National savings plan could help low-income earners

PREPARE FOR THE FUTURE: PM Lee's National Day Rally speech on Aug 17 brought home the importance of retirement planning.


    Aug 25, 2014

    National savings plan could help low-income earners

    PRIME Minister Lee Hsien Loong's National Day Rally speech on Aug 17 brought home the importance of retirement planning. Considering Singapore's ageing population, his message would have caught the attention of many.

    As a country, we've done well over the past 49 years. Progress since independence has brought different challenges.

    One is the widening income gap. Success attracts skills and wealth, which keep us growing. And our safe and clean city is a favourite choice for many foreigners to come here to live or invest.

    The rising cost of living is a fair complaint - but that comes with an open, competitive economy that encourages high skills, talent and matching wages.

    This, however, makes it difficult for the older generation and the less capable to retire gracefully. Many are less educated, earning low salaries, and unable to move into more-skilled jobs that pay well.

    The Government has recognised this and come up with the Pioneer Generation Package and MediShield Life.

    At the rally, Mr Lee also announced extending the lease buyback scheme to four-room Housing Board flats. Putting on the hat of a financial planner, he spent some time on the challenges of retirement.

    The rise in living costs and a widening income gap are here to stay, as we progress to developed-nation status. Well-educated, highly skilled people earn high salaries, and the rich can leverage on their wealth to create even more wealth.

    This will continue to affect a section of society, especially those who are less capable. As a caring society, we should alleviate their burden.

    The Central Provident Fund (CPF) and retirement costs have been in the limelight recently. Some people have proposed that the amount available for housing be reduced to allow for more funds in later years.

    This idea has its merits, but funds drawn down for property need to be paid back with interest when the property is sold - in effect making it a form of investment.

    Still, property investment is cyclical and very much influenced by market forces. Reducing the quantum of financing available for housing makes for fewer options on where to live, but also lowers risks if prices fall.

    Whether housing is an effective hedge against inflation depends on global peace and our nation's continued progress.

    Another argument is for the Government to issue inflation- linked bonds.

    This may look like an attractive option, but it does not directly benefit the poor unless we place investment and trading restrictions on them. Both would have the effect of reducing liquidity.

    The biggest challenge is how to consistently generate returns that beat inflation. The amount of funds can be very large if there are no restrictions and we add existing CPF balances to it. When returns fall below the moving average interest rate, underwriting the shortfall will impact our Budget allocations.

    Some argue for higher interest on CPF balances. The CPF is already paying more than double the rate of the 10-year Singapore Government Securities bond yield on the first $60,000 in our accounts.

    Another group argues for more liberalisation for members to invest their CPF funds. This option is perhaps viable for a minority of members who are well educated and able to absorb losses.

    Returns are proportional to risks and, in practice, many members may not be able to do better. I have a colleague with an MBA who lost money during the Lehman Brothers crisis.

    Any effort to make retirement more comfortable for lower-income and less capable Singaporeans must be simple, sustainable and place responsibility on the individual.

    One suggestion is a national savings plan open only to low-income earners. It can also offer fixed-deposit options with attractive returns for savers to think long term.

    The maximum amounts saved can be capped at a reasonable figure. Both savings schemes can pay interest above what the banks pay and act as a good savings complement to the CPF.

    Annual income can be verified through the Inland Revenue Authority of Singapore database. Full-time housewives and aged parents may also benefit as relatives place funds in their names.

    To make it more equitable, the interest rates can be tiered on a sliding scale to benefit the really poor and elderly.

    While not quite like inflation-linked bonds, the purpose would be the same, without the onerous promise to match the inflation rate. It would offer better returns in simple banking terms to those in the lower stratum of society.

    Thrift and saving for the future should be encouraged - particularly among lower-income Singaporeans, to help them retire more comfortably and with greater peace of mind.