Monday, June 3, 2013

Life starts at 60, how long will funds last?

Jun 02, 2013

Retirement income scheme needs urgent fixing to smoothly ride crest of silver tsunami

By Han Fook Kwang Managing Editor

When you turn 60, the universe conspires to remind you how young you really are.

That's how I felt last Monday when the front page of The Straits Times declared that Singaporeans live longer than most people elsewhere and that a 60-year-old today can expect to live another 25 years.

That's the same as 60-year-olds in 12 other countries, outlived by only the Japanese who can expect to live one year longer.

It's good to know you belong to such a select group.

The paper that day was full of stories about people past 60 doing things you wouldn't imagine anyone in the last quarter of their lives doing.

There was the American rock band Aerosmith led by 65-year-old grandfather Steven Tyler rocking the 10,000 crowd at Gardens by the Bay.

Jupp Heynckes, 68, coach of the German football club Bayern Munich, almost danced off the Sports page celebrating his team's victory in the Champions League final.

In the Life! section, a beaming Madam Kwan Swee Lian of the famed chain of seven restaurants in Kuala Lumpur showed what an 80-year-old can do, opening her first eatery in Singapore last month.

I felt surrounded by older people telling me life begins at 60.

The reality in Singapore, as it is in many other places, is that there are more older people than ever, many more active than their parents at the same age.

There are more than 800,000 residents who are 55 and older, or about one in five, and their numbers are growing fast.

I do not think the implications of having such a large group who share similar expectations and concerns, and who will be around for quite some time still, have sunk into policymakers and Singaporeans in general.

It should, because their impact on the economics and politics of this place will be unprecedented.

One painful truth, though, is that for most who have stopped working, their retirement fund, if that's what the Central Provident Fund (CPF) can be called, will be totally inadequate to finance the lifestyle they have been used to.

Even those earning fairly high salaries will not have enough savings because of the CPF cap which limits their contributions and is pegged to a monthly salary of $5,000.

That was a killer move which almost guaranteed their retirement funds wouldn't be enough.

There have been contradictory studies on whether a young graduate starting out today and working until 65 will have enough CPF savings when he retires. One study concluded it wouldn't be enough as he can expect a monthly retirement payout equivalent to only 22 per cent of his last drawn salary. That's clearly unsatisfactory.

Another study commissioned by the Government estimates a much higher monthly payout equal to 70 per cent of the salary he was earning when he was 55.

The very different conclusions arise because a great deal depends on the assumptions made, especially on how salaries change through a person's working life.

Based on my own experience and people I know, the first study appears to be closer to the reality, meaning the CPF has come out well short for most people.

In fact, that's what an international study done last year found out.

The research done jointly by the Australian Centre for Financial Studies and Mercer, a global leader in the retirement business, ranked the retirement income system of 18 countries based on 40 indicators in three areas: adequacy, sustainability and integrity.

Singapore obtained a C grading and ranked 13th. The bottom four places were all occupied by Asian countries - China, South Korea, Japan and India - while the top three were Denmark, the Netherlands and Australia.

But it was in the area of adequacy, which is about whether the retirement fund is enough when it is needed, that Singapore was found most wanting. It ranked second from the bottom, ahead of only India.

The CPF's own figures support this finding: As at end-2011, more than half of those aged 60 and older had less than $100,000 in their balances, below the minimum sum specified by the CPF Board.

The saving grace for many is their homes, funded mostly by their CPF savings, and whose value would have gone up considerably in the last 20 to 30 years.

Move to a smaller place and use the windfall to fund their retirement? It is a viable option for those who have benefited from the property booms of the past.

But what about those just starting out, and in their 20s and 30s today?

Even though the property purchasing part of the CPF has been a boon to many and is a unique feature here unmatched by other countries, no retirement scheme should be dependent on the vagaries of the property market.

Singapore clearly needs a proper scheme, one which can ensure adequate financial security beyond what the CPF is currently providing.

The CPF is a good scheme, but it hasn't caught up with rising expectations and longer life spans.

Worse, over the years, other considerations crept in which eroded savings, the biggest culprit being the chopping of contribution rates which have not been restored to their original numbers.

[And the use of CPF to purchase flats and property. The net effect of allowing this is not quite clear. On the one hand, as investment, property probably offers a better return than the 2.5% from CPF... But it depends on the property market continuing to grow. And this is now in question - hence the point above about the vagaries of the property market. On the other hand, allowing people to use their CPF to purchase property directly leads to the inflation of property prices. ]

How to improve the scheme's adequacy?

There are many options, including increasing the contribution rates - especially from employers, raising the income cap, creating a separate parallel scheme for those who can contribute more beyond their CPF obligations, and having a government top-up scheme for low-wage earners.

More importantly, study how those highly ranked countries do it and make more fundamental changes to the scheme if necessary instead of just tweaking it at the edges.

In the meantime, Singaporeans will have to save a great deal more and not depend entirely on the CPF.

I listened enviously when a Swiss banker here told me that when he retires at 62, he will be paid at least 60 per cent of his last drawn salary for the rest of his life.

That's a proper retirement scheme which has three pillars consisting of a national, a company and an individual pension plan.

With the impending silver tsunami only years away here, this is an urgent and pressing task.

In fact, it is even more important for retirees to have adequate savings in a fast-paced country like Singapore.

It might seem perverse, but a growing economy isn't necessarily good for retirees who rely on fixed savings.

When there is growth, and incomes rise all round, prices generally go up as well - bad news for those with no income and fixed savings.

Of course, this isn't a good reason to stop growth because all the other people depend on it to raise their living standards.

But governments need to be more sensitive to the effect it has on those who have stopped working and take measures to ensure that high growth doesn't erode real savings.

If they don't, you can expect this silver-haired group to flex their political muscle at the ballot box.

Indeed, I believe this is already happening.

When you hear Singaporeans complain about the high cost of living, quite a bit of the noise comes from this group.

This won't be an easy problem to solve, balancing the needs of one segment of the population who might be worse off when there is economic growth against the rest who benefit from it.

That's why it is all the more important to get the retirement income scheme right in the first place.

It's my 60th birthday wish for Singapore.

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