Greater respect for human rights?
We refer to the article “Greater respect for international humanitarian law to prevent more suffering” (Straits Times, Aug 21).
Singapore in bottom 10 countries for signing human rights’ conventions?
Singapore is among the only 10 countries in UN like South Sudan, Tonga, Myanmar and Brunei, which received a “red card” for ratifying 4 or less out of the 18 International Human Rights Treaties [Link]. No other first world countries was in the 10 (“Human Rights Treaties: SG receives ‘red card’ from UN“, TR Emeritus, Jul 23):
In this connection, let’s look at the Convention which relates to social security, like our CPF.
United Nations Universal Declaration of Human Rights (UDHR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR)
The following may be some areas of concern with reference to specific articles in the United Nations Universal Declaration of Human Rights (UDHR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR) :-
Social security (CPF)
Singaporean workers have to make mandatory contributions of up to 37 per cent of their wages to their own individual pension accounts (the Central Provident Fund accounts).
The Government issues non-marketable government bonds at 2.5 and 4 per cent to take over CPF funds, by matching the interest rates of 2.5 and 4 per cent paid by the CPF Board to the various types of CPF accounts.
There is no transparency as to how the government uses CPF funds. Presumably, most of these funds end up or have previously ended up in the coffers of the Government Investment Corporation (GIC) and Temasek Holdings (TH). It was recently disclosed that CPF funds are managed by GIC.
We know that GIC and TH have indicated historical shareholder returns of 5.2 per cent (20 years’returns only, but not from inception) and 16 per cent per annum respectively. Yet the CPF Board pays only 2.5 per cent on Ordinary Accounts (generally about two-thirds of CPF contributions) and about 4 per cent (about one-third of CPF contributions) on Special and Medisave accounts. This discrepancy may undermine Singaporeans’ access to adequate social security.
Malaysia’s EPF?
In contrast, for example, Malaysia’s Employees Provident Fund (EPF) paid a dividend of 6.35, 6.15, 6.00, 5.8 and 5.65 percent in 2013, 2012, 2011, 2010 and 2009, respectively, and has historically paid a return of between 4.25 to 8.5 per cent.
This access is regarded as a component of people’s economic and social rights by the United Nations, as provided under Article 9 of the International Covenant on Economic, Social and Cultural Rights (ICESCR).
“Interference” to the right to social security?
In November 2007, the Committee on Economic, Social and Cultural Rights clarified its interpretation of what constituted the State’s obligations with regards to ICESCR’s Article 9. It said in paragraph 45 of its General Comments 19: “The obligation to protect requires that State parties prevent third parties from interfering in any way with the enjoyment of the right to social security. Third parties include individuals, groups, corporations and other entities, as well as agents acting under their authority.”
“The obligation includes…adopting the necessary and effective legislative and other measures, for example, to restrain third parties from denying equal access to social security schemes operated by them or by others…arbitrarily or unreasonably interfering with self-help or customary or traditional arrangements for social security that are consistent with the right to social security…”
GIC and TH, being sovereign wealth funds, are third parties under the government’s authority. Their apparent access to CPF monies for the purposes of investment could result in interferences to the disbursement of returns on CPF accounts. Indeed, the discrepancy in the returns enjoyed by GIC and TH shareholders and the CPF members can be regarded as interference.
The Committee added on paragraph 46: “To prevent such abuses an effective regulatory system must be established which includes framework legislation, independent monitoring, genuine public participation and imposition of penalties for non-compliance.”
The absence of transparency on the access enjoyed by the GIC and TH to CPF monies is arguably in contravention to these obligations.
The ICESCR was first adopted by the UN General Assembly in December 1966 and came into force in January 1976. To date, there are 160 parties and 69 signatories to the treaty. Singapore is not a signitory to the ICESCR.
How many can meet the CPF Minimum Sum?
As the percentage of active CPF members who meet their MS including the pledging of property at age 55, was 49 per cent in 2013, what is the percentage who were able to meet the combined MS ($155,000) and MMS ($43,500) of $198,500 in cash in their CPF, without the property pledge (less than 15% of Singaporeans who reach 55?)?
1 in 8 met MS?
From the CPF Trends: CPF Membership, June 2012 report, We calculated that there were 187,426 active CPF members aged 51 to 55 out of the total active CPF members of 1.74 million in 2011. There were 197,476 inactive CPF members aged 51 to 55.
As there are also 1.64 million inactive CPF members, what percentage of both active and inactive Singaporean CPF members who reach 55, were able to meet the MS?
We estimate this figure to be about 1 in 8, as an estimated 1 in 4 active CPF members were able to meet the MS in cash.
In this connection, how many Singaporeans who turn 55 are estimated to have a total of $198,500 (MS plus Medisave Minimum Sum (MMS)) or more in their CPF?
2012 Retirement Study commissioned by the Ministry of Manpower
From the graph in the study, it appears that real earnings start to decline from around age 38, for males at the 50th percentile for earnings.
So, our understanding is that at age 55, which is the age used to compute the Income Replacement Ratio (IRR), the real earnings would be about the same as that at around age 33.
So, does this mean that we are assuming that one would be earning at age 55, the real earnings equivalent of what one earned at around 33?
In other words, the amount that is used to determine the IRR may not be what most layman may think that as they grow older – they would earn more.
IRR – Based on net earnings?
“To calculate net IRR, the denominator is the assumption of 85% employment density factored in. The after-tax pre-retirement earnings are computed by deducting personal income taxes and employee CPF contributions from the gross pre-retirement earning of workers at age 55″.
Does this mean that the earnings at 55 are further discounted for “85% employment density” (periods of unemployment or economic inactivity), personal income taxes and employee CPF contributions?
In other words, the amount that is further discounted to determine the IRR may not be what most layman may think that it is based on their gross pay at age 55.
IRR – Include Imputed Rental?
“Adjusted Net IRR with Imputed Rent
Including imputed rent in the calculation lifts the net replacement rate by an additional 4 to 9 percentage points for men and additional 7 to 11 percentage points for women. When comparing Singapore’s IRR with those of countries with low home ownership such as Germany, where rental is the norm, it would be more appropriate to use IRR with imputed rent”.
Our understanding of this is that as it is assumed that most Singaporeans own their homes, and do not pay rental, an adjustment is made to increase the IRR to include imputed rent.
In other words, it may not be what most layman may think that the IRR is the actual cash that they can use, but rather an inflated figure assuming that they would otherwise have to pay rental.
In summary, the IRR is based on age 55 earnings that are discounted for declining real earnings as one gets older, periods of assumed unemployment and economic inactivity, imputed rental, etc.
Are there any other countries in the world that analyse retirement adequacy on this basis?
Other studies – Low IRR?
This study is also not inflation-indexed for the retirement annuity, like the “OECD (2012) reports the gross IRR for Singapore to be 13% for a working career of 40 years and 9.3% for a shorter career of 30 years (See OECD, p. 36)”.
Of course the study explains in great detail why the OECD and other studies differ in methodology and assumptions which we shall not dwell into, as they are very complicated.
We understand that all studies done so far on Singapore assumes a constant wage increase (such as 2%) methodology, against the subject study’s declining real earnings as one gets older assumption.
In our opinion, a constant wage assumption may be more appropriate as arguably retirement adequacy should be about being able to meet expenses which generally increase with inflation, regardless of the Singapore context of declining real wages with age.
The reason given for using age 55 earnings is “we modeled earnings using empirical wage growth for different age bands as described in Section 2.1, where earnings generally decline in later life. Earning just prior to retirement at age 65 is therefore too low a proxy for pre-retirement earning”.
In our view, if like the other studies whereby the earnings at 65 (the retirement age) is used instead of 55, the “discount” factor may be higher due to even lower earnings at 65, such that the resulting IRR may be so high that nobody in the world may believe it.
An ideal life story?
The study is fundamentally based on an ideal scenario – buying a BTO flat with HDB grant at age 30, without the realism that at its peak, more than 40,000 HDB households were unable to pay, and we have no regular statistics as to how many people are in arrears for more than three months on their HDB and HDB bank loans, HDB and bank foreclosures, etc.
Also, with the current trend particularly of PMETs losing jobs, difficulty in finding a similar reasonably paying one, etc, how many Singaporeans can expect a life that is smooth sailing all the way?
In our view, an independent academic study commissioned by the Government on such an important subject as the retirement adequacy of the nation, can be more robust by giving more attention and mention to the statistics, problems, issues and concerns of the present. The study seems to be overly focused on projections of the future.
For example, We feel that the study may not have adequately addressed the fact that currently, for every active CPF member, there is almost one other inactive CPF member (as well as some self-employed?) who may have very little savings for retirement.
Depletion of CPF Medisave before retirement?
“52 per cent of the withdrawals in 2009 were to pay for the members’ own direct medical expenses.
The remaining withdrawals were to pay for family members: 17 per cent for spouses, 18 per cent for parents, 12 per cent for children, one per cent for grandparents and others.” (“S’poreans withdrew total of S$660m from Medisave accounts in 2009“, Channel NewsAsia, Apr 26, 2010)
Rate pegged to 10-year government bonds?
Singapore’s CPF Life scheme is subject to the uncertainity as to what the average yield of 10-year government bonds plus 1 per cent may be in the future. All CPF Life annuity payout projections are based on the assumption of 4 per cent, which is based on an average yield of 3 per cent on 10-year government bonds plus 1 per cent. Currently, the average yield of 10-year government bonds plus 1 per cent is less than the 2.5 per cent floor rate (which is the lowest rate payable on CPF Life and the CPF Retirement Account).
In fact, since the former 4 per cent rate was pegged to the average yield of 10-year government bonds plus 1 per cent, from 1 January 2008, the rate has always been below 4 per cent.
There is no guarantee that the current minimum rate of 4 per cent, which has already been extended a few times, will continue to be extended from 1 January 2016 and beyond.
“This is in line with the Government’s announcement made in September 2012 to maintain the 4 per cent per annum floor rate for interest earned on all SMA monies and Retirement Account monies until the end of 2013.” (“Interest rate for CPF Special and Medisave Accounts to stay at 4% from April to June” (Straits Times, Mar 18)
Stay until death vs 30 years?
For example, Taiwan’s reverse mortgage scheme allows the retiree to stay until death, whereas the HDB Lease Buyback Scheme is only for 30 years.
Nobody alive after 30 years will be homeless?
In this regard, according to the HDB’s web site – “There may be cases where the flat owner outlives the 30-year lease. Such cases will be dealt with on an individual basis and appropriate housing arrangements will be provided to those flat owners who are not in a position to pay for the lease extension.
No elderly flat owner will be left homeless if he/she outlives the 30-year lease of the LBS flat.”
So, unlike Taiwanese retirees who can stay until they die, Singaporean retirees have the uncertainity of “Such cases will be dealt with on an individual basis and appropriate housing arrangements will be provided to those flat owners who are not in a position to pay for the lease extension”.
Lifetime Reverse Mortgage?
I understand that in the typical Lifetime Reverse Mortgage schemes in other countries, the residual marker value of the home less annuity withdrawals and accrued interest, is also returned to the deceased retiree’s estate.
Suggestions for review
CPF Life annuity payouts should be indexed for inflation, like the pension schemes of most countries. Annuitants can be given the option to choose inflation-indexed or fixed monthly payouts.
Review the policy on age fifty-five withdrawal, that those who have less than the prevailing CPF Minimum Sum (MS) of $155,000 and the Medisave Minimum Sum (MMS) of $43,500, cannot withdraw anything at age 55.
Singaporeans who are in financial hardship from age 55 to 65, before their CPF Life annuity will begin at age 65, should be allowed to make some withdrawals.
Review the Available Housing Withdrawal Limit (AHWL) suspending the further use of CPF for housing repayments when the Valuation Limit (VL) of the HDB or private property is exceeded, and the CPF account holder has less than half the prevailing MS in his or her OA and SA. This typically affects the lower-income more, as their OA and SA contributions are generally lower. Hence, it may be more difficult for their OA and SA to catch up with the yearly increasing MS to meet the AHWL.
Review the policy of not allowing the OA balance at age 55 for housing repayments. Some Singaporeans who were not aware of this policy had to sell their homes, despite having funds in their OA at age 55, as some may not know that they have to use up their OA for housing before 55.
Instead of making periodic CPF Medisave top-ups to older Singaporeans, use the funds to pay for their Medishield premiums instead. Otherwise, such top-ups may be easily consumed by rising medical costs.
Review the policy of exempting employers from having to pay their 17 per cent contribution to CPF for foreign employees. This policy puts Singaporeans at a disadvantage, as employers save 16 per cent of salary costs when they employ foreigners.
S Y Lee and Leong Sze Hian
P.S. Come with your family and friends to the
3rd Return Our CPF protest on 23 August 4 pm at Speakers’ Corner https://www.facebook.com/events/648543138548193/?ref=2&ref_dashboard_filter=upcoming
