When I retire, I want to travel on cruise ships. I want to laze in the shade of a beach umbrella as I pretend to read a book while checking out one perfect human body after another. I also want to be able to do all this while I’m still relatively young, without being attached to an IV drip and carrying a colostomy bag full of my organic waste material. For that, I’ll need to make sure I can get some money out of my CPF when it’s time for me to retire! I wonder if other countries’ pension schemes are better off.
What is a pension scheme exactly?
A pension scheme is basically a source of income during retirement. While there are many different ways a pension can work, it is simply a method to ensure that even after retirement, we’re still able to have a decent living day to day.
How does it work?
In most countries, your retirement income comes from two sources. The first is a basic government funded scheme that gives all residents of the country a base income, regardless of how much they’ve earned in their lives. This is basically to make sure that no one gets left behind.
The second is similar to how our CPF works. Employers contribute a percentage of your wage to a fund that builds up over time. At retirement, you’re supposed to be able to get this amount back. Supposed being the keyword.
How does Singapore compare to other countries’ pension schemes?
The Melbourne Mercer Global Pension Index is considered an authoritative report in the study of pensions and retirement systems. It grades the pension scheme of countries around the world using three broad categories of “adequacy”, “sustainability” and “integrity”. In the latest report, released last year, the report found that Singapore’s CPF system is the best in Asia, and the tenth best in the world, beating countries like Germany, Ireland, USA and France.
Here, we look at the top 3 countries’ pension schemes, according to the Melbourne Mercer Global Pension Index.
Denmark
Denmark’s pension system is made up of several sources of retirement income.
You have a state pension, which is given to you as long as you are a Danish national, and have lived in Denmark for at least three years since you reached the age of 15. The longer you’ve stayed in Denmark, the higher your state pension.
You also have a compulsory labour market pension, which is contributed to by both you, the employee, and your employer. These pensions are given to your dependents should you die before retirement and also pay for a form of insurance should you be unable to work. I guess, in a way, it’s similar to how our CPF and the CPF Dependents’ Protection Scheme works.
Finally, there is an individual pension, which is optional. This scheme is up to you to set up with a pension company or financial institution to prepare for retirement.
Denmark is considered the best in the world by Mercer mainly because of their pension scheme’s “sustainability” rating. This is due to one main factor – the level of mandatory contributions that are set aside for retirement benefits. In other words, according to Mercer, what made Denmark’s pension scheme so good is the fact that Denmark’s mandatory contributions to the pension fund are fully invested to provide for future retirement benefits.
Interestingly enough, Singapore was the only other country to match Denmark in this factor.
Australia
Australia’s pension system is made up of two main sources of income. There is a means-tested age pension, which is determined by your income, assets and other circumstances. Where does this money come from? The government. How do they get all this money? Here’s a small clue. To qualify, like Denmark, you need to meet age and residence requirements.
The other source is a mandatory employer contribution that’s paid into one of several private-sector arrangements. As the employee, you have the choice of contributing to these same private-sector plans on a voluntary basis.
Australia has been improving their pension system every year. An increase in the minimum contribution rate from 9% to 12% was the main factor in giving them the highest score in the “adequacy” rating. This generally led to an increase in the minimum pension.
This is something Singapore could definitely learn from, as our “adequacy” rating is actually what brings our ranking down. In the case of Australia, a large part of their high adequacy rating is due to the first factor, which scales based on a variety of factors.
The Netherlands
Pension in the Netherlands is made up of two main sources. There is a state pension, which gives you a flat monthly payout once you turn 65. However, this amount is decreased for every year that you haven’t lived in the Netherlands.
The second is the labour-based pension, which is built up by the employer. Basically, your employer puts money on your behalf into a third-party pension fund. This is to ensure you will not lose your pension if your employer goes bankrupt. This contribution is mandatory, but the details differ from industry to industry.
The interesting thing about the Dutch pension system is that there is no minimum access age for the labour-based pension, which means you can get the money as soon as you choose to “retire”.
Hmm…
What about Singapore?
According to Mercer, Singapore rates very low on the “adequacy” rating, and here are the recommendations by the report.
- Raise the level of social assistance to the poorest, aged members of society.
- Increase the percentage of contributions required to be saved for retirement.
- Encourage non-residents to save for their retirement.
Now, while I think Singaporeans will generally agree to the need to help those aged Singaporeans who are struggling to meet the cost of living, I’m not sure if we’re ready to accept an increase in the percentage of contributions required to be saved for retirement, or open CPF to non-residents.
Are we as Singaporeans willing to bite the bullet in order to have better retirement security? Share your thoughts with us.