Here's why young Singaporeans won't freak out in retirement

Male and female workers will hit 71%, 63% IRR through savings.

According to DPM Tharman Shanmugaratnam's published speech, yougn Singaporeans joining the workforce will have accumulated savings that provide a comfortable level of income in retirement, a level equal to a large part of their pre-retirement income.

Here's more from DPM Tharman:

Based on a study commissioned by MOM, the median male and female earner entering the workforce today will be able to achieve an Income Replacement Rate of 71% and 63% respectively through his/her CPF (Central Provident Fund) savings. These rates are within the World Bank's recommended range of 53% and 78%.

The study found, taking all the features of the CPF system today, that young Singaporeans joining the workforce will have accumulated savings that provide a comfortable level of income in retirement, a level equal to a large part of their pre-retirement income.

Economists measure retirement adequacy of social security systems by using what we call an Income Replacement Rate or IRR for short. The IRR is defined as a ratio of retirement income to pre-retirement earnings.

The study’s aim was to estimate the IRR using all CPF savings accumulated by a member up to age 65, including savings above the Minimum Sum which the member has the option to withdraw.

The study found that before taking into account the benefits that Singaporeans get from owning a home, i.e. if we just look at cash savings in the CPF, the median male earner entering the workforce today will be able to achieve an IRR of over 70% (71%) through his CPF savings. For a female median earner, the IRR is 63%.

These IRRs are within the recommended range by the World Bank, which is between 53% and 78%2. They are also comparable to those seen in pension systems in many developed countries. The equivalent IRR in the median OECD country is 66%; the average amongst OECD countries is 72%.

However, the IRR is even higher in Singapore when we take into account the fact that most Singaporeans would own homes that are fully-paid for by the time they retire. By not having to pay for rent, cash is freed up for other living expenses in their old age. Further, if a member so chooses, he could also monetise the value of his home, for example by moving to a smaller home.

The IRR then rises to well above the 71% figure that reflects only his savings accumulated in CPF. For higher-middle earners, the study found that the IRR attained was lower. This is to be expected as the CPF system was designed with the retirement needs of the middle and lower income earner in mind, and high income earners have private savings.

For lower income earners, the IRR attained was higher at about 81%. In fact through Workfare, which supplements the wages of our lower income earners, the IRR is boosted even further – from 81% of pre-retirement wages to 93%. This is above what we see in many developed economies.