Wednesday, 11 February 2015

Who's afraid of the Minimum Sum?

If you are earning at least $2500. 

On average. Over your entire working life. 

According to one report, young Singaporeans (in their 20s) earn an average of $3000.  Oh wait. That's wrong. It should be US$3060. Depending on the exchange rate used, that could be SGD3900 to over $4000.

Really? Young Singaporeans earn THAT much?

Yes. If you are a college graduate at least. That was the target group surveyed. (Still incredulous!)

OK. What if you are NOT a college grad? 

Can you meet the Minimum Sum with just your Special Account?

Assume the Minimum sum remains at $161,000 (effective July 2015) for a while.

Now, what kind of worker are you?

Model A: Low Qualification Casual Worker
This is a worker with no post-secondary education,
No bonus (12 mths salary a year), no increment, but still subject to CPF contributions. Starts working at age 20 until age 55.

Average Salary
SA at 55 (est’d)
No shortfall

You need to earn on average $2000 over the course of your working life (35 years from age 20 to 55) to meet the minimum sum. 

Model B: Post-Secondary Qualification (Casual Worker/contract worker)
Frequent change of jobs so usually no bonus. But also assumes no period of unemployment. Salary may rise and fall with change of jobs. Starts working at age 25. Salary is the average over the 30 years of work.

Average Salary
SA at 55 (est’d)
No shortfall
No shortfall
No Shortfall
*figure is lower than Model A because working life is only 30 years.

If you only start work at 25, you only have 30 years to meet the minimum sum. You might be able to make it with an average salary of $2600. Let's hope the extra years of studying pays off.

Model C: Post-Secondary Qualification (Full-time staff)
Few  change of jobs – assumes 13 mths of salary a year (one month bonus). Starts working at age 25. Salary increment every two years.

Starting Salary
Last Salary
SA at 55 (est’d)
No shortfall
No shortfall
No shortfall

Model A & B assumes an average salary throughout the working life of the CPF member, and assumes an employment “history” that may be quite normal for these workers – casual employment with frequent change of jobs. As such there is no guarantee of salary increment. And no bonus. (Is this usual?)

Model C is closer to the “traditional” model of employment – starting salary, regular increment, etc. But Model C is still very conservative. The increment is $120 EVERY TWO YEARS (is this considered conservative?). With this in mind, it would be clear that if the increment was every year, or the increment was higher, it is likely that all the scenarios in model C would meet the minimum sum.

However, it is arguable if the “traditional” model of employment will hold for very long. As it is, “life-time” employment has become an anachronism. “Long-term” employment now means 3 – 5 years. In the next 20 years, we may see employees being very mobile and employers having to be more aggressive in HR practices to hire and hold employees.

Then again, in the future, full-time/permanent employment may become rarer. Staff may be hired on a contract basis or a project basis, and there may be no need for employers to hold employees after the project ends. Employees have to show that they are still relevant to the company.

If so, Model B may be the more prevalent “employment” model in the future (say, 15 years from now?).

Currently, I believe graduates’ starting salary are at a minimum $2600 per mth (conservative), and they tend to be full-time or permanent staff. In model C, salaries starting at $2500 and above would not have a problem meeting the minimum sum. 

Assuming salaries for graduates will rise modestly, or even if it stagnates at current levels, Graduates should have no problem meeting the current minimum sum.

If the minimum sum rises to $200k at some point in the future, the starting salaries should rise to $3000 (in Model C) in order to meet the minimum sum. One survey found that young Singaporean Graduates make on average $4000 in their 20s. So no problem. For the graduates. Maybe.

The models show that if you are a low-skill, low qualification worker, you will have trouble earning enough to meet the minimum sum. About 700,000 workers currently make less than $20k per year. Or about $1670 per month (without bonus). These workers are projected to be short of the minimum sum by about $38,000 (see model A). 

[From a report:
The employment rate of Singaporeans aged 55 to 64 hit a record high last year, at 66 per cent, up from 65 per cent in 2013.]

Of course, employment and salaries for the individual are not static. Over time, salaries may rise or fall, or stagnate. Today, you may be part of the 700,000 with no income worth taxing. In a few years time, you may find yourself "promoted" to the rank of "taxpayer".

However, if employment trends change, then an assumption of a traditional model of relatively stable employment and a "career" path for employees, with starting salaries and regular increments may be unrealistic. 

Conversely, most Singaporeans (about 2/3 of each cohort) will eventually attain post-secondary qualification. Most will have tertiary qualification (about 60%) with a diploma or degree. They will be looking for PMET job vacancies. 

But if globalisation and computerisation, and automation (the second machine age) were to hollow out the middle management, will there be jobs for the M&E (managers and executives) in PMET ?

The problem is not the minimum sum. The problem is meeting the minimum sum. 

The argument against the minimum sum has so far been about avoiding having to contribute to a minimum sum at 55, for eventual payout at 65 via CPF Life.

The arguments have been short-sighted and self-serving - CPF members wanting to be able to access a larger piece of the pie that is their CPF savings.

However, the true problem is that if you cannot meet the minimum sum at 55, you would have difficulties at 65. Unless you have the good fortune to die before then. 

Moreover, the next generation will likely have more difficulties meeting the minimum sum, and more importantly being prepared for retirement.

Lower income workers will need more help.

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