Saturday, January 22, 2011

Working Till 65 - Myths and Realities

Why has the government recently raised the statutory retirement from 62 to 65? It has also increased the minimum sum to be set aside as well as the age you can start drawing out those monies. It had previously introduced the CPF Life scheme, which is compulsory for those born from a certain year then on.

Those belonging to the ABPAP (anything but PAP) side will argue that this is just a scheme to lock up CPF monies from Singaporean, until they day they die. Rather than approach the question from one predetermined side, let us try to connect the dots from the recent headlines. Of course, what qualifies as dots and how we should connect them, is a matter of interpretation, but for starters consider the following, which have hit the newspapers one way or another:
  1. Fertility rates are declining
  2. People have longer life expectancies
  3. The longer people live, they are going to use the health care system more
The matter of the fact, almost all developed countries have been trying to reform their state welfare systems. China, a developing country, has jump on the bandwagon early in its economic development stage, because it had adopted one-child policy. China has introduced reforms to reduce the cost of drugs as well as food.

How does it all link to the recent retirement age? Firstly, social security systems have been legacies of the nation-states created after the Second World War. The idea then, at least in Europe, was that everybody has a role in looking after the older generation. Retirement benefits there, were funded by high levels of taxation by workers in the labor force.

For those who have taken a basic history lesson, you will realize that such a scheme has a flaw. Immediately after the WWII, populations grew at a quick rate. And since most assets were bombed to bits or used for the war effort, economies could grow at a fast clip due to the low-base effect.

Fast forward, there are more older Europeans living on their retirement benefits than there are young people adding to the accounts. With hindsight, these systems are just long drawn out Ponzi schemes. Those who join the scheme much later, will always tend to lose out. Generation imbalance.

The Singapore Solution : CPF
Fortunately for Singapore, policy makers chose an alternative method to fund retirement benefits. Both employees and employers had to set aside a portion of monthly wage to the Central Provident Fund. Although locked up till a certain age, the money there earned a better than market interest rate.

Wait. If you say that the CPF way is better, than why is the government raising the retirement age. Cue the critics: the government (PAP) wants to lock up your money for a longer time because it has been losing money through badly-timed investments, and may not cough up all the required cash when the time comes. A bank run.

In my opinion, the success of the Singapore government in raising money for infrastructure projects  when it just gained independence, can be attributed to the CPF. Although critics can hold such views, I believe that the reasons for increasing the retirement age, is to maintain economic growth, although productivity may be dwindling. The future for investors is a book you such read, for a indepth and global analysis. And by raising the retirement age, people are better able to fund their retirement, since they are living older anyway.

Working till 65 : The reality
Which is better? The European scheme or Singapore CPF? The answer depends whether you are a policy maker or a person having to bear the brunt of policy. If you are the former, the CPF scheme better because it transfers the problem to the normal citizen. Moreover, given the one-party dominant political system here, such moves to alter the CPF can be passed into law relatively easily.

Naturally, if you are just a normal citizen, you will find that the moves to adjust the CPF one way or another, very unpopular. Here, critics are right in saying that, what if a person dies before he can reach the draw down age, would he not enjoy the fruits of his labor? This is a very good emotional argument.

It is again necessary to re-iterate that the CPF scheme avoids the generation imbalance that afflicts the European scheme. And for the CPF to function properly as a retirement plan, certain assumptions had to be made from the onset, namely how old someone will live after he retires. And as more people on AVERAGE live longer than expected, ironically due to better health care, they will burden the health system for a longer period of time. So much for the golden years.

Working till 65 is the unpleasant side effect of living longer. Due to physical wear and tear, people become less productive. And as a result, as you grow older, your pay falls off a steep cliff. My colleague told me that he worries that by age 35, if he does not find some way to move up the value chain (he makes a lot more money than I do), he worries that he will be priced out of the market. He said that the law of mathematics dictate that even if your pay were to increase a modest 3% a year, by the time you reach 35 (10 years of working at least), it may be more worthwhile for the company to hire a fresh graduate! 

Why do you think it is so hard for people who get mysteriously laid off at 55 years old to want to accept a lower paying job? At 55 years, that is another 20 years of compounding at 3%, which is quite a pay check.

Not every one can find a job that draws indecent pay, where he gets to travel as well as write so many books about his life. And from what I hear, most people want to retire early, rather than slog for the rest of their life. So although you can set the retirement age to 65, you cannot make people work till that long. Was it not so long ago, that retirement meant having to look after your grandchildren and spending time tending to your garden and stuff?

To Summarize (Or I am sorry to waste your time)
  1. As the Singapore population on AVERAGE live longer and becomes less fertile, increasing retirement age is necessary to allow the CPF to function as intended and for the economy to grow.
  2. Nonetheless, policy makers must be aware that there will be people need the money as urgently because bad things do happen.
  3. For those who are more fortunate, you should start financial planning early, if you want to exit the rat race earlier than the draw down age.
  4. For those who are less fortunate, you should consider planning your career such that you can move higher up the food chain. Aim for higher management as history suggests that middle managers are the first to be laid off in any downturn.
  5. Cast your nets wide. Singapore is a small country. Take the opportunity to venture out of the country to gain more experience and possibly get a higher pay. After all, if so many from Asia are coming here to make their fortune, you too can go elsewhere to make yours. The world is your oyster.

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