Playing The Numbers Game

Deputy Prime Minister Tharman Shanmugaratnam is also our Finance Minister, which makes it difficult for us to doubt his arithmetic. But when he said the male median earner who enters the workforce today can achieve an IRR of 70% over his working life, one starts to speculate what he had to drink at the two-day Singapore Human Capital Summit 2012, held at Resorts World Sentosa.

Fortunately the guy put in charge of our finances was referring not to the more common accounting measure of Internal Rate of Return, but to something called Income Replacement Rate. The OECD definition refers to the old-age pension replacement rate as a measure of how effectively a pension system provides income during retirement to replace earnings which were the main source of income prior to retirement.

Make it clear, we lesser mortals don't have a pension scheme to speak of. What accumulates in our Central Provident Fund (CPF) account is our lifeline when employers decide we are no longer welcomed in the work place. Putting away 36 cents (age 36 and below) out of every dollar earned into the kitty should be enough buffer for a rainy day. Even with 7 cents deducted for medical contingencies, 29 percent is a pretty decent savings rate.

What the key findings from the Ministry of Manpower-commissioned study don't say is that a big chunk is swallowed up by "subsidised" housing. It's nice to hear that a $200,000 flat has been sold for say, $800,000, but a similar size flat would probably be asking for a similar price. Unless the long term plan is to cash in the enhanced asset, and move to Johore, Batam or Bintang, the majority will still end up asset rich, cash poor. The "independent" study estimated the rosy IRR's using all CPF savings accumulated by a member up to age 65, including savings above the Minimum Sum. They are assuming people actually have CPF balances in excess of the Minimum Sum. Until they show us the mathematics, it will just be any variant of the $100,000 flat afforded at $1,000 a month.

One is reminded of Mitt Romney's gaffe about middle income Americans earning between $200,000 and $250,000. The reality is that such an income is only enjoyed by the top 4% of the population. The median US income is around $50,000. But if you are pretty rich, you may well mix only with people in your income bracket, and assume everybody else is also well off.