Help middle-income shore up their CPF savings

Help middle-income shore up their CPF savings
Graduates may under-save for retirement due to an “unrealistic” assumption in the calculation of the income replacement rate, says Prof Hui.

AS MUCH as half of Singapore's working population, many of them graduates in the middle-income group, may not have enough in their Central Provident Fund (CPF) accounts to tide them through their golden years.

The Government should do something to help them shore up their CPF savings, or at least educate them about saving more for retirement on their own.

This warning was sounded by Associate Professor Hui Weng Tat of the Lee Kuan Yew School of Public Policy at the CPF forum.

The problem, he tells Insight, lies in the calculation of the income replacement rate, or IRR - the percentage of a worker's pre-retirement income covered by pension payouts.

"My fear is that the overly optimistic expectations created by the misleading official statements and projections will lead to under-saving for retirement and cause much disappointment for middle-income persons in the future," he says.

For this group, an IRR of at least 60 per cent is considered adequate for retirement.

This means CPF Life payouts would have to amount to at least 60 per cent of what someone earned before retiring. And indeed, based on official calculations, they will.

But these are based on the "unrealistic" assumption that a person starts work and retires in the same income distribution percentile, says Prof Hui.

"If you start work as a graduate on about $3,000 a month at 24 years old, you will expect to earn more by the time you retire. People expect some mobility upwards in their income based on seniority or experience."

Taking this into account, he calculates that the IRR for median-income earners starting with a pay of $3,000 would amount to about 50 per cent at the highest.

This drops to about 30 per cent if they used CPF savings for housing. "So these people may not save enough, because they think CPF alone is enough," says Prof Hui.

The CPF will be more adequate for those in the lower-income groups, he notes. CPF Life payouts should amount to at least 70 per cent of their last drawn pay, and could even exceed it.

Other panellists, such as financial services firm Marsh & McLennan Companies' chairman Wong Su-Yen and SingCapital chief executive officer Alfred Chia, agreed that the CPF alone may not be enough for retirement for some.

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