I love taking an assumption – especially if it’s “officially” published – and breaking it down with cold, hard facts. Yeah, you know I’m badass that way. And the front page article of today’s Today (haha) newspaper, headlined “Young Workers Will Have Enough CPF For Retirement” provided just that opportunity.
In summary, it cites a Ministry of Manpower-commissioned study which proudly proclaims that “young Singaporeans entering the workforce today will have accumulated enough savings in their Central Provident Fund (CPF) when they retire to see them through their golden years.” It also uses fancy terms like “Income Replacement Rate” and “monetise your home” to convince you that you have nothing to worry about.
I’m highly skeptical of this claim, because inflation will eat away at your savings faster than a fat kid at McDonald’s. You may think that you’re saving a huge pile on cash in your CPF account, but the hard truth is that the value of your savings is being eroded every day by inflation – which means you can’t buy as much stuff as you did with the same money. By the way, inflation in Singapore is nothing to scoff at – it’s averaged 3.5% for the past 5 years, but it hit a whopping 5.0% in March this year.
I hate making groundless claims, so I ran my own study with super optimistic assumptions just to see how much you’ll have at retirement in the best case scenario if you rely on CPF:
What you’ll contribute to CPF
Assume you earn at least $5,000, which is the current wage ceiling for CPF contributions. After adding employer contributions, around 21% goes into your Ordinary Account and around 7% goes into your Special Account. The actual percentages differ depending on your age, but for simplicity we’ll stick with 21% and 7%, which is around the median allocation for working adults.
So your yearly CPF contributions will be:
(21% x $5,000 x 12) = $12,600 a year to your Ordinary Account, and
(7% x $5,000 x 12) = $4,200 a year to your Special Account
(You can’t use your Medisave account except for medical-related expenses, so we’ll ignore that for now.)
“But it has three keys on the logo – so it must be safe!”
What you’ll get when you retire
Say you start work at 25 and work for 35 years till you’re 60. Applying a 2.5% p.a interest rate to your Ordinary Account and a 4.0% p.a interest rate to your Special Account, you get the following amounts after 35 years:
Ordinary Account: $709,398
Special Account: $321,713
Total: $1,031,711
Sounds awesome right? WRONG. The above figures don’t take inflation into account. Factoring in an inflation rate of 3.5%, you actually get:
Ordinary Account: $212,803
Special Account: $96,506
Total: $309,309
That means that after 35 years, your retirement savings will only be able to buy $309,309 worth of stuff in today’s dollars. Will that last through retirement?
What your retirement income will be (after inflation):
The average lifespan of a Singaporean male is around 80 years, while that of a Singaporean female is around 84 years. So assuming they stop work at 60, the average male will spend 20 years in retirement while the average female will spend 24 years in retirement.
Monthly retirement income for males = $309,309 ÷ 20 years ÷ 12 months = $1,288
Monthly retirement income for females = $309,309 ÷ 24 years ÷ 12 months = $1,073
Wow. An average of $1,180 a month. Wasn’t retirement supposed to entail spending our days sipping pina coladas on a cruise ship? At this rate, it sounds more like a retirement of eating cai png every day, and working at McDonald’s serving other young brats who don’t have a clue that they’re being screwed over by inflation.
“To all retirees, please submit your resumes to nomoney@mcdonalds.com”
I’m not exaggerating. Plug in the numbers here if you don’t believe me. In fact, these figures are probably really optimistic, meaning that things could get a lot worse. Here’s why:
Why these figures may be inflated:
1. Most people don’t earn $5,000 from the age of 25, so their CPF contribution is way lower than what I calculated. In fact, some people may never even hit the ceiling of $5,000/month.
2. The inflation rate of 3.5% is the average of the past 5 years, which included a global financial crisis. During good economic cycles, the inflation rate will likely be much higher.
3. Healthcare advances mean that you’ll probably live longer, past the current average of 84, so your retirement savings will have to last a whole lot longer.
4. This is assuming that you have unlimited access your CPF savings in retirement. In reality, the government pays it to you via a life annuity which might pay a couple of hundred dollars a month. And they can change the rules anytime. Don’t always assume you can access your savings that easily.
Oh crap. What the hell am I supposed to do?
This isn’t a criticism of CPF. In fact, I think that it’s awesome that Singapore has one of the highest savings rates in the world. A thousand bucks a month at retirement is better than nothing, though it’s definitely not enough if you want a rich retirement.
What I’m saying is that you simply cannot afford to rely on CPF and savings for retirement. The numbers just don’t work out. Yes, we’re all getting screwed, but the good news is that we can do something about it. Instead of relying on the “gahmen” to take care of you, you need to take personal finances into your own hands: Save consciously, spend smartly, and invest in assets that have a proven track record of beating inflation, like the stock market.
That’s what I’m trying to do with this blog and my upcoming book – to educate people that our current trajectory just isn’t enough, and that you can do a lot better. 🙂
Also, a large portion of our CPF goes into funding our homes. So if we can’t liquidate our property (not that we should) we’d have even less. And if you borrow from the gahmen, it’s at 2.6% interest, higher than what the Ordinary account pays out. I guess for many of us, 60 is probably too optimistic a retiring age?
True that! Well, the gahmen requires you to pay back CPF everything PLUS INTEREST if you ever sell your house, so that’s why I didnt include it in my calculations. But you’re right that if you don’t sell your house, then a large chunk of it would go to CPF. Soooo we’d all be asset rich, cash poor: owning our own houses, but working at McDonalds.
The bottom line is that CPF is a nice thing to have because it may give you a couple of hundred dollars a month at retirement, but there is no way that anybody is going to be able to live off it.
CPF isn’t a completely bad idea. Considering SG has a SWF, Temseak could easily top up CPF accounts to counteract inflection.
But I agree that relying on CPF alone is a bad idea. It should be used in combination with tax funded pensions (I.e. raise funds in the same year as paying out) and pension insurance schemes. Multiple sources would help mitigate pressure on SWFs to generate money or the next generation supporting twice the number of people.
SG should attempt a combination of CPF + SWF + Pension Insurance, and attempt to give things like accommodation or transport free of charge to those you don’t have enough money.