I refer to Roy Nerng’s article on our CPF and HDB system (Apr 2).
It states thst ” Do you know that if you had started work at the age of 21 in 2001 and earn a median wage, by the time you are 55, you should have accumulated almost $700,000 in your Ordinary and Special Account (OSA).
But why is this not happening to many Singaporeans?
According to Leong Sze Hian, he estimated that only 1 in 8 Singaporeans are able to meet the CPF Minimum Sum (currently $148,000).
It has also been shown by 3 studies that Singaporeans have the least adequate pension funds.”
What CPF means to a worker?
- I would like to look at this issue from a slightly different perspective – from the perspective of lower-income workers.
Let me assume that you are a 21 year old lower-income worker earning $1,500 a month, and your pay never increase for 44 years until you retire at age 65.
Of course, its not possible for your pay to not increase for 44 years – even though many workers have seen their real pay decline in the last decade or so – but I just wanted to illustrate to you – how much you may be shortchanged by way of the low CPF interest rate (2.5% on the OA)?
For example, the pay of cleaners, labourers and related workers has declined by about 40% in real terms, in the last decade or so.
CPF is an implicit tax?
Your accumulated CPF, assuming an average CPF interest rate of 3%, at age 65 is about $642,484.
If we do not pay the lowest pension fund interest rate of as low as 2.5% on the bulk of our CPF (ordinary account) – if we assume an average interest rate of 6% – the accumulated sum at age 65 is about $1,4 million.
So, if a lower-income worker who has no pay increase in his lifetime loses by way of what I call an implicit tax (low pension interest rate with the Government keeping the excess returns) of about $758,000 ($1.4 million – $642,000) – how much would one lose with the normal annual pay increases, especially for higher-income workers?
In this connection, we should note that Temasek and the GIC’s historical returns are 16% (S$ terms) and 6% (in US$ terms) per annum.
HDB’s impact on retirement?
If we assume that a typical lower-income worker will buy a 3-room HDB flat – and then upgrade to a 4-room flat – by the time he or she retires – the only feasible option may be to downgrade in order to monetise the HDB flat to supplement the insufficient retirement funds.
However, the price differential between a 4 and 3-room resale flat may be just over a hundred thousand dollars today. This may not be of much help to have a comfortable retirement.
The reason why one normally ends up in the predicament of having to downgrade to a more expensive resale flat, instead of a new BTO flat – is because of the HDB’s policy that one can only buy 2 new flats or have enjoyed 2 housing grants/subsidy in a lifetime.
The mother of our problems?
So, the combination of having the highest pension contribution rate in the world (37%), the lowest pension interest rate in the world (2.5%) and high public housing prices (I believe HDB prices have been increasing at about 7% per annum) – may have caused untold misery to hundreds of thousands of Singaporeans – by way of having inadequate funds in retirement as well as little or no cash savings and low purchasing power before retirement.
Leong Sze Hian
* Leong is the Past President of the Society of Financial Service Professionals, an alumnus of Harvard University, has authored 4 books, quoted over 1500 times in the media , has been host of a money radio show, a daily newspaper column, Wharton Fellow, SEACeM Fellow, columnist for Malaysiakini, executive producer of the movie Ilo Ilo (24 international awards). He has served as Honorary Consul of Jamaica and founding advisor to the Financial Planning Associations of Brunei and Indonesia. He has 3 Masters, 2 Bachelors and 13 professional qualifications.