Singapore’s CPF system has both its ardent supporters and naysayers. On one hand, we can optimise our CPF accounts to achieve one million dollars by 65 (1M65), 4M65, 10M65, 1M48A for singles or even make our children millionaires. On the other hand, we have detractors that want to keep as little as possible in their CPF accounts as possible as they ascribe to some common CPF myths.
According to Mercer’s Global Pension Index 2022, Singapore’s CPF system is the top ranked pension in Asia. So, what makes our CPF system so highly rated?
Singapore’s CPF System Is Ranked 9th and Graded “B” On The Global Pension Index
While Singapore’s CPF system is the top ranked in Asia, it is actually ranked 9th out of 44 systems graded “B” on the Global Pension Index. This index covers 44 retirement income systems globally, representing 65% of the global population.
The systems that receive the top grade of “A” are Iceland, Netherlands and Denmark. Singapore received a “B” grade, which is on pare with other countries such as Canada, Germany, Sweden, Switzerland, New Zealand and the UK. We also are graded above other Asian countries like Hong Kong, Malaysia.
Source: Global Pension Index 2022
Each of the systems are evaluated on 3 sub-indices: Adequacy, Sustainability, and Integrity. Our CPF system scored “B+” for adequacy, “B” for sustainability and “A” for integrity. Singapore’s overall score improved from 70.7 in 2021 to 74.1 in 2022.
Singapore Does Not Provide A Basic Pension Unlike The Icelandic Dutch, Danish Systems
According to the report, “Iceland’s retirement income system comprises a basic state pension and a pension supplement (both of which are income-tested according to different rules); mandatory occupational private pension schemes with contributions from both employers and employees; and voluntary personal pensions.
The Netherlands’ retirement income system comprises a flat-rate public pension and quasi-mandatory earnings-related occupational pension schemes linked to industrial agreements.
Denmark’s retirement income system comprises a public pension scheme that provides a basic pension, a means-tested supplementary pension benefit, a fully funded defined contribution (DC) scheme providing lifelong pensions and mandatory occupational DC schemes.”
These top 3 retirement income systems all have a basic pension scheme that is not conditional on contributions (or employment) but is tied to residency. This is then supplemented by additional means-tested and/ or contribution-based schemes. This is unlike Singapore’s CPF system which is solely built on contributions.
However, the next ranked Asian system – Hong Kong, ranked at 19th – is also based on a similar concept of mandatory provident funds which employers, employees and self-employed make mandatory contributions.
CPF Scored Highly On Voluntary Contributions But Less So For Replacement Rate
One important aspect of a retirement system is the replacement rate or the percentage of an individual’s annual employment income that is replaced by retirement income when they retire.
According to the report, a minimum pension of about 30% of average earnings is likely to adequately alleviate poverty. The OECD’s target is a replacement rate of 70% of final earnings, of which 30% includes mandatory pensions for private-sector workers (publicly and privately funded) and typical voluntary occupational pension plans for those countries where such schemes cover at least 30% of the working population.
However, this is an area that Singapore’s CPF system doesn’t score as well at 6.8 out of 10. In comparison, the top 3 systems (Iceland, Netherlands and Denmark) achieved full scores in this area.
Instead, CPF scored the maximum for whether voluntary contributions are treated by the tax system more favourably than similar savings in a bank account and whether the investment income earned by pension plans is exempt from tax in the pre-retirement and/or post-retirement periods.
As Singaporeans, one way we can take advantage of our CPF system is to make more voluntary contributions or top-ups to our CPF accounts. This way we can maximise our eventual CPF Life payouts, thereby increasing our replace rate.
Reducing Debt Increases The Adequacy Of Our Retirement
One of the measures of retirement income adequacy in the report concerns the net household saving rate in the country and the level of household debt in the country. This is because the living standards of the aged will depend on the benefits arising from the total pension system and the net level of household savings outside the pension system.
Singapore scores moderately well in this area at 7.5 out of 10. While we scored the maximum for household savings rate (Singapore’s household savings rate is 34.2%), we did not do as well for household debt.
This may be hindering our retirement adequacy as the level of household debt represents the financial liabilities that must be paid by households in the future. If we do not clear these debts during our working life, these liabilities will eventually be paid by accumulated benefits from our retirement income, which will reduce the amount available for our actual retirement.
Our Aging Population Calls To Question The Future Sustainability Of CPF
Singapore scored poorly for two aspects on the sustainability of our retirement income system. The first concerns the life expectancy at the current state pension age, the projected life expectancy at the expected state pension age in 2052 (that is, in 30 years’ time, the projected old-age dependency ratio in 2052 and the estimated total fertility rate (TFR) for 2020–2024.
Singapore scored 2.8 out of 10. This would be no surprise to anyone who has taken look at our population demographics. Life expectancy has been increasing. Our life expectancy at age 65 is 21.2 in 2021. The longer the period of retirement, the longer our CPF systems needs to provide for these members and the greater the financial cost. Meanwhile, our resident TFR has been on a steady decline and stands at 1.12 in 2021. This doesn’t bode well for our future younger generations who will have to support a growing number of elderly. One way to mitigate this is immigration which draws in younger people in their peak working years but that also presents other socio-economic problems.
The second aspect is also related to our aging population and concerns the labour force participation rate for those aged 55–64 and the labour force participation rate for those aged 65+.
Higher labour force participation at older ages means people retire later and also reduce both the number of years in retirement and the level of retirement benefits needed, while accumulating greater savings for retirement during the working years.
Singapore scored 3.2. In contrast, top scorers in this area have more than 80% labour force participation amongst those aged 55–64: 82.5% in Sweden and 83.4% in Iceland.
CPF Is One Of The Best Pension System In The World
According to the report, Singapore’s CPF system can be improved (in terms of index scoring) by:
- Reducing the barriers to establishing tax-approved group corporate retirement plans
- Opening up CPF to non-residents (who form a significant percentage of the labour force)
- Increasing the age at which CPF members can access their retirement savings as life expectancies increase
- Improving the level of communication to CPF members
However, these recommendations need to be taken into context. Every country has different needs, and we need to be careful of what we wish for.
It is not CPF’s goal to score well on global indices, but to focus on the needs of Singaporeans. Compared to other Asian countries, Singapore’s CPF system comes out tops. We can also hold our ground against many other developed countries, ranking higher than UK and USA.
As Singaporeans, what we can do is to optimise our individual retirement adequacy and utilise one of the best tools we have for retirement: our CPF system
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