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CPF Members Entering Workforce Today Will Have Adequate Savings in Retirement

14 November 2012

  1. Young Singaporeans joining the workforce will accumulate savings through the CPF system that will provide adequately for their retirement, and compare well with international standards, according to the Occasional Paper on “Adequacy of Singapore’s CPF Payouts: Income Replacement Rates of Entrant Workers” released today.
  2. The study used a widely-used international measure for retirement adequacy called the Income Replacement Rate (IRR), which is the ratio of retirement income to pre-retirement earnings. The study estimated the IRR that a member could attain at age 65 based on his accumulated CPF savings, including savings above the Minimum Sum which the member has the option to withdraw1.
  3. Amongst new entrants to the workforce today, the study finds that the median male earner will be able to replace 70% of his wages when he retires. For the median female earner, the IRR is at 64%. These are within the range recommended by the World Bank and comparable to those seen in OECD countries. This is without considering the additional savings that a Singaporean would typically obtain if he were to sell his HDB home and move to a smaller flat during his retirement.
  4. This study, by two independent National University of Singapore (NUS) researchers – Associate Professors Chia Ngee Choon and Albert Tsui – was commissioned by the Ministry of Manpower. Their work fills gaps in previous similar studies, by incorporating unique institutional features of the CPF. The profiles of the researchers are provided at Annex A.

    Key Findings of the Study

    (i) CPF members entering the workforce today would have adequate CPF savings when they retire.
  5. The study estimated the IRR for new entrants into the workforce earning incomes at the 30th percentile (lower-middle), 50th percentile (median) and 70th percentile (upper-middle) levels of their cohort. Table 1 summarises the results for these younger workers. (Note: The IRRs shown already factor in withdrawals made by CPF members to pay for their homes. In other words, members continue to own and stay in their homes after retirement.)

    Table 1: Net IRR for Young Workers

    (lower-middle income)
    (median income)
    (upper-middle income)
    Men 88% 70% 63%
    Women 80% 64% 59%
  6. Compared to the median earner, the lower-middle income earner has a higher IRR while a upper-middle income earner has a lower IRR. This reflects among other reasons the fact that CPF contributions are capped, and a higher interest rate is paid on the first $60,000 of balances, which benefits those with lower incomes more. The CPF system is aimed at meeting basic retirement needs, and recognises that Singaporeans with higher incomes typically have other assets which can be used in retirement.
  7. The IRR for females is lower because, empirically, females generally earn less than their male counterparts and have a longer life expectancy. However, both male and female members amongst young workers at the lower-middle income level (30th percentile) and above are able to meet the CPF Minimum Sum.
  8. These IRR figures compare well internationally. The World Bank recommends a range of 53% to 78% for middle-income earners. The average and median IRR amongst OECD countries for a median-income earner is 72% and 66% respectively.
  9. In Singapore, our policies promote home ownership and retirees generally do not pay rental costs. Home ownership is not always the norm overseas. To facilitate comparison with countries where rentals are the norm for the median retiree, it is therefore useful to estimate the adequacy of the CPF system taking into account the imputed rent of the home they own. The resulting IRR in Singapore is higher, at 78% for the median male member and 74% for the median female member.

    (ii) Workfare provides a significant boost to the retirement adequacy of low-income CPF members.
  10. The study also extended its analysis to low-income new entrants at the 10th and 20th income percentiles. For these low-income members, the Workfare Income Supplement (WIS) gives a significant boost to their retirement savings and correspondingly, also their IRRs. At the 20th income percentile for example, Workfare lifts the IRR from 80% to 92% for males, and from 69% to 91% for females. For members at the 10th income percentile, the boost to IRR is even more significant. In other words, low-income members are able to attain a higher IRR, although they are unable to attain the Minimum Sum.

    (iii) Prudent housing choice is important for retirement adequacy.
  11. Prudent housing choice is important to ensure that one sets aside sufficient CPF savings for retirement. The positive IRR results found above can be attained when households buy a flat type within their financial means, i.e. 3-room, 4-room, 5-room flat for households at the 30th, 50th, 70th income percentiles respectively. When prudence is exercised, mortgage instalments can also be fully paid from members’ monthly contributions to the CPF Ordinary Account.
  12. For a median male member who purchases a home that is one flat type larger (i.e. 5-room instead of 4-room), his IRR would be 58% instead of 70%. (This is without taking into account potential monetisation of his home during retirement.)
  13. Members who have stretched their finances to purchase a larger home should be prepared to consider monetising their housing asset later in life to supplement their retirement income should the need arise. They can monetise by subletting a room or moving to a smaller flat to boost their retirement payouts, including tapping on monetisation schemes offered by the Government.

    (iv) CPF savings withdrawn must be used wisely.
  14. In the study, all CPF savings accumulated by age 65 (net of withdrawals for housing) were used to purchase a CPF LIFE plan. If savings above the MS are withdrawn and spent on non-retirement purposes however, and only the MS is used to fund retirement income, the IRR will fall to 35% for the median male member and 36% for the median female member. This shows that where members withdraw savings above the MS, they should invest it wisely to generate a stream of retirement income to supplement their CPF LIFE payouts.

    Model Set In Singapore Context, Uses Actual Data
  15. The study incorporates the unique institutional features of the CPF, such as the different CPF accounts (in particular Ordinary Account and Special/Retirement Account) and the use of the Ordinary Account to pay for housing. It is also designed based on current CPF policies in areas such as CPF contribution rates, CPF salary ceiling, interest rates on the respective CPF accounts and the level of the Minimum Sum (in real terms). It also builds in how the WIS boosts retirement savings.
  16. The assumptions in the study were based on empirical data to reduce subjectivity as far as possible. For example, the wage growth of members at different income percentiles, which is an important parameter in the study, was derived empirically from historical wage growth data. Real-world experiences of individuals were also factored in to ensure that the assumptions were reasonable. For instance, the study made allowance for the fact that individuals may experience bouts of unemployment or economic activity (see Annex B for a summary of key assumptions).
  17. The study focuses on younger Singaporeans, or those entering the workforce today. Many of today’s older generation of Singaporeans have lower CPF balances, due to the much lower incomes they earned in the past and the greater leeway they had to use their CPF savings for housing. Thus, many do not meet the Minimum Sum. However, older CPF members have typically also benefited from the much larger appreciation in value of their homes over the past decades. To help those who wish to monetise their housing assets to supplement their retirement income, the Government has introduced grants through the Silver Housing Bonus and the enhanced Lease Buyback Scheme.

  18. The study shows that the majority of young Singaporeans will receive adequate payouts in retirement. It also underscores that retirement adequacy is premised on individual responsibility. Individuals have to work consistently and make prudent decisions so as to set aside adequate savings for their retirement. In addition, the findings of the study are an important validation of the CPF system.

    For More Information
  19. The Occasional Paper on “Adequacy of Singapore’s CPF Payouts: Income Replacement Rates of Entrant Workers” is available online under the Retirement Income Adequacy section of MOM's Statistics & Publications webpage.


1 The study essentially models the accumulation of CPF savings throughout a member’s working life, and uses the CPF savings accumulated (net of withdrawals for housing) to derive his CPF LIFE payouts in retirement. The concept of net IRR, which is net retirement income divided by net pre-retirement earnings, after deducting personal income taxes and employee CPF contributions, is primarily used in the study (see sidebars 1 and 2).


Annex A

Profiles of Researchers

  • Chia Ngee Choon is an Associate Professor at the Department of Economics at NUS. She is the co-editor of the Singapore Economic Review. Assoc Prof Chia’s research interests lie in applied economics in ageing and health. She studies economic issues relating to pension, old-age and healthcare financing; and the fiscal implications of ageing.
  • Albert Tsui is an Associate Professor at the Department of Economics at NUS. He specializes in financial econometrics. Associate Prof Tsui’s current research interests include demographic macroeconomics, pension economics, reverse mortgages and retirement adequacy issues.
  • Their CVs can be found at the links below:

Annex B

Assumptions Used in the Study

The assumptions in the study were based on empirical data to reduce subjectivity as far as possible. A summary of the key assumptions is outlined below.

Earnings Paths

  • Wage growth is determined using data from MOM’s Labour Force Survey over 2001 to 2011.
  • The age-earnings profile of members at different income percentiles follows a hump-shaped distribution where wage growth is faster when the worker is young and tapers off into the negative as he gets older.
  • Workers are assumed to remain in their respective income percentiles throughout their working life.

Employment/Contribution Density 

  • It is assumed that the member works 85% each year (ie. unemployed/inactive 15% of the time) from age 25 to 54, and works 78% each year (ie. unemployed/inactive 22% of the time) from age 55 to 65. These assumptions are based on the actual lifetime experience of CPF members who are active at age 55.

CPF Policy Parameters

  • The CPF contribution/allocation rates, CPF salary ceiling, Minimum Sum, interest rates, and Workfare Income Supplement (WIS) payments used in the model are based on current CPF policies. In particular:
    • The interest rate for Ordinary Account is 2.5% while that for Special, Medisave, and Retirement Accounts (SMRA) is 4%. The first $60,000 of CPF savings including up to $20,000 in the OA, would also earn an Extra Interest of 1%.
    • The CPF salary ceiling is pegged to wage growth at the 80th income percentile
    • The Minimum Sum is $120,000 (in 2003 dollars), in line with recommendation by Economic Review Committee in 2003
    • The WIS quantum and income eligibility criteria are assumed to keep pace with the income growth of the WIS target group

Housing Consumption

  • A male member marries a female member from the same income percentile. Upon marriage, they buy a BTO flat when they are aged 30 (for males) and 28 (for females) respectively. 30 is the median age of male residents when they purchase their first Build-to-Order (BTO) flat, and 28, the equivalent age for females.
  • The couple buys a BTO flat that is within their financial means – i.e. the 30th, 50th, 70th income percentile members buy a 3-room, 4-room and 5-room flat respectively.
  • HDB housing grants are factored in (Additional CPF Housing Grant and Special CPF Housing Grant).
  • The couple uses all accumulated CPF OA savings at the point of purchase for the down-payment and the balance net of housing grant is financed through a 30-year HDB loan at 2.6% mortgage interest.
  • Mortgage instalment is jointly financed by the couple
  • Couple does not upgrade to a larger home

Retirement Income

  • Members use all the CPF savings net of housing withdrawals, including amounts above the Minimum Sum, to purchase a CPF LIFE Plan.
  • Payouts are calculated based on the LIFE Standard and Basic Plans.
  • Members will start receiving payouts from the drawdown age of 65.