Reverse Mortgaging and why it failed in Singapore

Topics: Retirement, Central Provident Fund, Real estate Pages: 21 (5345 words) Published: October 5, 2014


3880B: Economics of Ageing
Reverse Mortgaging:
Why did it fail in Singapore?
Hew Shi Jun Victoria A0098871

1. Introduction
Population-ageing will be one of the most challenging social phenomena in Singapore, being one of the fastest ageing countries in the Asia-Pacific region. As post-war Baby Boomers turn 65 years old from 2012 onwards, Singapore will experience an unprecedented age shift. Over a quarter of the current citizen population will retire from the workforce and enter their silver years. Given low fertility rates below replacement rates and increased life expectancy, Singapore faces the prospect of a shrinking and ageing population and workforce. According to the Life Cycle Model (LCM), the young borrows, the working age saves and the elderly dissaves. With increasing share of elderly coupled with increasing life expectancy, elderly have to accumulate enough savings for their retirement during their working age years. There is an even greater need for females to do so, given their longer life expectancy. However, are Singaporean elderly financially prepared for retirement? And how does one go about assessing the old age income adequacy? It is not easy to measure as people have different characteristics and living standards are subjective. There are numerous measures of old age income adequacy in existing literature. One of which is the concept of Income Replacement Rate (IRR), which represents retirement income relative to pre-retirement earning. Generally, if retirees are able to replace 70% of pre-retirement earnings, they would be able to maintain their standard of living after retirement. (Scheiber, 2004 and McGill et al, 2005) Bear in mind that there are limitations in using IRR to measure old age income adequacy. For instance, an individual working full time with minimum wage may have 100% IRR. However, this does not necessarily imply a decent or comfortable standard of living. Nevertheless, this paper shall rely on the concept of IRR to measure old age income adequacy as it is a common measure and would facilitate easier comparison across different existing literature. Existing literature suggests that the current social security system of Singapore may be insufficient in providing for old age retirement. However, Singaporeans are asset rich and cash poor, with most of their assets stored in the form of housing. This asset can serve as a source of income in their retirement years and reverse mortgaging (RM) is one such method of tapping on home equity for financing retirement. Despite being able to tap on home equity to alleviate the financial burden for a retiree, the RM market has remained weak. Hence, this paper shall explore the possibilities as to why RM is unsuccessful in Singapore compared to other methods of monetizing home equity. Also, a comparative analysis will be done with other developed countries to understand if this problem is unique to Singapore. 2. Sources of income for the elderly

According to the 1995 National Survey of Senior citizens in Singapore, the most common sources of finance for the elderly Singaporean are the CPF and investments (25.7%), financial support from children (64%), personal savings and insurance (6.6%) and financial support from spouse (3.7%). Traditionally, the majority of elderly depend on their children for financial support. With trends of shrinking family sizes due to lower fertility rates, it will be difficult to obtain financial support from children in the future. Their dependence is likely shift to the government, placing greater fiscal pressure and may have significant impact on economic growth. As such, more emphasis will be placed on the Central Provident Fund (CPF). The government advocates for individuals to be independent in preparing for their own retirement so as to prevent disincentive to continue working and saving. Family should come in as a safety net; second line of defence. And if all else fails,...

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