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How ready is this nation for retirement?
This can be measured by two tools: a.) savings from the individual and b.) taxes from the individual to the government (whom then disburses the benefits).
One has to first establish that these two tools are often used in unison. Digits-wise, it matters little whether it is an individual payment contributed to a locked savings fund (still your money), or whether it is a taxation contributed to the government coffers (still your money, just mixed with others). Here is a rough idea of the contributions towards a savings account and tax contributions of some countries:
Assumptions: a typical 30-year-old earning a monthly gross income of S$3,500 in the private sector. Annual income: S$42,000. All values are reported after applying exchange rates on the various currencies.
Exchange rates: SGD 1 = 2.56 ringgit = 6.25 HKD = 48.6 rupees = 4.98 krone = 0.74 Swiss francs as of 21 July 2014.
*: This figure is obtained through summations of employer contributions to the different aspects of the provident fund.
Table 1: Contribution Rates of Different Countries and Income Taxes. All sums used are annual sums for convenience with annual income tax values.
Here are two things I found interesting: with the exception of Switzerland, contribution to social security is rather low in Singapore! Even Norway, which has a large reserve of oil, demands that one pays their due in taxes!
If anything, perhaps the Swiss pay less (in taxes) for their “Swiss standard of living”. Maybe that was what then-PM Goh Chok Tong was hinting at?
Retirement adequacy comes in two forms: individual preparation and government intervention.
By saving, you save your own money; it is in your account and that money does not get redistributed. No one sees CPF monies all being pooled into a giant “National Savings” account for re-distribution.
Individual contributions encourage people to work for their future because every cent they make is owned by them.
Yet, it must be acknowledged that not everyone can make, in their working life, enough money to retire on. This is where the government intervention is needed. Redistribution to help the needy. Redistribution, in layman language means “robbing Peter to pay Paul”.
The question is: who pays significant tax?
The answer: only the top 31% of Singaporeans pay income tax!
In other words, redistribution happens from the top 31%, while those who do not pay income tax only receive benefits. These occur in various forms, ranging from CPF top-ups to GST vouchers.
If anyone wants to compare our system against a Nordic country’s, here is a list of questions and answers I’ve thought up:
Q: Why do Nordic countries spend so much on social security?
A: They have natural resources. They can afford by selling natural resources.
Q: Why can’t Singapore follow a Nordic system?
A: Nobody says cannot. However, if someone complains about having savings locked up, would one trust the G to tax fairly instead?
Q: Singapore is stingy on social security. Can we help more people by spending more?
A: Handouts will not solve the problem. Attitude will.
Q: Singapore has the GIC – why aren’t they contributing back to our pensions? It is my money after all!
A: But they are. Up to 50% of their investment returns get pumped back into the country. The amalgamated budget helps the government provided guaranteed interest rates to your CPF account. But please note that GIC does not pay directly into your CPF account. In fact, the GIC has nothing to do with your CPF money. When the G uses your money for investment, they park it with a whole bunch of other agencies, not just the GIC. Thus it is the Government that assures you of your rates and has direct influence on your returns.
Honestly, there I think there is never an answer to whether a savings-based or tax-based system dominates. Many countries make use of both instruments to work towards retirement adequacy for the majority. Naysayers can say plenty of things, but three important questions that remain for the reader, moving forward:
1. Do we trust that our system is good enough, moving forward? (No trust and we’ll just “hanta kaki” on the issue, no matter what policies get implemented.)
2. Is the G stretching each dollar to its fullest extent? (Why pay more tax if there is a more efficient way around spending money?)
3. Can we accept changing fundamentals that force rethinks in retirement adequacy, such as longer lifespans and global inflationary pressure?
Sources:
Provident Fund Rates:
Singapore’s CPF contribution: http://mycpf.cpf.gov.sg/Members/Gen-Info/Con-Rates/ContriRa.htm
Malaysia’s EPF contribution:
India’s EPF contribution: http://www.bemoneyaware.com/blog/epf/
Hong Kong’s MPF: http://www.mpfa.org.hk/eng/mpf_system/system_features/contributions/index.jsp
Switzerland’s pension funds: http://www.ipe.com/zurich-city-pension-scheme-confirms-unavoidable-contribution-hike/40042.fullarticle
Tax Rates:
Singapore: http://www.iras.gov.sg/irashome/taxcalculators.aspx
Malaysia: http://www1.malaysiasalary.com/calculators/income-tax-calculator.html
India: http://law.incometaxindia.gov.in/DIT/Xtras/taxcalc.aspx
Hong Kong: http://www.gov.hk/en/residents/taxes/etax/services/tax_computation.htm
Norway: http://www.davemanuel.com/2009/09/08/the-norwegian-tax-system/
Switzerland: http://www.estv2.admin.ch/e/dienstleistungen/steuerrechner/2013/zh.htm
Income Tax:
Income Taxes in Singapore: http://sghardtruth.com/2012/05/29/income-taxes-in-singapore/
[plinker]
