Singaporeans have always been told by the government that we pay one of the lowest taxes in the world. But do you know what we have not been told?
Do you know that when comparing what we pay into our CPF with what people in other countries pay into their forms of social security, Singapore actually has the highest total contribution rate (employee 20% + employer 16% contribution rate) in the world (Chart 1)!
Chart 1: Social Security Programs Throughout the World, Social Security Programs Throughout the World: Asia and the Pacific, 2012, Social Security Programs Throughout the World: Europe, 2012, Social Security Programs Throughout the World: The Americas, 2011, Social Security Programs Throughout the World: Africa, 2013, Coordinating Healthcare and Pension Policies: An Exploratory Study
But not only that, what is even more shocking is that the 20% of our own income that employees pay into the CPF is also the highest in the world (Chart 2)! So, Singaporeans pay the highest proportion of our income into social security in the world.
Chart 2: Social Security Programs Throughout the World, Social Security Programs Throughout the World: Asia and the Pacific, 2012, Social Security Programs Throughout the World: Europe, 2012, Social Security Programs Throughout the World: The Americas, 2011, Social Security Programs Throughout the World: Africa, 2013, Coordinating Healthcare and Pension Policies: An Exploratory Study
But how did we get to paying the highest contribution rate into our CPF? Take a look at the growth of the total CPF contribution rates since 1955 (Chart 3). You can see that the contribution rate has more than tripled since the CPF’s inception.
Now, take a quick look at the growth in the Employee (blue line) vs the Employer (red line) CPF contribution rates since 1955 (Chart 4). Don’t spend too much time on this – take a look at the next chart.
In Chart 5, you can see the growth of the Employee and Employer CPF contribution rates since 1994. In the first few years, the contribution rates were the same at 20%. However, after the general election in 1997 under Goh Chok Tong, the employer contribution rate dropped, while Singaporeans have been made to shoulder the burden of topping up our retirement funds. However, even though the wages of Singaporeans have remained stagnant since 2000, workers still contribute more into CPF, whereas even though profits of companies have been increasing since then, companies have been paying lesser into our CPF. Note that the largest companies in Singapore are owned by the government, via Temasek Holdings.
However, do you know that when compared to the rest of the world, of the 166 territories with social security in the world, only in 12, or 7% of these territories, did employees contribute more than the employers into social security? Singapore belongs to this 7% (Chart 6).
Chart 6: Social Security Programs Throughout the World, Social Security Programs Throughout the World: Asia and the Pacific, 2012, Social Security Programs Throughout the World: Europe, 2012, Social Security Programs Throughout the World: The Americas, 2011, Social Security Programs Throughout the World: Africa, 2013, Coordinating Healthcare and Pension Policies: An Exploratory Study
So, because Singaporeans pay the most into our CPF, our CPF assets are actually the largest among the Asian countries (Chart 7). Sounds good? Read on.
But something is not quite right – what is shocking is that even though we have accumulated so much monies in the CPF, our CPF is actually the least adequate for retirement (Chart 8)! Our ratio of retirement income to pre-retirement income is only 20%!
The same finding is found in the Melbourne Mercer Global Pension Index, which ranked Singapore as having the least adequate minimum pension (Chart 9). Minimum pension is the “percentage of the average wage, that a single aged person will receive” upon retirement. Singapore’s score of 0.2 means that Singaporeans will receive only about “10 percent or less of average earnings”, which “offers very limited income provision”. 30% is necessary to meet the “poverty alleviation goal”, which means that Singapore’s 10% can possibly entrench poverty in Singapore further. Already Singapore’s poverty rate of 28% is the highest among the developed countries and countries in the region, and the low CPF returns does nothing to help the situation.
Another report by the OECD also shows that our overall pension as a share of individual lifetime earnings, at only 13%, is the least adequate, whereas the average in other countries is about 57% (Chart 10).
Chart 10: Pensions at a Glance Asia/Pacific 2011
So, our CPF is vastly inadequate for our retirements, even as we set aside the highest proportion of our incomes into CPF! This explains why that according to the latest Manulife Investor Sentiment Index, 69% of Singaporeans “expect to continue in full-time or part-time work during so-called retirement” – the highest in the region where an average of only 55% would expect to have to do so.
According to the Asian Development Bank, “Pension experts generally recommend a replacement rate of 60%–75%, adjusted for longevity and inflation risks.” Thus Singapore’s replacement rate of 20% is “not providing an adequate retirement income for retirees”. But the question is, where then did our CPF monies go if we have accumulated so much money, but they are not coming back?
This could be because around 75% of our CPF is trapped in housing (pink shaded portion in Chart 11). This is way too high, as compared to only 20% for the United States. This would also explain why from 50 years of age onwards, we would only be able to receive 17%-30% of our pre-retirement incomes when we retire (blue shaded area in Chart 11).
It is thus ridiculous when Prime Minister Lee Hsien Loong had said that, “poor people are not poor by any international standard” because “the lowest one-fifth, 20 per cent of households, … each poor household has on average $200,000 of net wealth in the HDB flat.”
What this means is that they would have around 75% of their CPF trapped in housing, and would only be able to retire with an amount that is only 20% of their pre-retirement incomes. If they want to be able to use the “net wealth” of $200,000 to retire, they would have to sell their flats and become homeless. Is this what the PAP recommends Singaporeans to do? Would this be what the PAP ministers would do for themselves?
According to the Asian Development Bank Institute, if Singapore wants to achieve a replacement rate of between 35% and 40%, “a contribution rate of 10 to 15 percent should be sufficient“. What this means is that either our 36% contribution is ridiculously high, or that our 36% contribution rate should be able to provide us with a replacement rate of more than 80% (we should be able to receive 80% of our pre-retirement incomes) or even close to 100% (Chart 12a and 12b).
So, with the 36% contribution that we are giving, that should mean that we have more than enough to retire on, by international standards! But why is this not happening? Housing prices that have shot through the roof is one reason. But what is the other reason why are CPF aren’t earning as much as they should?
We will tell you why in the next part of the article.
Leong Sze Hian and Roy Ngerng of The Heart Truths