Friday, 16 November 2012

'CPF enough for retirement if...'

Study lists three conditions for people to build an adequate nest
By Toh Yong Chuan, The Straits Times, 15 Nov 2012

YOUNG Singaporeans who join the workforce today will have enough savings in their Central Provident Fund (CPF) to finance their retirement, say two university professors.

But there are three caveats:
- They must be prudent in their choice of homes and buy HDB flats within their means;
- Any CPF savings above the Minimum Sum they withdraw must be invested to generate a steady stream of retirement income; and
- They must continue to remain in the workforce.

National University of Singapore (NUS) economic professors Chia Ngee Choon and Albert Tsui drew these conclusions in their 27-page study on the adequacy of CPF payouts. The study was commissioned by the Ministry of Manpower and released yesterday.

It comes on the heels of questions raised recently on whether CPF funds can meet retirement needs.

During the Budget debate in March, several MPs urged the ministry to relook this issue.

Nominated MP Mary Liew cited a report by Professor Hui Weng Tat of the Lee Kuan Yew School of Public Policy, who had published a study warning that young Singaporean graduates may not have enough CPF savings for their retirement.

In April, the ministry approached the NUS professors to do the study. Some details of it were released in September by Deputy Prime Minister Tharman Shanmugaratnam.

Professors Chia and Tsui created a simulation model using ministry wage growth data in the past 10 years previously unavailable to the public or researchers.

They picked young workers entering the workforce this year so as to build a "baseline model" where variables like initial wage, wage growth and employment history can be calculated.

They worked out that a 25- year-old male who starts work today and draws a starting median monthly pay of $2,500 will be able to build up enough CPF savings over 40 years. After he retires at 65, he will be able to get an income that is 70 per cent of his pre-retirement income, pegged at his monthly pay at age 55.

The ratio of retirement income to pre-retirement earnings is known as the income replacement rate (IRR), and is used by economists to measure whether retirement funds are adequate. The higher the number, the better.

The IRR for a 23-year-old female Singaporean who starts work today would be 64 per cent when she retires at 65.

The professors said these IRRs are comparable to that of Organisation for Economic Cooperation and Development countries, which stands at 66 per cent.

Prof Chia said three groups who were representative of the labour force were studied - those earning incomes at the 30th percentile, 50th percentile and 70th percentile of their cohort.

The authors assumed these Singaporeans will marry, buy a new HDB Build-To-Order flat in 2017, and live in it till past retirement.

They stressed that to have enough retirement funds, Singaporeans must choose homes based on their income bands. Those at the 30th percentile should buy a three-room flat, those at the 50th a four-room and those at the 70th band a five-room. The IRR would drop if they choose larger flat types, they said.

The study also said the Workfare safety net provides a "significant boost" to help low-wage workers meet retirement needs. For example, the IRR of the 20th income percentile for men would rise from 80 per cent to 92 per cent with Workfare.

Annuity scheme can be improved, say dons
By Toh Yong Chuan, The Straits Times, 15 Nov 2012

ALTHOUGH the Central Provident Fund (CPF) is generally adequate for retirement needs, some policies ought to be improved, the two National University of Singapore (NUS) professors said.

They suggested that the CPF Life annuity scheme be amended to provide a more than basic standard of living amount when one retires.

The private annuity market should also be developed to offer good options for retirees to invest their savings.

CPF members should also get incentives to keep savings beyond the Minimum Sum with the CPF Board, said professors Chia Ngee Choon and Albert Tsui.

Reacting to the survey, Nominated MP Mary Liew, who had raised the issue of adequate CPF retirement funds in Parliament, yesterday said she was glad the ministry had commissioned it.

But she added that it was important to manage the retirement expectations of younger workers.

Professor Hui Weng Tat of the Lee Kuan Yew School of Public Policy, who had written a paper on CPF being inadequate for young tertiary-educated workers today, said he was "a little sceptical about the assumptions" made in the current survey.

First, the authors had assumed that real wages will rise at a pace that is slower than the Government's target of median incomes growing by 30 per cent in 10 years. He also felt that it was "somewhat unrealistic" to assume that a 65-year-old worker would be earning less than what he earned at age 55.

"Given the trend towards higher retirement age, we would expect the real wages of those at age 65 to be higher than those at age 55 in the future," he said.

Labour MP Zainal Sapari, who heads the National Trades Union Congress (NTUC) team that oversees low-wage workers, said he welcomed the study being commissioned, but urged the Ministry of Manpower (MOM) to look beyond models and projections.

"It would be good if MOM can provide real case studies to show the reality is as reported in the study," he said.

Another labour MP, Mr Seng Han Thong, said he was worried about low-wage workers who are struggling to make ends meet. "The model covers new workers or the 'future old', but how about the 'present old'?" he asked.

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