Prudent housing choices ensure enough CPF savings for retirement: survey

SINGAPORE: With prudent housing choices, young Singaporeans in the workforce today will have enough savings through the Central Provident Fund (CPF) system for their retirement.

This is according to details released on Wednesday from an independent study commissioned by the Ministry of Manpower.

Deputy Prime Minister Tharman Shanmugaratnam first made mention of this study at the opening of the Singapore Human Capital Summit in September this year.

The study was conducted by two researchers from the National University of Singapore, Associate Professors Chia Ngee Choon and Albert Tsui.

In the study, the assumption is that Singaporeans entering the workforce today, would be looking to buy their first homes in 2017.

Another assumption is that the men would be 30 years old, and women 28.

And these couples would buy build-to-order flats that are in keeping with their household incomes.

As workers use CPF savings to finance housing, it is important that they buy a flat type within their means, to leave enough CPF savings for retirement.

For lower-middle income households at the 30th income percentile, typically with a combined monthly income of S$5,100 in 2017, that means a three-room flat.

For median-income households at the 50th income percentile, typically drawing a combined monthly income of S$7,100 in 2017, a four-room flat would be the choice.

Upper-middle income earners at the 70th income percentile, typically earning a combined monthly income of S$9,200 in 2017, could choose a five-room flat.

These figures are projections of 2017 dollars, i.e. nominal household month salary when new entrant turns 30 for males and 28 for females.

With these assumptions, couples can then fully pay their mortgage instalments from their monthly contributions to the CPF ordinary account.

And men earning median incomes at the 50th percentile should be able to replace 70 per cent of their wages on retirement at 65.

That is, their CPF savings should be enough to provide them with 70 per cent of the monthly income that they earned at 55, which is assumed to be the age when a Singaporean's monthly income peaks.

For women, the income replacement rate (IRR) is 64 per cent.

The IRR is a widely-used international measure for retirement adequacy. It refers to the ratio of retirement income to pre-retirement earnings.

The study estimates the IRR that workers could get at age 65 based on their CPF savings. The figures in the study compare well with international standards.

The World Bank recommends a range of 53 to 78 per cent as the IRR for middle-income earners.
Associate professor Chia said that IRR can be used as an indicator of retirement preparedness.

"Our study shows that there is a very clear trade off between retirement adequacy and housing consumption," said associate professor Chia.

"Take for example the base case, when we look at the median worker at say, 50 percentile, we have assumed that this worker will buy a four-room flat. If this household decides to buy a flat type that is one size bigger, say a five room, then we'll see the income replacement rate fall from 70 per cent to 58 per cent," he added.

The median IRR amongst Organisation for Economic Co-operation and Development countries for a median-income earner is 66 per cent.

The study takes into account current CPF policies and features such as CPF contribution and interest rates.

- CNA/lp