Income For Retirement

About a month ago, circa 19 September, Deputy Prime Minister Tharman Shanmugaratnam told delegates at the Singapore Human Capital Summit that the Singapore median male earner who enters the workforce today will be able to achieve an Income Replacement Rate (IRR) of over 70% through his Central Provident Fund (CPF) savings. For the female median earner, the equivalent IRR is 63%. The IRR for the median OECD economies is 66%, while the World Bank recommends a range of between 53% and 78%.

Christine Benz explains that most retirees spend substantially less than 75% or 80% of their previous working income because many of the commuting expenses, outside meals, and working clothes are no longer necessary. Most likely, big ticket commitments like housing loans and the kids' university education would have been done with. And in the American context, retirees need not pay taxes for Social Security and Medicare. On that score she quotes Aon Consulting's Replacement Rate Study, which concludes that in 2008, a 78% income replacement rate would allow a 65-year-old with $60,000 pre-retirement income to retire in 2008 with the same standard of living he or she had while working. The assumption is that 15% of pre-retirees' income have been saved regularly during the working years in preparation for retirement.

Our mandatory CPF contribution rate should, theoretically, put us in good stead. Except that in our situation, retirees continue to co-pay for their Medicare through the chunk eaten up by Medisave, plus premiums for additional cover like Medishield. And then there is the Goods and Services Tax.

Tharman's premise for the IRR numbers include the overpriced housing board flat, an illiquid source of funds which can be made available only by downgrading or pursuing a refinancing exercise. Assuming the house has already been fully paid for by then. He calls this "Our strategy to help them monetise the values of their homes in retirement." Tharman also pointed that many older Singaporeans have low CPF balances and are unable to achieve the IRR that "the study" has found. These older folks bought houses at significantly lower prices, unlike the younger generation who is already seeing COV (cost over valuation) figures in excess of $200,000. We are told "details of the study will be released in the near future", but the released date was not indicated. Have you seen "the study"? Except for those still entitled to state provided pensions, one suspects the true picture of the IRRs may not be as pretty as painted.