Overseas Singaporean: CPF is one of the best retirement systems worldwide

Hello Daniel, I’m a Singaporean in Melbourne who has spent the last decade working in the financial industry here, dealing with pensions and investments. Back when I left Singapore I was deeply unhappy with the CPF scheme. However over the years, I’ve come to appreciate how it is run and currently believe it’s one of the best systems worldwide.

Allow me to answer some of your (and your readers’) questions:

1) >> “I suppose that if we wanted some sort of assurance of a pension, the alternative would be higher taxes – maybe 15-20% more income tax? Thing is that CPF caps off at $4500 so the upper middle and rich will be contributing more to society if it was a progressive tax.”

Using Australia as a guide, the aged pension costs 13.25% of the budget.

Singapore’s guiding philosophy has always been that everyone pays their own way, as much as possible. Over the long run, progressive taxes are just a recipe for class warfare due to moral hazard. It splits a society into two. Human talent/investment is a lot more mobile in Asia too. In my experience Singapore can’t afford such a measure.

2) >> I agree with some of, or actually, most of your points. Except for minimum sum’s shifting of goalposts.

The minimum sum isn’t really shifting the goalposts, it’s reflecting how the goalposts have changed. The direction of casuation is different. You’ll notice that the increase is about a constant 7% per year.

Many are upset that this is above the CPI rate. What they don’t understand is that the CPI rate is an estimation for a typical member of society (typical basket of goods). In contrast, the minimum sum is tailored for retirees, in particular healthcare.

In other words, the Government has consulted its actuaries and expects retirees to experience a 7% rate of inflation rather than the 2-3% CPI. Hence the forced increase in the minimum sum. Again, you see the same philosophy of self-reliance in play.

3) >> But the problem lies in the fact that many, a whopping 50% is unable to achieve that. I agree with shifting the withdrawal age and the increase in minimum sum. BUT! The govt must at the same time help us by increasing our wages!

I wish the Government could just wave a magic wand and increase everybody’s wages. But we all know that’s not how it works.

Part of the problem is location. Singapore is an Asian country and our competitors command a huge wage advantage (less so than in the past, but still significant) over us. Suffice to say that Singaporeans are already the most expensive workers in the region. In the past we possessed a comparative advantage because our neighbours were relatively backward, but they have caught up since. There is no easy “fix” here.

4) >> This would account for part timers and such, but when folks who hold down a regular job their whole lives don’t make enough to retire on when their body can’t work any more… the system has failed.

Then let me inform you that the system has pretty much failed everywhere.

I think everyone (not only Singaporeans) have to re-adjust their expectations. Times have changed. If one wants to retire, working your entire life is no longer enough. One needs to take the responsibility to learn to invest, to purchase assets. That’s a reality no amount of politicking can change. Sure, citizens can demand that the Government pick up the tab, and in some countries they actually do – until the money runs out.

CPF at least guarantees you a roof over your head and income from an annuity. Yes, it’s not inflation indexed (one of my biggest complaints), but look, if you want the Government to bear inflation risk, then the returns will be lower for everyone, simple as that. Better to let each individual fight their own fight instead of complicating things with cross-subsidizing.

I have younger Australian colleagues who were renting, are renting, and will be renting their entire lives. They will never retire, and will never own any assets, not even a HDB lease.

5) >> What the G should do instead is to tell a 25 year old what he needs to aim for at age 55, or a 35 year old what he has to put away over the next 20 years.

As I’ve previously explained, the Government has already told Singaporeans what to expect. Whether Singaporeans will happily accept this reality is another issue.

7% per year is the minimum, or else one isn’t prepared for retirement. And if one is not prepared for retirement, one shouldn’t be allowed to withdraw one’s CPF monies. After all, a responsible Singapore shouldn’t unnecessarily burden his fellow citizens.

For the 25 year old: The current MS of 150K * (1.07 ^ 30) = 1.14 million.

In the end, it really does boil down to whether Singaporeans are willing to continue with this philosophy of self-reliance, or whether they will selfishly demand more benefits for themselves at the expense of their fellow citizens, perhaps fracturing society.

Many are upset that Temasek earns 14-16% (BTW those are historical averaged rates, I seriously doubt they still earn those rates), but where do they think the money goes to?

Of course those monies eventually benefit Singaporeans – for example, the 80% hospital bill subsidies, our kids’ education, and the fact that most Singaporeans pay no income tax, amongst others?

There is no free lunch. If Singaporeans demand more pension benefits the money must come from somewhere – most likely your fellow citizens’ pockets.

I hope I don’t come across as too harsh. If you have any further questions, please feel free to ask and, using my experience, I’ll try to answer them as best as I can.

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