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
