Singapore’s pension plan is better than Switzerland

By October 30, 2017Current

TL;DR – It’s about adequacy, sustainability, and integrity.

Since 2009, the consulting firm Mercer has been calculating the Global Pension Index of 30 countries every year. In this year’s study, Singapore, with our CPF, has the best retirement income system in Asia.

Out of the 30 countries in this year’s study, Singapore was ranked 7th, ahead of New Zealand, Canada, and even Switzerland.

What does that mean? How is this index calculated? We unscramble the index for you.

Adequacy, sustainability, and Integrity

The index is made up of three sub-indices – adequacy of benefits, sustainability and integrity.

On Adequacy: The primary objective of any pension system is to provide adequate retirement income. Thus the sub-index of adequacy considers the base (or safety-net) level of income provided as well as the net replacement rate for a median-income earner. It also looks at the net investment return over the long-term.

On Sustainability:The sustainability sub-index brings together several measures that affect the sustainability of current programs. It takes into measures and government policy to tackle challenges posed by an ageing population, and the increasing old age dependency ratio. It looks at the level of funding in advance real economic growth over the long-term. It also takes into account the level of government debt.

On Integrity:The last sub-index considers the integrity of the overall pension system. It considers the role of regulation and governance, the protection provided to plan members from a range of risks and the level of communication provided to individuals. It uses the Worldwide Governance Indicators published by the World Bank provides a broader perspective of governance within each country. Lastly, it estimates the value citizens get from their pension plan versus the costs of the system.

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What does Singapore’s index mean?

The description of the sub-indices and Singapore’s relatively high score in the index suggests that the benefits provided by our system is quite adequate (65.2), and the system is quite sustainable (66.2), and has high level of integrity (80.7).

Over all, Singapore improved this year compared to last. This was a result of the government providing minimum pension top-up amounts for the poorest individuals, increasing flexibility in drawing down retirement pension amounts and raising certain contribution rates and interest guarantees.

The findings from this Mercer study is another piece of evidence that people who think that the Government is losing our CPF are wrong. On the contrary, Singapore’s system has been found to be quite able to meet the retirement needs of Singaporeans in the long term.

More importantly, the study suggests that our system is very resilient and provides significant protection for the retirement funds of Singaporeans. And we all do this at a relatively low cost.

Room for improvement

Of course, that’s not to say that Singapore’s system is perfect. After all, there are still six other countries that have done better than us. The Mercer study suggested the following ways to improve Singapore’s system:

  • Reducing the barriers to establishing tax-approved group corporate retirement plans
  • Opening CPF to non-residents (who comprise more than one- third of the labour force)
  • Increasing the labour force participation rate at older ages as life expectancies rise

Hopefully, we will continue to refine our system so that all Singaporeans will have enough to retire even as our population ages.

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Jake Koh

Author Jake Koh

Recovering sushi addict, I'm a man of mystery and power, whose power is exceeded only by his mystery.

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