26 January, 2017

Subsidising the GIC

Singapore needs to relook and adjust its economic model because what we have neither sustainable nor conducive for future growth.  I took data from here Singapore Average Monthly Wages from 1989-2017, Labour, Employment, Wages and Productivity and Singapore Statistics: Employment and Labour.

Assuming an average wage from the period of 1980 to 2010, a period of 30 years, which is one generation.  And assuming a CPF contribution of 4%, instead of 2.5% because I am assuming that, like most Singaporeans, the Ordinary Account is used for housing, leaving the Special Account.  Thus, I am being conservative here, and assuming a best-case scenario, disregarding a weighted average.  This means the average Singaporean worker earned just over $800,000 in wages, and contributed just over $270,000 in CPF.  With the accumulated interest on the CPF, that is a total just shy of $500,000.

In this scenario, the CPF functions as a forced savings mechanism.  Even at 4%, it does not keep pace with inflation, meaning that the average Singaporean, keeping his money in the CPF, is actually making a loss in the long-term.

The accumulated funds in the CPF, the CPF monies, are invested by the CPF Board in Special Singapore Government Securities, SSGS11, that are issued and guaranteed by the Singapore Government.  As per Government Investment Corporation of Singapore FAQ, GIC, along with MAS, manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government which CPF board has invested in with the CPF monies.  So, while the CPF monies are not directly transferred to GIC for management, one of the sources of funds that goes into the government's assets managed by GIC is the proceeds from SSGS.  The coupon rate of this is between 2 to 3%.  I am doubtful that all our CPF is invested in these bonds; the numbers, even assuming 2.5%, do not add up.  There is a lot of secrecy here, much of it for good reason, but I believe it is safe to assume that all our CPF monies are invested through GIC.

Now, I have no doubt that GIC is competently run.  The average long-term investment has a return of between 6.5 to 8% cumulative.  If we take it at about 7%, converting the GIC reported numbers from USD to SGD, the average Singaporean would have earned about $800,000.  That is $300,000 more than what he saved in that period through the CPF.  So, all these average Singaporeans are now in deficit of $300,000.  They saved $500,000 in that 30-year period, and GIC invested that money and earned $800,000 from each of them.  If we take it as “management fees” for accumulating and investing that money on behalf of us, that is 37.5%.  Hedge funds do not charge that.

A system has been created here where the average Singapore worker is effectively subsidising government investments.  The worker is the commodity, a source of cheap capital.  This structure is inefficient.  The problem with this cheap capital is that it is not cheap in the long-term.  A lot of money has been locked away in a lower yield investment that did not keep up with inflation, impoverishing a generation.  Over time, these funds have been siphoned up, creating a wealth gap.  Perhaps it is time to consider scrapping the CPF as we know it, and allowing Singaporeans to be direct shareholders of the GIC.  This would effectively remove one layer of management cost, put more liquidity into the system, and create greater flexibility in how Singaporeans manage their money.  If the government expects us to trust them, they should also trust us.

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