The Real CPF Problem

The Singaporean government recently increased the minimum amount required for Central Provident Accounts which as caused concern among many people.  Given that I have written numerous times about CPF, I will only recap the highlights before moving on to my primary topic about CPF today.

First, the Central Provident Fund is vital to understand Singapore government finances.  The CPF pays 2.5-4% on funds from savers but then loans that money to the government who issue long term debt securities and unsurprisingly pays a nearly identical weighted amount on what it borrows.  The Singapore government then invests the money in different ways, and by all appearances, keeps whatever in excess of the 2.5-4% it earns.  The CPF is a central organization to understand Singapore public finances.

Second, despite Singapore government claims to the contrary, the CPF is imposing enormous implicit taxes or costs on Singaporean savers.  If the average Singaporean had earned the average Singaporean wage since 1980 and saved the amount required by law but earned the GIC long term average rather than CPF interest, the average Singaporean would have approximately $850,000 SGD in the bank.  This is approximately $300,000 more than they would have earned with the same amount of savings in a CPF account.  To put this number in perspective, Singaporeans pay higher fees than what the typical hedge fund would charge.  The Singaporean government is directly harming everyday Singaporeans by mandating savings into a seriously underperforming asset for the governments benefit.

Third, Singapore operates a one sided model where the tax payer assumes the risk but the government gets the benefit.  If the investments do well, the government keeps everything above the 2.5-4% CPF interest payment; if the investments do poorly, and let’s assume, the CPF collapses, the tax payer will guarantee the payment to CPF holders.  In other words, risks are socialized while benefits are privatized.

More important than the technical shortcomings of the CPF is how Singaporeans think of CPF, Temasek, and GIC.  Officially, the Singapore government holds more than $800 billion in financial assets.  Temasek holds more than $200 billion SGD and GIC is estimated to hold around $400 billion of that total $800 billion.  Despite official pleadings to the contrary, Temasek and GIC are not private companies they are owned by the government, controlled by the government, and key officials are appointed by the government.  Temasek was created out of privatizing government assets.  SingTel, the largest holding of Temasek, was created from the Singapore Telecoms and Post Office Ministry.  DBS was originally the state owned Development Bank of Singapore.  These were and still are public assets.  A similar story holds true for GIC and CPF.

The assets of Temasek, GIC, and the CPF are the assets of the people of Singapore.  Only in certain people’s imagination are Temasek and GIC assets private and separate from the people of Singapore.  The earnings in excess of 2.5-4% that the government keeps for itself that it does not return to CPF savers are directly harming Singaporeans who are on average $300,000 poorer.  GIC and Temasek assets that the government insists are private despite all evidence to the contrary demonstrate the governments disdain for the blessing of the financial bounty it has received from the Singaporean taxpayer.

Kenneth Jayaretnam has proposed privatizing and floating Temasek and GIC to then distribute shares to the public.  There are many variations of this basic idea.  For instance, CPF savers could earn some amount tied to GIC or Temasek or the social security system could be privatized like Chile with savers allowed to invest via private asset managers.  Though the government claims to seek an ownership society, the mechanism and returns of the CPF are much closer in reality to the United States social security system where the government uses contributions as a cheap pool of borrowing with extremely low rates paid for contributions.  In fact, the most recent US social security actuarial report says that low income earners receive a higher total real return than Singaporean CPF savers in nominal terms.  Giving people ownership of the assets Singaporeans created and linking their savings to the returns of those firm would create an actual ownership society.

As a matter of prudence, I support raising the CPF minimum to ensure income levels for the elderly in the future.  However, the easiest and fairest way to accomplish this objective is to pay CPF savers a fair return for the investments that they are funding.  The government should not be allowed to confiscate earnings above and beyond the rate it pays on CPF funds.  It is complete hypocrisy by the government to publicize the supposedly amazing job it does managing Temasek and GIC which supposedly earn 16% since inception from public assets and 7% in USD term over 20 years from public assets, then plead poverty when paying CPF holders a paltry 2.5%.  The wealth of Singapore which has been funded by the Singaporean people belongs to the Singaporean people.

An ownership society requires that owners of capital the CPF savers are compensated based upon market rates, have the ability to move their funds to higher earning investments, receive information about their investments, and how much they are paying their investment managers.  The Singaporean government refuses to provide any of this information hiding basic information that would be considered standard information in the marketplace or if owned.  Tragic stories of Singaporean unable to access their considerable savings they supposedly “own” demand government accountability.

The Singaporean people are the ones to demand answers and changes to how their money is managed.

Are Singaporeans Xenophobic?

Singapore has been beset by charges and counter-charges of xenophobic attitudes towards foreigners.  A major financial center, regional economic power, and playground for the super wealthy Singapore has carefully crafted its image as foreigner friendly with welcoming immigration policies.  The rapidly rising level of foreign born residents has prompted a variety of concerns by many Singaporeans with charges and counter-charges of xenophobic attitudes.

Immigration provokes strong feelings around the world for both rational and irrational reasons.  It is important however to put immigration, the benefits, and the costs in perspective.  The United States has the largest absolute number of immigrants in the world with 46 million but also one of the highest numbers as a percentage of the total population among large countries.  Only Canada and Australia have higher relative numbers with 21% and 28% of the population foreign born as compared to 14% in the United States.

Small countries generally have higher levels of foreign born population than larger countries.  This happens for a couple of reasons.  First, there are numerous prosperous but small countries like Monaco, the United Arab Emirates, and Singapore.  As people generally prefer to migrate somewhere prosperous, these countries are magnets for migration.  Second, given the law of large numbers, relatively small numbers of immigrants into a small country can have large relative impact.  For instance, Monaco has less than 25,000 immigrants, but that represents 65% of the total population.

It is important to compare the absolute and relative level of immigration before we examine the charges of xenophobia.  Singapore has the 22nd highest number of immigrants when ranked as a percentage of the population.  To put this number in perspective, this is roughly three times the number of immigrants as a percentage of the population in the United States and 420 times China.  Even in absolute numbers Singapore has lots of immigrants.  Singapore has more total immigrants than China, Brazil, and Indonesia combined.

This however does not answer the question of attitudes towards foreigners or whether Singaporeans are xenophobic.  Speaking only from personal experience, Singaporeans have been respectful, agree, and disagree with what I have said but rarely have I experienced anything I would classify as anti-foreigner.  Ironically, the emails and commenter’s who have told me not to poke my nose into Singaporean affairs, to speak generally, are those who defend PAP.  The most anti-foreigner emails and comments I have received come from those, generally speaking, accusing others most vociferously of xenophobia.  People who have listened respectfully and challenged me are criticizing the party in power and those generally on the receiving end of xenophobia charges.

However, this fails to address what people think about immigration and why they believe what they believe.  As an economist, I believe in the free market which includes the free movement of goods, capital, and labor to where they can be most productive.  However, I also recognize that for many reasons, there are practical reasons this is difficult or impractical in the real world.  Too often proponents of a specific policy, even economists, fail to recognize the trade offs.  For instance, immigration has generally overall positive benefits but also very real costs.

Taking the case of Singapore, given the constraints to housing and land, large population inflows are going to place significant pressure on housing prices.  Furthermore, while high skilled workers doctors, scientists, and economists are better suited to immigration pressures to the labor pool, middle and low skilled workers are going to face the greatest pressures.  Consequently, immigration is placing upwards price pressure on housing and downward pressures on wages for most people in Singapore.

Criticizing government policies on immigration is not xenophobic.  There are real benefits to immigration but also very real costs.  Criticizing government policies on immigration is not xenophobic as people are facing very real pressures from the decisions.  Criticizing opponents of government immigration policies as xenophobic and bigoted reveals the weakness of the argument and inability to weigh the complexity of policy dilemmas involved.

Are Singaporeans xenophobic?  If they are, I certainly haven’t experienced it and the anti-foreigner rhetoric that has been directed at me as come from those criticizing others as xenophobic and as a substitute to refute my ideas.  No, Singaporeans aren’t xenophobic, they just want honest debate about government policies.

Subsidizing Profits, SMRT, and Temasek

In 2008 during the global financial crisis, United States politicians debated whether bailing out failing banks would set the precedent of ‘privatizing profits and socializing losses’.  Economists call this problem “moral hazard” when companies are not forced to recognize their risks and consequently accept higher risks knowing a third party will absorb their losses.  While the debate rages about whether major US and international banks privatized the profits and socialized the losses, this is standard practice with many Singaporean and specifically Temasek owned companies.

SMRT is probably the best example of this practice within Singapore.  As I have noted elsewhere,   SMRT and other Temasek firms enjoy tremendous privileges that other foreign or even other Singapore firms simply do not enjoy.  For many year, the Singaporean government has paid for the capital that that SMRT uses everyday.  The tunnels, the rail lines, the subway cars, and buses that SMRT uses everyday have been purchased by the Singaporean tax payer.

The financial effect is simple.  SMRT as a publicly listed company and a portfolio company owned by Temasek makes money only because of the generosity of the government and the Singapore tax payer.  Despite having recently declared a $62 million SGD net profit for the year, SMRT depends heavily on the gifts of the Singapore tax payer through gifted buses and other infrastructure.  If SMRT had to make principal and interest payments on the buses alone, it would require yearly payments of $150 million SGD.  The financial effect is this: SMRT profit is entirely attributable to subsidies given to it by the Singaporean tax payer and not high quality management at Temasek.  Put another way, Temasek and its senior executive are only able to declare a profit for SMRT because the Singapore government gives it money.

There are three more philosophical reasons this matter.  First, most people appreciate and respect the success of other when gained through skill, talent, and hard work but resent unfairly gained benefits.  This is why few people complain about companies like Apple or Google, they make a good product and compete with others.  SMRT has not achieved its profitability due to providing a top quality product against fair competition, but through political manipulation and public bailouts.

Second, SMRT is socializing the risk and privatizing the profits.  When losses are incurred it is the Singapore tax payer that suffers but when profits received, it is the executive of Temasek that enjoys the benefit.  SMRT is placing the risk on the tax payer but capturing the benefit for itself.  While individuals or firms taking individual or corporate risk should be allowed to keep those profits private or socialize risk and profits, it is truly objectionable to socialize the risk but privatize the profits.

Third, the true financial and economic cost of SMRT and related infrastructure is not being recognized.  As one economist noted, if something cannot go on forever it will stop.  Singapore, SMRT, and Temasek cannot maintain a loss making firm dependent on regular bail outs to report profits or eventually it will stop.  By hiding the true cost of ownership, maintenance, and investment, the government is attempting to protect its Temasek owned asset rather than the tax payer.

Mass and public transport is a notoriously difficult and generally loss making industry.  It is however, morally reprehensible to pretend that a company is making money and use tax payer money to create  profits for the investments of family members.  The people of Singapore are being defrauded by bearing the risk of investment but seeing none of the profits.

Note: This piece was prompted by a post in the last week asking whether SMRT was a public or private company.

Interesting Chinese News

Chinese real estate buyers overseas are quite savy bu the 73% vacancy rate in one Chinese city should worry even the biggest cheerleader.

Can China tap its reserves if it meets financial problems?  This guy says it is much more problematic than people realize and I agree.

An official bank stress test says that the large banks would only see their bank capital remain above 10% if bad loans surged five fold.  Count me as skeptical especially given what we know about how Chinese banks count bad loans and arbitrage risk weightings.

Chinese provincial GDP is falling rapidly.  Is this due to better counting (i.e. they have stopped making up their GDP numbers improved data collection standards) or is GDP really falling faster?

The Chinese government needs never ending real estate and land price increases for more reasons than one.