Higher CPF Minimum Sum

The CPF Minimum Sum has been raised again, this time to $139,000. The reasons given by the government were rising life expectancy and inflation.

I am of the view that the CPF Board needs to find additional ways of dealing with the inflation problem. Minimally, there should be changes to the CPFIS rules to allow members more freedom to pursue investment goals that are consistent with higher rates of inflation.

For example, since inflation is a problem and since we have a negative real interest rate environment, why is the maximum gold allocation only 10%? How is that going to protect the other 90% effectively?

I would contend that the current rules effectively drive people into real estate, and serves to prop up prices in that market. Such policies which encourages a misallocation of capital should be stopped. Otherwise we will see a retirement crisis in the not-too-distant future, as I had previously warned of.

Thoughts on the Budget

Having listened to the Budget Speech in its entirety over the radio yesterday, I came away with the feeling that there was very little new thinking in it, apart from what I believe is a structural shift towards greater welfare spending, the latter being an acknowledgement of the inevitable reality of our aging population, the magnitude of which most Singaporeans seem to have yet to grasp.  The government appears to be giving what the people wants - more welfare.

While there were targeted measures to help the poorer segments of the population cope with inflation, nothing was done to address the fundamental causes such as the rapid growth in M3, reliance on real estate speculation to create the illusion of wealth and the impact of such speculation on rentals and other overhead costs for businesses.  Furthermore, I could not find anything in the Budget that was aimed at preparing the country for the energy transition that will be coming our way within the coming decade.  But on this point, I am less disappointed since the awareness of an energy crisis is not mainstream.

SDP's so-called Shadow Budget

Notwithstanding the above, I also found the SDP's attempt at gaining credibility rather amusing.  Based on what I saw on my Facebook news feed, SDP supporters were busy hailing its budget proposal as a breakthrough in thinking.  There were even claims that it must have caused considerable distress to and panic in the PAP government.  So I went to the SDP website to have a look, and came away thinking that SDP supporters must have been drinking too much of their own Kool-Aid, just as they have accused government supporters of the same.

The idea that “[o]ur re-prioritized spending is to benefit the people rather than the PAP” is nothing more than the stale idea of welfarism that has been practised in the West for the past 60 years.  There was absolutely nothing original in the SDP's shadow budget.

As much as the SDP harps on about the tyranny of the PAP government and how it will offer freedom, the fact that it has proposed a budget similar in size to the government's last budget show that the party has no understanding of the concept of freedom, since it feels that the need to maintain the power to allocate the people's wealth as it feels fit.

The idea of bio-fuels as an alternative industry shows that the SDP's energy literacy is very low.  If it had done a simple search on websites like theoildrum.com, it would have discovered that bio-fuels is a total waste of time.

Furthermore, its proposal to cut defence spending shows that its geopolitical sense is very poor, unable to see beyond the pleasant rhetoric of the diplomatic pronouncements of countries in our neighbourhood to discover all the undercurrents in foreign relations.

Paying you with your own money

The other irony in all these is that while the critics of the PAP government accuse it of using an 'election budget' to buy votes, opposition parties such as the SDP are basically doing the same thing with their emphasis on greater social welfare spending.  They should perhaps read 'The Law' by Frederic Bastiat to see the beam in their own eyes, rather than harping on the speck in the PAP's.

If you are interested in learning how politicians of all stripes strive to bribe you with your own money, I'd suggest reading this article: The Sad Road to Socialism.

Beware of politicians bearing gifts, especially dumb ones.  Otherwise, regardless of how much reserves we have, we will be voting ourselves into national bankruptcy in our love for welfare handouts.

Immigration and the Coming Retirement Crisis

I was prompted to write this blog post because of 2 things:

1. Reading Prof. Vaclav Smil's book entitled Global Catastrophes and Trends: The Next Fifty Years; and
2. Reading commentary on an anti-government website attacking MM Lee's misguided population and eugenics policies for causing the precipitous decline in fertility rates.

Prof. Smil, citing other population studies, noted that there have been no instances of a country whose fertility rate, having fallen below 1.5, had recovered back to replacement levels, irrespective of pro-natal policies. Given that Singapore's fertility rate has fallen to 1.06, it would appear to me that the country has gone way past the 'event horizon'.

If the examples of other countries do indeed show that the fertility decline is irreversible, then it would seem that an aggressive immigration policy aimed at sustaining economic expansion would make a lot of sense. This brings me to my next point.

Policy Failures

That the previous population policy was wrong and had resulted in the current fertility problems is well-known and widely-accepted. Even former top civil servant Ngiam Tong Dow acknowledged as much in his post-retirement speeches and writings. In addition, our failure to raise economic productivity rates is also well-documented and known to anyone who has studied the history of economic policy in Singapore. The flip-side of this failure is an inability to wean employers here off from reliance on cheap foreign labour to sustain economic expansion. This was mentioned in Ngiam's latest book entitled Dynamics of the Singapore Success Story.

Given these facts, the opposition parties and their supporters are not wrong in pointing out that the PAP government's policies were the cause of the current problems. However, my quibble is that pointing out who was at fault does absolutely nothing in terms of finding a solution to the problems.

No Painless Solutions

As far as I can tell, there are 3 possible solutions to the population problem. The easiest is to aggressively import people into the country, which most Singaporeans consider undesirable for various reasons. The second way is to try to encourage more people to have more children, which has been tried with arguably no success.

The third way is to raise productivity, which has also been tried with limited success. If we were to pursue this policy aggressively again, this means cutting off the supply of cheap labour to local employers in order to force a restructuring of their operations and business models to take place. In theory, this will bring severe short-run pains in exchange for longer-term growth in productivity by changing relative input costs and encouraging longer-term capital investments aimed at raising efficiency. This is a course of action that I personally favour. However, given how indebted many Singaporeans are, my question to my fellow citizens is this: Can you take the pain without severely negative financial repercussions?

Retirement Crisis

As I have argued elsewhere on this blog, given how most Singaporeans have over-spent on real estate using our CPF money, we need to sustain Singapore's resident population at current levels in order to prevent a cataclysmic decline in real estate prices. Raising economic productivity allows for growth with a lower population, but this method does not prevent a collapse of the real estate market arising from a lower demand for housing and commercial real estate. Furthermore, even if there is good productivity growth, there is no guarantee that the fruits of such growth will be shared equitably between employers and workers. This could then be yet another impediment towards workers saving adequately for retirement while paying off their mortgages.

Face the Contradiction

Given the bind that we are in, Singaporeans need to recognise the contradiction in our wanting to restrict immigration, and our desire for high real estate prices to fund our retirement. If we are serious about finding a more sustainable solution to the immigration issue, we need to also make attendant adjustments to the way we spend on real estate, our current consumption habits and become more aggressive in saving for retirement. Merely demanding that the government do something about the problem will not change the fact that a lot of us have planned for retirement using assumptions about real estate prices that are contingent upon high levels of immigration.

My Outlook for 2011

After an eventful 2010, I believe that 2011 will bring even more surprises as we move into the next phase of the global financial crisis. Here are some of my thoughts on what could be important issues for the year:

Sovereign Debt Crisis

With credit spreads of the PIIGS countries near record levels, I believe that the market will start to recognise that the debt problems of the EU countries cannot be resolved without either outright default or being inflated away through debt monetisation. I also believe that the US and China's debt problems will start to appear on the radar screens of more investors, and that there is a small chance of them being blown up to full-scale crises. All these will make investing very 'interesting' in 2011, to put things mildly.

Singapore General Elections

While I am not able to foresee whether there will be significant changes to Parliament following the next GE, I believe that none of the long-term problems facing our country will be tackled irrespective of the GE results. As I have previously mentioned, I don't believe that any of the opposition parties have any clue about the serious external threats that Singaporeans will have to deal with in the next decade. As for the PAP government, since I am not privy to what goes on inside the system, I can only say that the outward signs are that no one there appears to be willing to discuss the same long-term threats as well. As such, as far as I can tell, the next GE will not have any direct bearing on those long-term issues.

Retirement

Singaporeans will continue to ignore the looming retirement crisis by over-spending on real estate and cars, while at the same time complaining about the high cost-of-living in the country. We will raise concerns about foreigners taking away our jobs but at the same time fail to realise that this heightened job insecurity situation is at odds with our willingness to commit to 35-year housing loans in order to have the old stereotypical 'good life' of living in a private apartment. Those under 40 will continue to display an ignorance of the virtues of thrift. Many will seek to maintain their standard of living by spending their parents' wealth, thus endangering the retirement savings of the latter. The harsh reality of diminished future prospects due to greater global competition will continue to be ignored.

Inflation

Short of a wholesale deleveraging like what we saw in 2008, where investors sold every kind of risk assets, there is a good chance that oil and food prices will continue to move higher given the supply and demand fundamentals of these markets. Furthermore, if China continues to refuse to let the RMB appreciate against the USD, MAS could be forced to continue letting our money supply grow at high single-digit rates as the US Federal Reserve continue its money-printing and debt monetisation schemes (a.k.a. 'quantitative easing'). This will contribute to higher inflation rates and perhaps inflation in some local asset markets. Singaporeans will complain about the inflation but will do nothing to deal with the issue, preferring to blame the government and ignoring the power of our own behavioural choices.

Self-reliance

PM Lee's New Year's Day message contained a call to 'strengthen the spirit of self-reliance among Singaporeans'. I believe Singaporeans will continue to bitch and moan against the government whenever we are unhappy with things, and prefer to see ourselves as victims rather than do the adult thing of taking responsibility. And because of this, very few people will be interested in preparedness.

Have a joyous and peaceful 2011!

Negative Real Interest Rates

A survey of economists of next year's CPI inflation expectations by the Monetary Authority of Singapore showed that inflation is expected to be around 2.9% for 2011. What this means for the typical Singaporean saver is that it could be yet another year of negative real interest rates for his hard-earned savings.

Faced with such a situation, any saver who is serious about protecting his purchasing power will likely be forced to take some risks in having to invest in riskier assets such as bonds, stocks and other asset classes. This also makes saving for retirement more complicated, since CPF interest rates for the Ordinary Account is below the expected rate of CPI inflation.

Also, if home loan rates remain roughly around current levels, the negative real rates may also encourage further price appreciation due to speculation, and this could force the government to come up with another round of measures to cool the property market.

In a negative real interest rate environment, my view is that gold and silver will continue to do well in SGD terms, although likely combined with very high volatility in these 2 markets. As such, it seems possible that next year, just like the current one, savers wanting to protect their purchasing power will have to stomach higher volatility. The faint-hearted are destined to see the value of their hard-earned money erode.

This is most unfortunate. I feel that savers should not be penalised like that. But my opinion on this matter is irrelevant. We just have to be prepared.

Raising Retirement Age in Singapore - Structural Issues

In PMO Minister Lim Boon Heng’s trial balloon about the need to raise the retirement age to 68, he used the example of Finland which faces a similar aging population problem. Let us look at why the example of Finland is not useful for Singapore as well as the other structural problems in our country that makes the raising of the retirement age an ineffective means of dealing with the inadequate savings problem.

We Lack Finland’s Strengths

In Finland, as in most other developed countries, quality control of both long-term and short-term immigrants is fairly robust, and immigration policy is tailored towards enhancing the well-being of citizens. In contrast, our government’s overwhelming concern is in this area is for economic growth, achieving through the use of foreign labour to lower costs for employers.

In addition, Finland is also an innovation-driven economy (see Michael E. Porter’s Competitive Advantage of Nations) where its companies can produce goods and services that have pricing power. On the other hand, the short-term growth focus of our economic policies for the past 20 years (since Prof. Porter’s book was published) has resulted in our economy being stuck at the ‘factor-driven’ stage, dependent on containing costs to satisfy the profitability needs of multinationals and local companies.

Thirdly, Finland has evolved a social compact where citizens and companies share both the burdens of their welfare state and the benefits thereof. On the other hand, Singapore citizens are told to fend for ourselves due to the risk of companies packing up and moving to cheaper locales. Clearly, the social glue that is present in Finland is not found in Singapore.

Given the aforementioned, it is reasonable to believe that raising our retirement age to 68 will not result in higher employment for older, less productive workers.

Other Structural Problems

The biggest structural problem that I can think of now is the high cost of housing in Singapore. In the recent decade (at least), HDB has allowed the pricing of its flats to move with fairly high correlation with the price movements in the private property market, thus deviating from its mandate of providing affordable housing to citizens. With prices rising faster than salaries, this means that CPF savings that can be productively invested elsewhere in the economy has been used up to pay for housing. Furthermore, as the US housing bubble shows, depending on the value of one’s home for retirement can result in a lot of grief, since it is premised on ever-increasing prices that some later generation has to pay when the properties are sold. Somewhat like a Ponzi scheme, don’t you think?

As the economy is increasingly become more service-oriented, the inherently lower productivity of the services sector will mean greater income inequality when coupled with our current immigration policy. For most of us who don’t have exceptional skills, the need to compete with foreigners in our own country will mean diminished income growth prospects, and thus lower savings for retirement.

What Does It Mean For Us?

Since there is no way we can restructure our country to be more like Finland in the short time before some of us are hit with the retirement crisis, it basically means that we have to start to look for our own solutions to this problem. And as advocated in my previous article, this definitely means an aggressive plan to lower current costs of living in other to transfer purchasing power into the future to fund retirement.

Raising the Retirement Age in Singapore

Since hitting the news last evening, PMO Minister Lim Boon Heng’s trial balloon about raising our retirement age to 68 has prompted a fair amount of negative comments online, with Singaporeans expressing anger and fear about the issue. Some online commentators have even called for Singaporeans to vote against the PAP in the coming elections to express their displeasure and to effect political change.

Since dealing with this issue through the ballot box requires that other Singaporeans to co-operate in terms of voting, and since we cannot be sure of the outcome until after the fact, I thought that it would be more useful for us to plan on how to deal with this potential policy change at the level of our individual lives instead.

Likely Impact

First of all, let’s look at the likely impact that raising the retirement age to 68 will have on us. The thing that we can be certain of is that access to our hard-earned CPF funds will be delayed in line with the later retirement.

The other thing which I think is likely to happen, although there is some uncertainty, is that the chances of us staying employed beyond the age of 60 will not improve even with legislative changes. This is because without complementary policy changes and actions elsewhere (e.g. immigration), this policy alone will not alter employers’ preference for younger workers, and legislative compulsion will simply drive them to take evasive actions and to move production overseas to cheaper locations such as Vietnam, which has a young and motivated population. The result will be that for the years between 60 and 68, we will need to find alternative means of supporting ourselves financially without recourse to CPF funds.

Defensive Actions

Having spent time thinking about the future economic prospects of our country, I am driven to conclude that for the majority of the working middle-class in Singapore, our current lifestyles will almost certainly translate into poverty in old age (I will write a more thorough analysis if I have time in future).

Given this situation, I feel that it is very important for us to make preparations for the possible retirement funding crisis. The first step is to come to terms with the reality of poorer future prospects for most of us who have to depend on a salary for our livelihoods. If you are not convinced of this either rationally or emotionally, please leave a comment here to let me know that you want further analysis on this subject. Note that blaming the government for past policy mistakes will not be helpful towards our preparedness!

The next step is to take a critical look at our current lifestyles, and find ways to cut back on expenses in order to increase savings. In a more serious case, it may even mean selling an over-priced property to downgrade to more modest dwellings. And as I have argued earlier, it is not prudent to depend on cashing out of our real estate at retirement in order to raise the needed funds.

Once a plan to cut unnecessary expenditure is in place, we can then upgrade our knowledge on investing in order to be better at making our savings work harder. This is necessary because markets are getting more volatile unlike the previous 30 years when a buy-and-hold strategy works because of the rising tide lifting all boats.

Finally, we may want to re-examine the premises upon which we define our happiness and fulfillment. We may want to find meaning in building deeper relationships with our friends, family and community, and move away from the endless cycle of ‘work-and-consume’ that seem to pervade our materialistic society.

The above is merely an outline of what we can possibly do to prepare for the policy changes that the government is thinking about. I hope that it will encourage you to think of creative solutions and to take proactive steps to deal with the situation. Comments are most welcome.

Immigration, Property Prices and Your Retirement

The Straits Times reported on Friday 22/10/2010 that Singapore was ranked seventh in a survey of how countries ranked in terms of adequacy of income for retired persons. It reported that the CPF Board had expressed reservations regarding the limitations of the survey, in particular its exclusion of the CPF funds that we use to buy property:

“If CPF monies withdrawn for housing are included, savings are substantial, averaging around $200,000 for active members who turned 55 in 2007-2009.”

Implicit in the CPF Board’s statement is that money used to buy our HDB flats could be included in the assessment of our financial preparedness for retirement.

What worked previously

Historically, our HDB flats and other residential properties have been a good store of value for our retirement. Rapid economic growth in the past decades have allowed for the appreciation in the prices of such properties. This has allowed older people who have retired in the past 20 years to cash out of real estate at significant profits for use to fund their retirement.

What this means for those of us who are saving for our retirements is that if we are to rely on the existing model of using real estate as a means of funding, we will also need our economy to continue to grow in order to be able to obtain the price appreciation needed. Furthermore, for most of us, we will need to have continued growth in our incomes in order to pay off the mortgage that invariably comes with the purchase of real estate.

In order for this model to continue working, we will also need to sell our properties to someone else, and this is where the issue of immigration comes into play.

Given the country’s low fertility rate, we will soon be facing the prospect of a declining population if there is no immigration. Specifically with respect to the real estate market, this will mean lower demand for housing in future, which translates to the possibility of the country having a surplus of housing units. This lower demand will mean either lower growth or even outright declines in property price in future.

In addition, given that economic growth is a function of capital, labour and productivity growth, a declining population will also mean that economic growth will slow unless compensated by rapid increases in productivity. Given our mediocre record in raising productivity, this means that economic growth will be problematic in future without immigration.

It can thus be said that we Singaporeans are confused about the immigration issue. On the one hand, we have expressed our unhappiness at the influx of foreigners causing all sorts of stresses on the country’s physical infrastructure. On the other hand, whether we are aware of it or not, we need to keep population either stable or growing in order to maintain real estate prices that we depend on for our retirement. So short of a rapid turnaround in birth rates, which seems to me to be unlikely, we will have to accept the current liberal immigration policy.

Risks

While I feel that the government is not likely to reverse in any significant way the current immigration policy, I would like to highlight the risks to us as individuals of continued reliance on real estate as a store of value to fund our retirement accounts.

A mortgage is a bet on your personal future. It is an expression of confidence that you will be able to grow your income sufficiently to handle the payments, and if stretched over a long period, that the income stream will be stable. In recent years, we have seen more volatility in the Singapore economy due to greater uncertainty in the global economic situation. With the constant need to restructure, jobs have become less secure and retrenchments and unemployment more likely. This means that committing to a long term mortgage (e.g. 15 years and above) may not be a prudent thing to do.

For those who buy additional properties to rent out, besides betting on the government not changing the current immigration policy, you are also betting that the economic prospects of Singapore are bright enough to continue to attract people to move here for work and residence. While we cannot foretell the future, we need to be aware of the significant risks that lie on the horizon. These include peak oil, the currency wars turning into global protectionism and trade wars, and a collapse of the USD resulting in a new currency regime. Although I am unable to guess with any degree of accuracy what the exact impact of these events will be on Singapore, it is possible in my view that they will result in diminished prospects due to the serious external economic dislocations that are likely to happen.

On the whole, I personally am of the view that reliance on real estate as a funding vehicle for retirement will have significant risks in future. Furthermore, as real estate prices here have increased at a pace far outstripping income growth in the past decade, one has to wonder how much further this trend can continue. As such, new entrants to the property game should be aware of the dangers of buying at or near the top of the market.