Prudent housing choices ensure enough CPF savings for retirement: survey

SINGAPORE: With prudent housing choices, young Singaporeans in the workforce today will have enough savings through the Central Provident Fund (CPF) system for their retirement.

This is according to details released on Wednesday from an independent study commissioned by the Ministry of Manpower.

Deputy Prime Minister Tharman Shanmugaratnam first made mention of this study at the opening of the Singapore Human Capital Summit in September this year.

The study was conducted by two researchers from the National University of Singapore, Associate Professors Chia Ngee Choon and Albert Tsui.

In the study, the assumption is that Singaporeans entering the workforce today, would be looking to buy their first homes in 2017.

Another assumption is that the men would be 30 years old, and women 28.

And these couples would buy build-to-order flats that are in keeping with their household incomes.

As workers use CPF savings to finance housing, it is important that they buy a flat type within their means, to leave enough CPF savings for retirement.

For lower-middle income households at the 30th income percentile, typically with a combined monthly income of S$5,100 in 2017, that means a three-room flat.

For median-income households at the 50th income percentile, typically drawing a combined monthly income of S$7,100 in 2017, a four-room flat would be the choice.

Upper-middle income earners at the 70th income percentile, typically earning a combined monthly income of S$9,200 in 2017, could choose a five-room flat.

These figures are projections of 2017 dollars, i.e. nominal household month salary when new entrant turns 30 for males and 28 for females.

With these assumptions, couples can then fully pay their mortgage instalments from their monthly contributions to the CPF ordinary account.

And men earning median incomes at the 50th percentile should be able to replace 70 per cent of their wages on retirement at 65.

That is, their CPF savings should be enough to provide them with 70 per cent of the monthly income that they earned at 55, which is assumed to be the age when a Singaporean's monthly income peaks.

For women, the income replacement rate (IRR) is 64 per cent.

The IRR is a widely-used international measure for retirement adequacy. It refers to the ratio of retirement income to pre-retirement earnings.

The study estimates the IRR that workers could get at age 65 based on their CPF savings. The figures in the study compare well with international standards.

The World Bank recommends a range of 53 to 78 per cent as the IRR for middle-income earners.

Associate professor Chia said that IRR can be used as an indicator of retirement preparedness.

"Our study shows that there is a very clear trade off between retirement adequacy and housing consumption," said associate professor Chia.

"Take for example the base case, when we look at the median worker at say, 50 percentile, we have assumed that this worker will buy a four-room flat. If this household decides to buy a flat type that is one size bigger, say a five room, then we'll see the income replacement rate fall from 70 per cent to 58 per cent," he added.

The median IRR amongst Organisation for Economic Co-operation and Development countries for a median-income earner is 66 per cent.

The study takes into account current CPF policies and features such as CPF contribution and interest rates.

S'pore needs to restructure economy to sustain growth: Tharman

SINGAPORE: Deputy Prime Minister Tharman Shanmugaratnam said Singapore's economic growth will be weak in the short-term mainly because of the gloomy world economy.

And the challenge for Singapore, he said, is to restructure its economy to ensure sustained growth over the long-term.

Mr Tharman, who's also Finance Minister, was speaking to reporters on the sidelines of a community event in his Jurong GRC.

Many countries in the world are now bracing themselves for the possibility of a "fiscal cliff" in the US.

This means a huge economic crisis may be looming for the US - if its deeply divided Congress is not able to come to an agreement.

Congress, which is made up of the House of Representatives and Senate, will still be controlled by two parties in the new Obama administration.

The Republicans regained control of the House, while the Senate is dominated by the Democrats.

Mr Tharman pointed out that even if the US gets past this hurdle, the bigger challenge is to put its mid-term budget on a more sustainable path for the years ahead in order to restore investor confidence.

He said: "That's what's necessary to really get the economy to restart. And it requires common ground to be found on both taxes and spending on the parts of the Democrats and the Republicans.

"The experience of the first term was one of intense partisanship. Hopefully in the second term, there will be a willingness to find common ground. The initial signs are positive but it's too early to say."

The effects of sluggish growth in the US and Eurozone are likely to cascade to Singapore, even though Mr Tharman said Asia continues to do reasonably well.

"Demand will be weak, but our real challenge in Singapore is in restructuring our economy. We've got to persevere in restructuring our economy so that we can get sustained growth over the long term, over the next five to 10 years based on productivity growth. That's the big challenge. Demand will be weak in the short term but it's not a fundamental problem for us because our unemployment rate is low, and that's the bottom line of the short-term. Unemployment rate is low, jobs are available and training places are available. Our real challenge therefore is to focus on restructuring our economy so that we can move one whole level higher - productivity, skills, expertise," Mr Tharman shared.

He said this means using management methods and technology to improve efficiency and productivity so that workers can get paid more.

"They can have more satisfying jobs and we can grow our economy without growing employment year after year, especially foreign employment. So we got to find the right balance. It's something that affects every sector of the economy. And, we look at the most developed countries and we can see how it's done. They too went through that transition. In some cases not very long ago, they went through the same transition. They ramp up on labour and they have to upgrade, do with less labour, but using technology and everyone playing that part, including customers, everyone playing that part. You can move up to a higher level. That way, our workers can get good wages, get good jobs," he said.

Mr Tharman added that the government will provide every form of support to help companies, especially small and medium enterprises, to make this transition.

Eurozone crisis impact on S'pore banks not significant: Tharman

SINGAPORE - The direct impact of the Eurozone crisis on banks in Singapore is not likely to be significant, as loans and investments made by banks here in the Eurozone comprise around 5 per cent of their total exposures.

This was revealed by Deputy Prime Minister Tharman Shanmugaratnam in response to MP for Chua Chu Kang Ms Low Yen Ling's question on the spillover effects of the eurozone crisis on Singapore's banking sector and overall economy.

He added that banks in Singapore also have a low dependence on the Eurozone for funding, with less than 8 per cent of their funding coming from the Eurozone.

Credit supply in Singapore has also not been significantly affected by Eurozone bank deleveraging, he said.

While some Eurozone banks have reduced lending to conserve capital and liquidity, others have been able to obtain increased funding from their head office to support their Asian businesses.

More importantly, other well-capitalised banks with strong liquidity positions, including Singapore and other Asian banks, have stepped in as some Eurozone banks pulled back from their traditional strongholds such as trade finance.

In fact, on aggregate, trade finance activity has continued to grow, he said.

However, he acknowledged that should there be further, significant deterioration in the economies and financial markets of the Eurozone, the Singapore economy will not be insulated.

The spillover effects will manifest largely through the trade and financial channels, he said. Trade-related sectors, including manufacturing and transport, are likely to be the most adversely affected.
There could be some pullback in credit amidst heightened risk aversion, and financing costs could rise.

In the financial services sector, sentiment-driven activities such as stock broking and foreign exchange trading could also see a decline in transaction volumes.

Mr Tharman said the Eurozone situation remains very fluid and the Government is monitoring developments closely and stands ready to act should conditions take a turn for the worse.

"We will ensure that sound businesses continue to have access to financing, and that households and workers receive appropriate assistance," he reassured the public.

As for the specific measures, it will depend on the how the economic situation unfolds, he said.

Tharman gives assurance on CPF retirement savings

Deputy Prime Minister Tharman Shanmugaratnam on Monday reassured MPs concerned about whether people have enough retirement savings, citing figures to show the Central Provident Fund (CPF) system meets the basic retirement needs of low to lower-middle income Singaporeans.

He also clarified the role of the mandatory savings scheme, saying it is not designed to meet the needs of higher-income earners, who often have private savings outside the CPF.

The Minimum Sum that a CPF member must set aside at age 55 is now $131,000. That sum gives a monthly income of $1,100 for life from age 65 under the CPF Life annuity scheme.

It is enough to meet the typical spending needs of a two-member, lower-middle income retiree household - that is, one between the 20th and 40th percentile by income.

'Some people think the Government introduced CPF Life to hold on to their money for life. Actually, all it means is that you get paid for life.'
Manpower Minister Tharman Shanmugaratnam

CPF Life plans to be simplified

Singaporeans can look forward to a simpler choice between two plans that will provide them with a stream of retirement income for life.

This is because of major changes to the Central Provident Fund (CPF) system announced in Parliament yesterday.

The four existing plans in the CPF Life scheme, which caters to elderly people, will be collapsed into just two.

Individuals who turn 55 after Jan 1 next year and with at least $40,000 in their Retirement Accounts will get to choose between a new Basic Plan and a Standard Plan.

Under the Standard Plan, people will get higher monthly payouts but bequeath a smaller sum to their beneficiaries when they die. The new plan combines features of the existing Plus and Balanced plans.

The Basic plan, which tweaks aspects of another existing plan, offers slightly lower monthly payouts but a bigger bequest.

The current Income plan, which gives the highest monthly payout but leaves no bequest, will be scrapped, as less than 3per cent of CPF members who opted into CPF Life chose the plan.

Moreover, many members who chose this plan - about 30 per cent - later changed their minds about leaving no bequest.

Payouts under the two new plans will start only when the individual reaches age 65, in line with the existing plans.

Deputy Prime Minister Tharman Shanmugaratnam, who announced the changes, cited public feedback showing that it took significant effort to understand and choose between the four existing CPF Life plans.

He added that Singaporeans now live much longer and that a growing proportion of retirees will outlive their CPF savings if they stayed on the Minimum Sum Scheme.

The Minimum Sum Scheme gives payouts for a limited period of just over 20 years.

About half of the Singaporeans aged 65 today are expected to live past 85, with one third of them likely to live beyond 90. In the future, those who reach 65 are expected to live even longer.

"CPF Life is therefore both an important and timely evolution of the Minimum Sum Scheme," said Mr Tharman.

He added that the changes will "provide simplicity, but retain the best features of the existing plans" while giving the public a "meaningful choice".

Mr Seng Han Thong, an MP for Ang Mo Kio GRC, asked about the popularity of the four existing CPF Life schemes.

Mr Tharman said most people chose the Plus and Balanced plans. About 90 per cent of the 73,000 people who have signed up for CPF Life since its launch in September 2009 chose either of those two plans, he added.

The new Standard Plan will be the default CPF Life scheme for individuals who do not make a selection when they hit 55.

Policyholders of the four existing CPF Life plans can stay with their chosen plans. They have until Dec 31 next year to switch to the new plans if they wish.

Men aged 55 with $40,000 of savings in their Retirement Accounts can get $380 a month for life under the Standard Plan, or $350 under the Basic Plan.

Mr Tharman stressed that the CPF system is "principally aimed at serving" the middle- and lower-income groups.

"It is not the purpose of the CPF to cater fully to the needs of better-off Singaporeans."