In Career, Discussions, Discussions, Foreign, Money, Retirement

Would it be better if the government forced us to save 40% for retirement?

Nelson’s post about how we have a problem with financial literacy as a whole reminded me of something I had planned to blog about but never got around to.

“Maybe Singapore’s model can work in North America. The details can be found via this link, but the gist of it is that the government forces its citizens to save 40% of their wage (costs split equally between employer and employee) into their own retirement savings.

It not only creates huge amounts of capital for people to invest – hence, stimulating business – but it ensures that even if people wallow in debt their entire working lives, at least their retirement will be taken care of.

Yeah, the Singapore model is a little nuts, but there’s no doubt it has contributed to the success of the tiny country.”

After visiting Singapore, I came away with a few notes on how they live there, and in regards to what Nelson mentioned about the forced savings, their model is not perfect.

40% OF VERY LITTLE IS … VERY LITTLE

If you don’t make enough, 40% of very little = very little at the end.

Photograph-Singapore-Cobbler-Working-Man-Older-Career-Job

This would not be a problem if it were like in Canada, and you could leave Toronto and retire to a small little town with a very low cost of living.

Singapore is an island, and as a result, unless Singaporean retirees leave and retire in another country, they’re kind of screwed because of the outrageous cost of living.

(Although some have told me they would retire in Malaysia because it’s just across the border, but have ultimately decided against it because they’re not comfortable with the Muslim rule there  as sharia law is different from what they’ve been used to their entire lives, not to mention the higher crime rates, etc.)

Anyway, assuming they retire in Singapore and haven’t made a lot of money their entire lives, their retirement is not really taken care of in that sense.

A LOT OF RETIREES LIVE WITH THEIR CHILDREN.. IF THEY CAN

A lot of retirees live with their children and it is their children who take care of them. For those retirees who do not have children and/or have children but they are not able to (or don’t want to) take care of their parents, then they live on the streets.

I used to read this blog – A Singapore Taxi Driver’s diary, and although it has long been gone, the archives remain.


This one story he wrote about a Singaporean lady living on the streets really drove that point home that some retirees do not have the luxury of retiring because in her 70s, she was still collecting cardboard to recycle for money, and used to carry 50kg a day to do it until a kind soul started helping her with her load.

Photograph-Singapore-Recycling-Cardboard-Working-Man-Older-Career-Job

Not every Singaporean retires comfortably.

Some do it only by the grace of their children.

SINGAPORE IS NOT TOLERANT OF “OLD BLOOD” IN THE WORKFORCE

They also tend to fire people who are getting too old (over 40 heading towards 50 and you’re considered too old to work), so you don’t really have a choice to continue working until you croak if you don’t make a lot of money.

Many companies find ways to quietly usher you out and let in new (cheaper and hungrier) blood into the workforce, and oust you before your time, which cuts into your earning potential.

Unless you have a very good job that let you save a good chunk of 40% before you “retire” (or are forced to retire), you are kind of screwed.

IT IS NOT PERFECT BUT IT IS A BETTER SYSTEM IN GENERAL FOR THE MAJORITY OF CITIZENS

With those points in mind, this kind of Nanny State mentality is good for the majority of people.

I may have also read somewhere (or was told) that the government invests the money for you, so you don’t even have to worry about that.

I do really like that you save the money and it goes into an account linked to your social security number (?) and it is earmarked FOR YOU.

I find it a far better idea to track these kinds of savings to the individual than to just throw everyone’s government savings into one big pot and let people dip into it as they wish.

All that said, I’d rather live with the Canadian model than the Singaporean one, but that’s because I am in the minority of folks who cares about saving for retirement, and knows they can’t trust the Canadian government to take care of them.

As a side note, France has a similar sort of retirement plan but it all goes into one big unidentifiable pot; they tax you VERY heavily and then promise to take care of you when you retire, until you die.

Right now they’re saying the French government is running into a few little problems:

  1. Cost of living has gone up since francs converted to euros
  2. Retirees are living longer and therefore using up more of the money
  3. Not enough people are working to pay into the pot to replenish the cash
  4. What you contributed in the past few years has stagnated with a return of 0% which is suspicious but due to reasons #1-#3 (Have a French source on this who looks at their retirement slips)

In this respect, if you’re going to have a Nanny State, at least having savings tracked to each person a la the Singaporean model would have solved the issue.

WHAT RETIREMENT MODEL WOULD YOU PREFER?

SINGAPORE’S NANNY MODEL OR THE DIY NORTH AMERICAN MODEL?


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Sherry of Save. Spend. Splurge.

I got out of $60,000 of debt in 18 months using TheBudgetingTool.com. Since then, I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K (savings rate = 85%). I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I also post daily on Instagram @saverspender.

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32 Comments

  1. Ati Aziz

    For me having the balance between the mandatory savings and DIY investments works so far

    – In Malaysia 11% of our income goes to retirement fund, with 13% additional employer’s match. This has worked to my advantage because as my income increase, so does my (and my employer’s contribution). It’s nice to be able to look back after 4 years and saw, whoop, I have saved RM40,000! I wouldn’t be able to do that on my own I think… :p
    – Our money in retirement funds is split into 2 accounts; 60% of it we will not be able to touch until retirement age, 40% we can use for approved investments outside the fund or buying a house or education. So we do have some controls as to how the money is invested. But I don’t really plan to use it to buy house/education/medical.

    So while my money is automatically socked away for retirement, I can afford to take some risk with the paycheck that I receive every month to tweak around on how to manage it – I save some on my own, invest some, and spend some – doing it Mochimac’s way! 🙂

    PS: Regarding retiring in Malaysia, I think like Brunei the sharia law is being made to sound as if it’s larger that it actually is. Plus some of the religionists’ behaviour doesn’t help in painting the picture – but seriously, the law doesn’t go beyond the technicality of getting married/passing the inheritance upon death etc. We have some cases when it involves changing religion etc. but that’s the complexity that comes with multi-cultural society in an ever-evolving political and social system.

    I would change my religion too if I could but so far the system doesn’t stop me from being true to myself… Like you said, hind sight is always 20/20. 🙂

    Reply
    1. save. spend. splurge.

      The retirement plan in Malaysia sounds amazing. 13% match!? I also like that you can use the money (part of it) for a house or to go back to school. Automated savings really makes you save a lot more, that’s for sure.

      As long as your religion doesn’t stop you from being who you are, I say go for it. I rather like the idea of a community bound by shared values and while I myself don’t have that, I can appreciate it.

      Reply
  2. Charles@gettingarichlife

    Employers contribute 9.75% increasing to 12% in 2020. Earnings taxed at 10%, instead of taxed a regular income and capital gains at 15%. Employer contribution is pretax yet recipients withdraw the principal tax free (like our Roth IRA). You can’t withdraw the money until 55 regardless of the situation. Australia is now second in retirement security.

    http://www.forbes.com/sites/nextavenue/2013/08/19/to-solve-the-u-s-retirement-crisis-look-to-australia/

    Reply
    1. save. spend. splurge.

      I’m also assuming this employer contribution comes out of the salary a person would normally get, no? I wonder if salaries are lower as a result of this forced savings plan.

      I like it. It sounds very practical.

      Reply
  3. Jo

    I’m a Singaporean in my 20s, and have to agree with your take on the retirement system here and provide more information. It’s actually 36%, however in similarities to a US 401(k), it’s a 20% contribution from the employee, and a 16% match (albeit mandatory) from the employer. Some argue that the 16% match actually constitutes as part of the base pay you earn. I’m not sure if there isn’t the mandatory contribution if employers would still pay you that 16% though.

    In addition, the employee contribution is income-based, if you earn anything less than $500/mo, you don’t contribute. Income of $750/mo onwards is a full 20%.

    The actual retirement savings is only 6%, as the rest is earmarked for other purposes – 7% in a HSA, 23% in a normal account. The cost of public housing and cost of living is high, so most people rely on the funds in their normal account (that 23%) to ‘purchase’ an apartment, both for the downpayment and the subsequent mortgage payment.

    This is the norm here, and some people do not trust the government to manage their contributions wisely, feeling like their contributions are just ‘figures on paper’ and set out to spend it on as big an apartment as they can afford.

    Since the actual funds set aside for retirement is 6%, it’s not going to be sufficient for retirement without any additional savings on your own initiative.

    Reply
    1. save. spend. splurge.

      Thank you for the specifics! 36% is still a lot. 20% for us, would be a lot.

      I think that any time you get “free” money from an employer, it undoubtedly comes out of your base salary, although to benchmark this would be difficult.

      I am also sure that having money in the bank would make some people feel more comfortable rather than letting the government handle it, plus the culture is all about owning assets (hard assets) like property, right?

      Reply
  4. No Nonsense Landlord

    Definitely not in favor of mandatory savings, but there should be more education. and a smaller safety net.

    In the US, people that are broke get cared for by the Govt. People that save get it taken away.

    Reply
    1. save. spend. splurge.

      You know, having children learn early on what a budget is in school would be a much smarter idea than forcing them to save. I really wish I had been given money management basics early on.

      Reply
    2. save. spend. splurge.

      Oh and it’s somewhat similar in Canada — those who are broke are taken care of by the social $$ net in Canada, and those who save TOO MUCH for retirement, don’t get anything (or get reduced $$).

      Reply
  5. Nelson

    Hey, mucho thanks for the link.

    For me personally, I am opposed to the government forcing me to save anything. I’d rather not be forced to contribute to a pension plan that I’m not even sure will be around when it’s time for me to collect.

    However, there are a whole bunch of people out there who haven’t saved a dime for retirement and who won’t start until it’s too late. Those people need to be babysat. If the free market takes care of them (i.e., they move back in with their adult children), then I’m okay with this. You didn’t save? Not my problem. See if junior will make sure you don’t starve.

    But governments have a habit of giving assistance to these type of people. I’d much rather force everyone to save a higher percentage than have the tax dollars of those of us who took care of business used to bail out the people who saved nothing.

    Reply
    1. save. spend. splurge.

      I wouldn’t mind being forced to save if it was tied to my social insurance number and in MY name, not some big random melting pot, which I believe is the case in Singapore.

      I do have to say that even if you haven’t saved anything in Canada, you still qualify for GIS, no matter how piddly it is, it’s still something and you can move to the middle of nowhere and pay $200 in rent, surviving on oatmeal if you had to.

      ..and because of that, I do believe that JacqJolie once told me that if you save TOO much for retirement in your RRSPs and so on, the government lowers how much money they eventually pay out to you because you saved too much.

      Reply
  6. G
    GirlinaTrenchcoat

    I like the Singaporean model because it does help people put away money, more than they probably would on their own. However, I’m a little wary of the ‘nanny mentality’, because if the gov’t is taking care of your money for you that reduces some of the incentive to learn how to be responsible for your finances.

    The North American DIY model is my preference so I can better control what I do with the money, and well, if I screw up I can’t really blame anyone else.

    Reply
    1. save. spend. splurge.

      I’d agree with that. They also invest it for you and what if they lose it all?

      Reply
  7. Stefanie @ The Broke and Beautiful Life

    I don’t mind the DIY model, just because I have the discipline to save as much as I can. I also don’t know if I could live on only 60% of my income. In fact, I know I couldn’t.

    Reply
    1. save. spend. splurge.

      I myself prefer the DIY model as well but I can see the benefits of a nanny model.

      Reply
  8. DC @ Young Adult Money

    Well, I certainly would like the social security system changed here. I wish I could opt out but there’s few/no politicians willing to put together a plan to phase social security out.

    I don’t think I’d want the government to be in charge of retirement, though, as we’ve seen how horribly that’s gone here in the US with social security.

    Reply
    1. save. spend. splurge.

      Oh true. Social Security seems like a mess, just like in Canada. It’s a mess up here as well and a bit confusing.

      Reply
  9. K
    Kathy

    As an ultra-conservative/libertarian, I am usually very opposed to the government telling me what to do. HOWEVER I am also opposed to taking care of people who can, but don’t, take care of themselves. I would be somewhat willing to go along with mandated retirement savings above and beyond Soc. Sec. IF the savings are in private accounts which the government cannot get its’ grubby hands on. If the rate is 40%, though, most people couldn’t possible live on the remainder. Heck, most people can’t live on what the make while only paying into Soc. Sec. Then either wages and prices would have to go up, or the government would still have to care for these people anyway, and perhaps even sooner than at retirement. And I don’t suppose the answer is to simply let them starve would be very popular. 😉

    Reply
    1. save. spend. splurge.

      You are just like BF. He’s a libertarian as well and would hate such a system.

      40% is a lot to save for retirement. I can see their point but 20% would have been more reasonable..

      Reply
  10. PK

    The US model is… “we force you to save 15.3%, up to $117,000 per person” through Social Security – equally split between employer and employee (which, in theory, means it all comes from compensation, but I digress because Politics).

    I’d prefer a model like Chile’s – mandated savings, private accounts. I don’t know every detail about their model, but it is optional for contractors and soon to be required in 2015, and mandated for employees up to a certain monthly income. They have a fallback, too – if their old system (closer to Social Security) would have been worth more than the private account (for anoyone who contributed 20+ years), they will pad the gap… of course, that hasn’t been needed yet for anyone.

    40% though? Huge.

    Reply
    1. save. spend. splurge.

      It sounds like too much to me. 40% is a LOT. 20% would be a better amount, methinks, but Singapore has become very expensive to live in as of late.

      Reply
  11. A
    AdinaJ

    I think a Singaporean model, with the option to opt out, might work. A lot of people (probably the ones who SHOULD be nannied by the state) will not bother to opt out – apathy, ignorance, what have you. Then, anyone motivated to take control of their financial future, can. I like the idea that the money goes into YOUR name/pot, not a general one. On the other hand, I’m not sure i would trust the government to invest the money. However, they probably wouldn’t do a worse job than the majority of Canadians currently. So … yeah, interesting idea.

    Reply
    1. save. spend. splurge.

      The problem is everyone would opt out 🙂 40% is a lot of your paycheque to give up, and I am not sure people would be disciplined enough to give up 40% without a fight.

      Reply
      1. M
        Ming

        @save. spend. splurge.: Hmmm, I’m a bit confused by the claim that it’s 40% of the person’s paycheck, but it may be that I’m not understanding the system correctly, according to your post the Singaporean “government forces its citizens to save 40% of their wage (costs split equally between employer and employee)”. Does that mean that the citizens are forced to put 20% away and that employers also are forced to match that and pay 20% of that wage into retirement for the employees? B/c that sounds a little bit more reasonable and translates into the government forcing employers to care about their employee’s retirement. My limited experience is that employee matches in America are not as generous as 20%. Would love some clarification.

        Reply
        1. save. spend. splurge.

          I got the information from Nelson’s post!

          Please see the clarification comment from Jo who is an actual Singaporean, re-posted here for your convenience 🙂

          “It’s actually 36%, however in similarities to a US 401(k), it’s a 20% contribution from the employee, and a 16% match (albeit mandatory) from the employer. Some argue that the 16% match actually constitutes as part of the base pay you earn. I’m not sure if there isn’t the mandatory contribution if employers would still pay you that 16% though.

          In addition, the employee contribution is income-based, if you earn anything less than $500/mo, you don’t contribute. Income of $750/mo onwards is a full 20%.

          The actual retirement savings is only 6%, as the rest is earmarked for other purposes – 7% in a HSA, 23% in a normal account. The cost of public housing and cost of living is high, so most people rely on the funds in their normal account (that 23%) to ‘purchase’ an apartment, both for the downpayment and the subsequent mortgage payment.

          This is the norm here, and some people do not trust the government to manage their contributions wisely, feeling like their contributions are just ‘figures on paper’ and set out to spend it on as big an apartment as they can afford.

          Since the actual funds set aside for retirement is 6%, it’s not going to be sufficient for retirement without any additional savings on your own initiative.”

          Reply
        2. save. spend. splurge.

          (Oh and employer matches in Canada/U.S. are not as generous either. 4% is considered an amazing employer contribution match)

          Reply
  12. M
    Ming

    Have you read this book Nudge? It’s written by a couple of economists who propose the idea of libertarian authoritarianism. Nudge people to do what’s best for them while making it easy to opt out if you want your freedom. The book applies it to healthcare, retirement savings, food choices and is just generally fascinating. It’s written in a similar style to Malcolm Gladwell and there were several moments when I laughed out loud.

    http://www.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/014311526X/ref=sr_1_1?ie=UTF8&qid=1398254602&sr=8-1&keywords=nudge

    Reply
    1. save. spend. splurge.

      I have not read it but thank you for the recommendation. I’ll check it out!!

      (I LOVE Gladwell’s books)

      Reply
  13. M
    MelD

    I just wonder what system will work best as the work force ages and have not yet reached any true conclusions. As in education, probably no system is perfect.

    Slightly OT, you might enjoy the Shamani Flint Inspector Singh stories that are set in/around Singapore (or not, but hey, I did!).

    Reply
    1. save. spend. splurge.

      I will check them out, thanks!

      Reply
  14. Charles@gettingarichlife

    What about the Australian model? It seems they have a much better retirement security than we do. It’s in between the Singaporean and Canadian style.

    Reply
    1. save. spend. splurge.

      What is it, in brief?

      Reply

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