Everyone Can Save 35% of their income

Canadians, you know how low the national savings rate is supposed to be.

Americans, your savings rate might be the lowest in the developed world.  … read more

Singaporeans…you save at least 35% of your salaries…every year.  And unlike the Japanese, you don’t let your money sit idly in simple savings accounts.  Yours gets invested.  Should North Americans follow your lead?

The high savings rate in Singapore is a result of the government’s foresight, when creating The Central Provident Fund

It’s a bit like an American 401K or Canadian RRSP—on steroids.  Singaporean employees invest 20% of their annual salaries.  It’s mandatory.  There’s no option.  Then the employer contributes a further 15.5%, putting the combined annual savings at 35.5% annually.

The money can be saved for retirement, where the government offers a guaranteed percentage each year.  Currently, that percentage isn’t high, but it’s guaranteed, and doesn’t generate taxable consequences.

Citizens can also use their CPF money to purchase homes.  Partly as a result, according to a speech given last year by Singapore’s Prime Minister, Singapore has one of the highest rates of home ownership in the world, at roughly 90%.  …read more

Some of a citizen’s Central Provident Fund money can also be used for Asset Enhancement, where investors can allocate their money towards Insurance, Mutual Funds, ETFs, Fixed Deposits, Bonds, Treasury Bills, Individual stocks, and Gold.

No country is perfect.  But with a balanced budget, despite no natural resources, this virtually debt-free country has set a precedent that many other countries could follow.  Putting Singapore’s wealth in perspective, it’s a country of just $4 million people.  But only 12 countries in the world own more U.S. Treasuries than Singapore does.  …read more

And per capita, the Singaporean government owns 104% more U.S. government debt than China.

With their forced savings plan, could this wise, forward-thinking government be on to something?

What do you think?  Could Canadians mandate an annual RRSP contribution?  Would it help?

And could Americans do the same with IRA, Roth IRAs and 401Ks?

Or does a personal forced savings plan, mandated by the government, strip an important level of a citizen’s right to choose?

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

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25 Responses

  1. This was actually thought of in Quebec:

    The study calls on the government to set up a mandatory RRSP-style plan (Registered Retirement Savings Plan) for Quebecers over the age of 35 who are not covered by a corporate pension plan.

    The government will not be proceeding with this recommendation…

  2. Robber Baron says:

    Slicing off another 10 or more percent of the gross pay from most families would spin the economy in a crisis. Already too many families are living pay-check to pay-check, or worse, on credit.

    Not that these forced pension programs aren't a good idea (though most N. Americans object to more government intervention in their right to choose). It simply requires a huge re-think of society and the economy.

    On a personal level, though, we should be saving more. Remember the old "Christmas Club" programs at banks, where you signed a contract committing to deposit a certain amount each week or payday, else lose all interest (and maybe get stuck with some penalty)? As horrific as these sound on one level, the idea that "you have to" is really a necessity for many savers. Employer-managed plans, then, where the money comes out of the paycheck (Electronic Funds Transfer, nowadays) before you see it is really useful.

    How many employers offer this service where you live?

    • Hey Robber Baron,

      I wonder if they could start off taking 1% of a person's salary, and getting the employer to match it. Then they could build it up to 10% over 10 progressive years.

      If you drop a frog into a pot of boiling water, it will immediately jump out right away. But if you warm that pot slowly, the frog will never leave the pot, supposedly…I haven't actually tried that with a cross section of frogs, so I can't be 100% sure.

  3. Robber Baron says:

    Add — I'm ashamed to admit this, but when I was younger I had my employer withhold a higher amount of tax than necessary. Each year after tax filing I got a healthy check from Uncle Sam. Forced Savings, No Interest. But I would have wasted that monthly (beer, etc), instead I got a check in May which I immediately dropped into long-term savings. All because my employer wouldn't offer a pension program of any type.

    • Hey Robber Baron:

      I did something similar once. I didn't mind paying more tax upfront, and then getting a nice rebate cheque when I filed my taxes. I think I was about 20, and it didn't take me long to figure out that there were more efficient ways of building weatlh. But it wasn't that bad, in many ways.

  4. I think most people would barely notice a mandatory 10% savings rate, which is why I'm such a huge advocate of paying yourself first.

    Ultimately though, I'm a believer that people should have the choice to save or not save. Government pension plans ensure seniors don't starve, if someone doesn't contribute enough to their retirement then that should be their problem.

    Generally though, a high savings rate is beneficial to a country. I'm not sure what the answer is.

  5. Hey Uproar,

    If you feel that it's likely beneficial to try, do you think the government could step up to develop it, incremently?

  6. The Dividend Pig says:

    I doubt that kind of paternalism will ever be enforceable in America. There is to much opposition here to "big" government.

    I do think people have the right to choose, but I don't think they deserve the right to choose, then the right to demand action. The US gives us the freedom to decide whether or not we save, which is great. The problem is then the non-savers want all their health-care covered, higher social security, and lower taxes. It doesn't work both ways.

  7. Interesting post.

    I actually have a post coming up myself related to this topic, I've tentatively entitled it "Carrots and consequences".

    I'd absolutely love to see some sort of forced savings plan here in Canada, a mandated RRSP or TFSA contribution. The mandate wouldn't tell you what to invest in, but it would mandate you HAVE do invest money.

    Even a 5% rule of gross income, with a few exclusions, would be great.

    Stay tuned for my post 🙂

  8. I'm looking forward to your post Mark. Do you think an initial 5% would work, or would the government need to set the contribution percentage a little lower to start with?

  9. Mike Holman says:

    I'm 100% against more mandatory contributions.

    Canadians are already doing a lot of this – the CPP is basically a 10% contribution plus a portion of all taxes goes to OAS and GIS. Let's just conservatively say we contribute 15% right now.

    As Financial Uproar (FU) said, the current programs ensure that seniors can survive ok. That's good enough.

    Why mandate more contributions? If people want to contribute more, they can – if they don't, they won't starve.

    What about Singaporeans who don't work? Who looks after them?

    I think your gradual implementation suggestion is more like slowly lowering the frog into boiling water. 😉

    • Hey Mike,

      Perhaps a true-blue Singaporean will be able to set me straight on this one. But from what I understand (I've lived here as an expat for 8 years) this is what happens with unemployed workers:

      1. There is no welfare or unemployment insurance. When I ask locals what they would do if they lost their jobs, they have said, "Live off my savings until I find another job."

      When I have asked them what they'd do if they ran out of savings to live off, they have said, "A family member will help me."

      Our society in North America is very independent. In Asia, Filial piety ensures that a family sticks together during times of duress. The burden is shared among family members instead of by the government.

      2, There are no homeless people in Singapore. From what I understand, if somebody starts showing up on a street corner with a tin cup, the authorities sweep in, provide temporary shelter for that person (assuming no family member can help them) and they give them a job so they can get back on their feet.

      Perhaps a real Singaporean can help me out with this or set me straight, if need be.

  10. Nataliee says:

    This is a very informative and interesting post and I can already see the heated debate going on. For sure Andrew, you know more about the CPF than I do.

    I'm not sure of the retirement plans in Canada or the US but as a Singaporean, I am thrilled and contented to have the CPF plan in place a.k.a. forced savings plan 🙂

    I purchased my house when I was 22 and I definitely do not have 25k cash to pay for the downpayment but yes, I was able buy my first house as my CPF account has accumulated more that. I finance it monthly with my CPF as I have monthly contributions into the account as long as I'm working.

    I also used the CPF to pay for my doctor's fee and hospitalization expenses when I gave birth. I didn't have to withdraw funds from my personal savings to settlle the bills.

    My spouse is not Singaporean thus he only started having the CPF when he obtained the PR status last year. Prior to that, he doesn't have 20% of his income deducted monthly. The government does it's job to help cushion off this effect. The contribution rate is 5% for the 1st yr of obtaining PR, 15% on the 2nd yr and the mandatory 20% from the 3rd yr onwards. Clever.

    I agree that the cost of living is high and there are already too many families living on a paycheck to paycheck senario and are debating the mandatory rules of forced savings. Most people do not save saying it's too difficult but since it's mandatory, they don't have the luxury to choose and that is for their own benefit too. The way I look at it – the government is trying to help individuals like me save for my own future, so that I can afford my own housing, medical expenses and of course for retirement. 🙂

  11. Hey Nataliee,

    I'm loving your comments! Thank you for giving this blog a Singaporean voice. Please feel free to comment as much as you like…while asking any question you like. Others will find it interesting and in many cases, educational!

    Thank you!

  12. The danger in a larger country is that the large base of savings could prove very tempting for politicians looking for new sources of funding. Unlike a smaller country like Singapore that has to answer to the outside world and could more easily see people and capital flee, the larger countries would find much of this money captive, and therefore these savings would be an easy target. Many of the current memes of the West go against savings, anyways, such as the belief that savings reduces the standard of living by harming the economy. 😉

    I think the government does have an active role to play, however — it should stop encouraging people to go into so much debt in the first place. Low interest rates held there by central bank policies drive up asset prices by encouraging people to borrow more. I'm not so sure it's solely a coincidence that housing prices in Canada have shot up so much and interest rates have plummeted at the same time. The government has taken some timid steps by reducing the amortization length and things like that but that's not going to help the people currently "fooled" by low rates into buying more than they would otherwise. Even if prices don't drop, being "house poor" is no fun at all.

  13. CFL says:

    I like this idea as many Canadians aren't realizing how important planning for the future is. The government is to busy buying fighter jets, but should be continually promoting the importance of financial literacy and its relationship to long term financial well being.

  14. Hey Andrew,

    Just posted my take on this subject, "Carrots or consequences" 🙂

    I would be interested in your perspective!



  15. Nataliee says:

    Hi Andrew,

    There are many homeless people in Singapore. It's a matter of whether they get noticed or not. They sell their house to clear debts or make quick money and again, this is because of financial illiteracy and poor planning.

    Though some receive help from family members, I believe Singaporeans are not very fillial piety like it used to be. More people believe that each individual have to be independent and survive on their own two feet.

    To answer Mike's question, the government looks after the needs of elderly non-working Singaporeans by issuing vouchers to purchase groceries and necessities.

    The are also agencies which offer services such as counselling and further financial assistance. But if these elderly citizens have children then I believe the children must look after and honour their parents.

    As for those young Singaporeans who doesn't work, they lead a difficult life and are just aimless (which is something they choose) and nothing will change unless they decide to work and earn a living.

    There's plenty of help to upgrade skills through courses which are heavily subsidized by the government so there is not a reason for an abled Singaporean to not have a job.

    • Hey Nataliee,

      Singapore, considering that it's such an amazing place, may have given you a different cultural view of what it means to be "homeless", compared to many North Americans' view. Friends in NA can correct me on this, but our perception of a homeless person is typically someone with a tin cup, sitting on the street with a sign that says, "I need money to eat"

      Your perception of a homeless person is someone who:

      "sell their house to clear debts or make quick money and again, this is because of financial illiteracy and poor planning."

      I think that the fact that Nataliee sees it this way is testimony to what an amazing country Singapore is. Singapore truly is a one-of-a kind place. In my eight years in this country, I have probably seen viewer than 5 seemingly homeless people. That doesn't mean that they aren't around. But my sense is that Singapore may have the lowest number of homeless people, compared to all other large cities.

      • Nataliee says:

        Hi Andrew,

        Thanks for enlightening me. I've just learnt another meaning of 'homeless' as per viewed by NA. It's interesting what a simple word can mean.

        I do agree that there aren't that many homeless 'I need money to eat' people in Singapore. There's many areas which Singapore as a country can do better by seeing what is done in the other counteries but going back to the topic of this blog post,

        I'm definitely in favor of the mandatory savings (CPF). And the idea of the employer contributing 15.5%. But then again, there is no CPP or anything like that in Singapore which the employer have to contrubute to other than the CPF.

        • Clint says:

          Kinda late, but to provide a little more clarity on homelessness in NA: typically unusually hot summers and cold winters will show up in death rates, especially of states with high homelessness like Utah. If you have a shelter to survive a cold night whether or not that shelter belongs to you (through ownership, lease, or gift say from family friend or church) you are not homeless.

  16. Steve in Oakville says:

    I'm really mixed on the concept of forced savings. In Canada, as Mike Holman noted, we already have CPP which is designed as a government sponsored pension plan. It involves mandated contributions by the employee up to about $2100 per year that is matched by the employer. It's definitely not as flexible as the plan you describe in Singapore, but we also have the optional Tax Free Savings Account which can be used for whatever we want but has strict maximum levels.

    I certainly don't think the employer should be adding 15% to the tab of hiring an employee for a savings program. As an owner of two small business, there's simply no way I could pull it off. I'd simply hire less employees or pay everyone less. And I'm not sure what that gains. On the other hand, if there was no Employment Insurance or Canadian Pension Plan that I was contributing to, maybe it would make sense and be cost-effective. I think Canada needs to look carefully at all other countries see how they're managing these issues.

    From a philosophical standpoint though, I'm more supportive of programs that add incentives to support savings (RRSP, TFSA) rather than mandate savings rates. Governments have the ability to persuade the public by making certains courses of action more attractive than others. I'm not sure forced savings is necessary, nor ideal.

  17. Hey Steve,

    As always, it's great to get your perspective. Plus, as a business owner, you shed some additional light on the issue. I don't know how it works in Singapore, relating to the government, potentially, assisting the businesses with some of that contribution money up front. I really don't know.

    As for incentives, I suppose that might be a better option than making it mandatory. Or how about this? A smaller, mandatory amount that must be saved, and then added incentives to invest more. That might be the middle of the road solution that covers both ends of the debate. What do you think?

  18. dgwg says:

    There should be higher premiums for the Canada Pension Plan as a start.. Why not REDUCE TAXES, How about giving back the Investment Income Tax deduction and Senior citizen tax deductions which were stolen years ago. The government should have raised the amounts that go into CPP program decades ago. Of course, governments are terrified of asking the public to put more in. At the same time one commenter suggested that it might just appear as another way to fleece the Canadian taxpayer through bogus demands for more funds to cover some new 'stupid' plan. If 58% of Payroll Association polled responded that they would be in a trouble if their two week check was delayed or not available, I do think that there are a lot more serious financial concerns out there which many do not realize. Anything that would help the average wage earner would be beneficial. It is obvious that watching federal, provincial and local governments squander literally billions of dollars that there is a critical need for better ways for the average earner (if there is such a thing) to plan for the future.

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