tertiary-educated - those with polytechnic diplomas or university degrees - will fund their retirement needs, as this group makes up the majority now.

'We can't project how many will become high-fliers and be able to fend for themselves no matter what, but we can say that, moving forward, up to two- thirds of each tertiary-educated cohort may not have enough for retirement.'

But surely people know that the CPF is not meant to be the only source of savings, especially since the system shoulders the cost of property purchases and health care as well?

Well, if that's the case, Prof Hui replies, the CPF Board should change its tagline, 'Saving for Retirement'

'I don't think many Singaporeans know that their CPF savings are not going to be enough to provide for their retirement,' he maintains.

As far as those aged 55 and above today are concerned, he says, it is a 'positive trend' that 45 per cent of them who are CPF members were able to meet the CPF minimum sum last year, up from 36 per cent in 2007.

Current rules require a minimum of $131,000 to be left in CPF accounts for retirement needs.

But he notes that many of those who make the cut include home-owners, who are allowed to pledge their properties up to 50 per cent of the minimum sum.

'What proportion of our current cohort aged 55 and above can meet the minimum sum when they retire, especially if they continue living in their current homes?' he wonders.

Prof Hui, who owns a privatised HUDC apartment which he bought nearly 25 years ago, is uncomfortable with the recent move to encourage older folk to downgrade to smaller homes to fund their retirement needs.

The Government recently announced that a $20,000 'silver housing bonus' will be given to those aged 55 and above who downgrade to a three-room or smaller Housing Board (HDB) flat.

Prof Hui maintains that property is an immobile asset. 'A home is where you build relationships, create memories and forge links with the community around you. Shouldn't it be for life?'

Downgrading and monetising homes need not be the only solution, he argues. Increasing the rate of returns of CPF savings - together with raising CPF contribution rates and the salary ceiling - would also work, especially for higher-income earners.

More radical solutions like reducing the cost of properties upfront - by shortening lease periods, for instance - could also help people build up savings for retirement.

'Why monetise at the end of your lifetime? Why not do it upfront rather than at the back end?' he asks, echoing an argument he first made publicly in the mid-1990s, even before the Asian financial crisis.

However, National Development Minister Khaw Boon Wan said in Parliament in January that cutting short the lease of new flats to bring prices down may not suit the needs of young couples who form the vast majority of new HDB flat-buyers.

These couples need their first flats to help them upgrade to larger homes or private properties as their families grow.

If their flats have shorter leases, they may have limited prospects of using their flats to buy studio apartments when they retire, he added.

Prof Hui thinks such an argument is untenable in the long run.

The average selling price of a five- room HDB flat - even in non-mature estates - has doubled since 1995. In mature estates, prices have shot through the roof, with new flats under HDB's Design, Build and Sell Scheme (DBSS) in Tampines creeping towards the $800,000 mark last year.

'In 15 more years, will we be looking at HDB flats that cost $1 million or more?' he asks.

He agrees that property cycles wax and wane but adds: 'If you study property cycles, the peaks are always higher than what they were before. And that's what, I feel, is unsustainable.'

Future generations would have to work harder - and longer - to afford such flats.

'As long as home-owners seek to make hefty profits from selling their homes, the future of our next generation will be in jeopardy as it will not be sustainable.'

Introducing properties with shorter leases will not necessarily bring about a crash in property prices as existing properties with the remainder of their 99-year or longer leases will continue to be bought and sold.

Soaring property prices will also erode Singapore's allure for immigrants - and blunt its competitiveness for global talent - at a time when immigrants are needed more than ever to combat the twin demographic time bombs of flagging fertility rates and rapid ageing.

'We must think ahead,' he urges. 'Soaring property prices are fine for one generation to cash out. But what about the next and the next?'

Rather than being seen as an 'investment', property in land-scarce Singapore should be reframed as for 'consumption'. 'In many places, home-buyers don't think of how much profit they will make when they buy a house. They are excited instead to have a base to build their lives in.'

Home ownership, having a stake in a piece of the nation, is of course good.

But the key for Singapore is to scale back the zeal for 'asset enhancement' - and change mindsets. 'The purpose of a home, especially in a land-starved country, is to provide a roof over your head. Once people don't expect prices to escalate, half the battle will be won.'

In other nations, he notes, property price escalations act as a 'catalyst for development' as they have vast tracts of undeveloped land.

'In Singapore, we need to conserve land, if we're planning ahead for 50 years. We should think out of the box,' he says. 'And creative use of shorter leases, I believe, would be thinking out of the box.'

But how would he deal with the outcry from existing HDB home-owners who hope to make hefty profits by selling their homes in the booming resale market?

The effect of such a policy, believes Prof Hui, would be no different than if a recession were to hit Singapore. People lose jobs in a recession, properties lose value - and nothing much can be done at the time to stem the tide of misfortune. But people live through it.

Unlike in recessions, home-owners would not lose their homes or their livelihoods - just possibly some of the paper value of their homes.

'Is that such a big sacrifice to make? I don't think so,' he says. 'Especially if it is to ensure our long-term competitiveness and higher living standards for future generations.'

Labour expert

ASSOCIATE Professor Hui Weng Tat, 55, teaches labour economics and public policy at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He has researched and written extensively on globalisation, migration and labour market issues in Singapore.

The Colombo Plan scholar holds a bachelor's degree in economics from the University of Tasmania and master's and PhD degrees from the Australian National University.

He has authored more than 30 academic papers and book chapters on issues such as retirement savings, migration and the impact of foreign workers on Singapore's economy.

He was a member of the Economic Strategies Committee Workgroup on low-wage workers in 2009. He has also been a consultant with the Ministry of Manpower and the United Nations Conference on Trade and Development (Unctad).

The former Raffles Institution boy is married to a nurse and they have three girls aged 19 to 25. Their home is an apartment at Pine Grove, where they have lived for the past 25 years.

Q&A: Minimum wage and foreign worker levy

You're an advocate of setting a minimum wage. Is that a better option than Workfare?

They are not competing schemes. The way the debate has played out here has pitted one against the other. It doesn't have to be so.

There is no fundamental conflict between a minimum wage system and the Workfare Income Supplement (WIS) scheme. Together, they can help taxpayers and employers share the burden of supporting low-wage workers. They are complements, not substitutes.

Placing the full burden of helping low-wage workers on the WIS scheme would not only significantly increase the Government's budgetary outlays but also fail to produce sufficient incentives that spur companies towards productivity improvements.

But wouldn't a minimum wage increase unemployment rates among low-skilled, low-wage workers, as the unions and the Government have said?

If we raise the salary of all cleaners to at least $1,000, will most cleaners go unemployed and will there be no demand for cleaners? No. You will still need cleaners as demand is relatively inelastic for the majority of these low-wage industries.

The WIS increases workers' wages through a direct government subsidy, while minimum wage does so at the expense of the employer's profit.

A minimum wage can encourage firms to adopt innovative management practices and production methods to achieve productivity gains that can sustain higher wages paid to their workers. It will also help to engender a stronger sense of dignity, respect and pride in employees towards their work, and lower labour turnover as a result of increased loyalty to their employers.

The foreign worker levy has been raised yet again. Is that working?

Not really. Raising the productivity of the 900,000 foreign workers here on work permits is the elephant in the room which deserves greater attention.

A higher wage levy may not drive productivity increases, if the higher wage cost is passed on by employers to the workers in the form of lower wages.

This could deter qualified and experienced foreign workers from coming. Instead, less productive foreign workers will be recruited here, resulting in lower labour productivity.

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