Perspective Unlimited

Wednesday, May 09, 2007

Retirement and Housing

Lucky Tan usually has some rather wild analysis and last week's post is no exception. The causation implied by the post is clear: (i) Govt forces Singaporeans to save in CPF; (ii) Govt allows Singaporeans to buy property using CPF; (iii) Singaporeans have no choice but to work longer since they do not have enough funds in their CPF accounts to support retirement.

This is obviously a seductive theory: simple enough to understand and conspiratorial enough to appeal. Not enough for retirement, blame government policies (again)! Despite his flawed reasoning, Lucky was essentially right on the point - many Singaporeans sit on a highly valued housing property but otherwise do not have enough cash for retirement. Though there are ways to monetise the asset to fund retirement consumption, the problem is in fact more than just that.

Before I continue, I will digress a little here. My uncle is a taxi driver who has worked hard all his life, lived frugally, and saved assiduously for his retirement. Looking at his bank account, you would hardly have guessed that he is a humble taxi driver. Already nearing retirement age, he nonetheless continues to work hard to the extent of taking the physically taxing night shift. I once asked him why didn't he retire since he had already built up a substantial retirement account. In the end, the answer was as simple as it was illuminating, "Don't know when I will die."

The Retirement Conundrum

In one short sentence, he has summed up the retirement conundrum. Two days ago, this story was reported in the British media. A man was suing the NHS because the hospital had informed him that he was dying. Like a rational economic agent, he then went on a spending spree and consumed all his savings, only to be told later that the original diagnosis was a mistake! This comi-tragic story again illustrates the same simple point.

As my uncle wisely points out, no one has perfect foresight when it comes to preparing for death. Unless the budget constraint is incredibly lax, this obviously makes any financial decisions concerning retirement tricky. It is not a matter of how much asset or cash one has, but how much is enough against an unknown future?

In a state pension system, the individual is effectively insured against his own longevity. Once retired, a person simply collects state pension until he drops. The current working generation pays the taxes to support the retirees. The question becomes one of actuarial sustainability of this form of inter-generational transfer but it is no longer the problem of individual retirees.

Lack of Insurance

The nature of CPF - individual accounts - transfers the risk to individual retirees. If one knows the time of death, perfect foresight will make financial planning so simple: reach retirement age, cash in on the property asset, and spread consumption until the last day. It is therefore incorrect to blame the lack of retirement funds on CPF liberalisation for property purchases. Of course, those who entered the market during the bubble years would have suffered losses but there would always winners and losers in investment. Barring episodes of price correction, property prices have mostly risen over the past few decades effectively boosting retirement returns. Not allowing CPF for property purchases would in fact deny individuals an avenue for investment.

However, as many academics have rightly pointed out, the major shortcoming of the CPF system is the lack of insurance for the individual against his longevity. There is always the risk that the individual outlives his retirement cash, and this may to a large extent explain why many retirees like my uncle take the "kiasu" approach and continue to do some work to supplement post-retirement income. Not because they are hard up for cash per se, but because they need to guard against an unexpectedly long life. It is a little ironic to think that medical science has increased the life expectancy of people only for them to run the risk of old age destitution.

While the risk is mitigated by working past retirement age, it will never really go away. Retirement can be postponed for some years, but sooner or later work has to stop for one reason or another. The current working assumption is that the family will effectively become the insurance when the retirement cash runs out. By and large, I imagine this assumption to hold for most retirees. But with families getting smaller and more individuals remaining single, it will be more difficult to assume this in the future. To solve the retirement conundrum, it is this part of the CPF policy that needs re-thinking rather than the housing bit.

27 Comments:

  • This comment has been removed by the author.

    By Blogger LuckySingaporean, at 1:59 pm  

  • Hi Bart,

    My wild analysis apparently took you a week of deep thought to come up with your 'thoughtful' analysis. I have a long memory. When the govt 'liberalised' the CPF, there were dissenting views asking the govt not to do it and keep the CPF as a pure provident fund to fund retirement. The dissenters pointed out that there will be huge risk insufficiency if the CPF funds were redirected for other purposes.

    We are here today when the govt is now proclaiming that we have to work longer and retire later because we don't have enough.

    I wonder why you consider something as direct as saying keeping more funds in the CPF for retirement instead of property allows people to retire earlier...wild?

    Whether the person could have been as frugal as your uncle is besides the point. History tells us that not all humans are that responsible and even more so today when instant gratification sought after with credit cards and bank loans. CPF monies protected from the loan sharks(banks) will provide a very important safety net funded by the individual himself out of his own pocket. By liberalising it, we add risk to what is safe...defeating its original purpose.

    Then you went on to say there is a lack of insurance against old age. What if Bart or Lucky lives to be 120?...oh nobody can ever take care of that? Unless there is a longevity drug invented, human longevity has a standard deviation of 7 years(Fries Hypothesis). The bulk of people falling close to the mean is the issue. The CPF never had a solution for people living to be 120 and whether it was liberalised or not. Longevity beyond the norm is a SEPARATE problem.

    My basic point is very simple - had the CPF not been liberalised most people would be able to retire earlier because they would have more set aside money for retirement (Bart why is this so hard to fathom?). My uncle is living quite comfortably in his 70s since retiring at 55 because he bought his flat pre-liberalisation and his CPF is sufficient. ..I don't we settle any argument bringing up uncles.

    By Blogger LuckySingaporean, at 2:03 pm  

  • Lucky,

    It is hard for me to fathom because I am an economist, I don't make this kind of straight line argument in a vacuum.

    We live in a world where all prices are determined, and their relationship with each other pinned down, by a general equilibrium.

    To suggest that if CPF was not liberalised, housing prices will not increase, and people will have enough is precisely that kind of argument that works in a vacuum - as if all other variables do not matter, as if there is no history or context.

    Every time there is rapid economic growth, asset prices often rise quickly, often bubble like. China / India and many parts of the world are today experiencing rapid housing price inflation. To blame our 1990s bubble on CPF liberalisation is to ignore the context of those days - where SE Asia was chalking up the kind of stellar growth rates seen only in China today!

    During those boom years, CPF contribution was at one time as high as 50 odd percent of gross income. The govt obviously increased the CPF contribution rate with intent of letting people to buy property. Would a pure provident fund need this kind of contribution rate? If CPF were frozen for no other uses, people would be complaining that government was locking away their money and not allowing them to participate in upside gains.

    Moreover, CPF was first allowed for public housing in 1968, and further liberalised for private property in 1981. You completely ignored this inconvenient history when you lay into the 1990s bubble.

    Of course there are risk with liberalisation, no free lunch here. But letting individuals exert some control and manage those risk is better than not letting them have the choice. I advocate more economic freedom, not less.

    But the lack of insurance is real. Some people have to stop working earlier for a variety of reasons, some will have episodes of unemployement. Unless some risks are pooled (some kind of law of large numbers), individuals will always be at the mercy of idiosyncatic events.

    By Blogger Bart JP, at 4:25 pm  

  • Bart,

    ::::To suggest that if CPF was not liberalised, housing prices will not increase, and people will have enough is precisely that kind of argument that works in a vacuum:::

    Bart as an economist, I'm surprised you came up with this counter-argument. If you further liberalise CPF so that people can buy retirement homes in Batam, I'm sure land prices in Batam will rise. However, I'm an engineer not an economist, I use only my common sense ....in today's internet age, I can check out my common sense alot to see if it is sound. Economists have done more complete research on the relationship of housing prices and CPF liberalisation and their conclusion is no different from mine:

    http://www.informaworld.com/smpp/content~content=a713706381~db=all

    "Summary. Regression models are used to show that interest rates, income growth rates and the supply of housing have not played a statistically significant role in the determination of private housing prices in Singapore between 1975 and 1994. Instead, private housing prices in Singapore were highly correlated with the prices for public-sector-built housing. Moreover, the timing of government policies relating to the use of compulsory savings for private housing finance purposes, the liberalisation of rules on public housing ownership criterion as well as for housing finance had a significant impact on private housing prices. "

    I read a number of studies on this phenomena. There are 2 main reasons why there was a significant rise in housing prices both were due to govt moves - 1) allow the loans to stretch from 10 years to 25-30 years 2) CPF liberalisation. The PAP which runs a public housing that supply 70% of the housing has a vested interest in seeing prices go up so they can build 'surplus' from the rising prices.

    ::::If CPF were frozen for no other uses, people would be complaining that government was locking away their money and not allowing them to participate in upside gains::::

    This is a personal responsibility vs govt role issue. We can argue for the other extreme and eliminate CPF altogether .... instead of selective liberalisation where the govt liberalise for whatever purpose it sees fit - liberalisation of CPF for investment was done just before major govt privatisation exercise...some cynics say it was to ensure success for the privatisation exercise. Whether liberalising more or less has to be taken in the total context amd evolve a system that works. Since we have no social safety net and CPF was started as a provident fund for purpose of retirement, it was a system that can work .. without the tinkering.

    :::But the lack of insurance is real:::

    Yes, it is real. It is a problem - super longevity. The govt has left this problem to charities. I went round to these 'old folks' estate with a Catholic group several weeks ago. These people at age 80s should be in nursing homes under good professional care instead of staying alone in rented flat living on PA. Whether insurance can take care of these people etc, it is too late for many ONLY the govt can take care of them! Bart...you and I will be okay because we can plan and have the means to plan, there are some 30% of the people who barely make ends meet, they can't even keep up with utilities payment...how to do financial planning? Even if there is insurance they can't afford it. The govt is trying to 'force' people who qualify for workfare contribute to CPF by making it a pre-condition....this rule is turning people away from workfare...too much optimisation ...

    At the end of the day, systems have to work. Bart, you're in London and I won't use that against you. But the homeless are increasing in bus interchanges, void decks and there are tents at the beaches. At which point we begin to say the system need fixing?

    By Blogger LuckySingaporean, at 10:43 pm  

  • Noticed link got truncated:

    http://www.informaworld.com/smpp/co
    ntent~content=a713706381~db=all

    By Blogger LuckySingaporean, at 10:48 pm  

  • Lucky,

    Do you believe I have not done some research before I commented?

    There is a problem of endogeneity here. When you run a regression and it shows a fit, how do you know whether it is X causing Y or Y causing X? Given a common land price and other associated costs, do you need a regression to show private property prices correlates with public property prices? If you regress public property prices against private prices, what do think you will see? Don't confuse correlation with causation.

    Of course, one would expect liberalisation to increase in prices, perhaps due to liquidity. But the entire contribution rate was, like I said, set in the context of property purchases. The overall CPF contribution rate does not exist in a vacuum.

    If you ask me, Singapore property prices are not only a function of domestic economy. It also depends many other factors, global economy, demographic and immigration trends. Try fitting a regression on property prices against the lag variables of workers entering the workforce.

    Of course there are poor people who cannot even save enough to meet current needs, let alone save for retirement. But that is another issue, nothing to do with the CPF for housing issue.

    But I do agree with you on the basic premise, many might not have enough cash for retirement.

    Regards,
    Bart.

    By Blogger Bart JP, at 11:43 pm  

  • Bart,

    You argument against the use of regression as proof in the research paper. But you have to understand that we don't have a free market in property. If you want to understand the mechanics of whether "X cause Y". here's my take on the matter:

    1. HDB is set up to provide affordable housing for Singaporeans. No matter what HDB has to provide housing for the majority of Singaporeans.

    2. If CPF is not liberalised, people can only pay for their HDB using their disposable income.

    3. HDB can only raise prices as fast as disposable income rises.

    4. Not liberalising CPF, the CPF monies is intact and there is more for retirement.

    You said that the CPF is set at a level for the purchase of property not just retirement. That is not the case, it was at that level even before liberalisation. If what you said is true, there it should be enough to retire on the minimum sum which is not what the govt is saying now.

    :::::If you ask me, Singapore property prices are not only a function of domestic economy. It also depends many other factors, global economy, demographic and immigration trends. Try fitting a regression on property prices against the lag variables of workers entering the workforce.:::

    You are assuming we have a free market for property which is not true. 70% of the property is public housing and the prices are set by the HDB. For a tiny crowded island like Singapore, if there is a free market for property, the equilibrium price of property determined by a free market will come at huge social cost. That is why HDB was started. Otherwise, we will all be at the mercy of private developers...and that would have been disastrous.

    ::::Of course there are poor people who cannot even save enough to meet current needs, let alone save for retirement. But that is another issue, nothing to do with the CPF for housing issue.

    But I do agree with you on the basic premise, many might not have enough cash for retirement.
    ::::

    Agree and agree. We are disagreeing on how we got here and how to move forward.

    But there are options. We have a brilliant govt that has amassed hundreds of billions in reserves....off the labor of the No.1 workforce in the world for decades. From the response in my blog for the "work longer" issue, the ground sentiment is the govt is trying to make its own job easier by passing down responsibility to the people. It will help them to avoid painful tradeoff and cuts in spending in other areas. You can argue that the No.1 workforce in the world deserves better than what they are getting,....just as our ministers deserve the millions they are getting!

    By Blogger LuckySingaporean, at 2:41 am  

  • Luckysingaporean,

    "You are assuming we have a free market for property which is not true. 70% of the property is public housing and the prices are set by the HDB."

    Sorry just for clarification - Could you detail what makes the HDB market "unfree"?

    By Anonymous Kira, at 7:22 pm  

  • Lucky,

    HDB is indeed a large supplier of new flats. But given the STOCK of flats, the new flats are not that big. The resale price index of public housing reflects the private transactions in the secondary market. What has HDB being a big supplier of new flats got to do with it? What so unfree about private transactions?

    In a general equilibrium, if property prices is out of whack with fundamentals, Singapore loses competitiveness. Other adjustments, through quantities or through prices, would ensue. Property prices rise because the land premium has gone up. The land premium goes up because of the economic activities associated tied to the land. Global city, high property prices, why should this be seen like a government conspiracy?

    It is also known that the property prices and stock market are correlated. So the government is controlling the stockmarket too?

    At the margin, we can argue whether the liberalisation is too much or too little, too fast or too slow etc, but in principle allowing individuals greater control should be a good thing.

    I understand where you are coming from Lucky. I reiterate that I agree with your general point.

    By Blogger Bart JP, at 8:49 pm  

  • It was not only the liberalising of CPF funds for property purchase that led to higher prices. It was the pegging of the HDB loan to the CPF interest yield. This was based on a blend of local 1 year FD and savings accounts rates and therefore artificially low. It is not a long term asset yield which is what the CPF should have been paying. Combined this with the then availability of a repeat loan for an upgrade, this provided unbridled liquidity to fuel property prices. This causal factor is real as there was a clear attempt by government to induce asset enhancement so as to get Singaporeans to have a stake in the country ( and as some more cynical may say to improve the work ethic! ) My quarrel is with the way that the CPF has been tinkered with whenever it suits government's other non retirement objective prerogatives. The CPF rate was reduced as an expedient but blunt way to make labour costs lower during the recession years for example. Looking back, you can see other instances e.g when it was liberalised to pave the way for the reform of the public sector transport system ( CPF savings were permitted to be used to purchase SBS shares), when it was allowed to pay for hospitalisation so as to "alleviate" the high costs of medical treatment, when it was liberalised for the purchase of initially, Singapore stocks, then later unit trusts so as to "grow" the fund management industry. Along the way, government has forgotten that it was set up as a retirement fund!

    By Anonymous Anonymous, at 10:07 am  

  • Bart & anons,

    Thanks anon for the additional points.

    We are going in circles with the property price issue. I then showed you evidence by other researchers who showed that other factors such as economic growth have less of an effect than the liberalisation of CPF. You refuted this by saying that it using regression can lead to wrong results. Then you went on to say that property prices are affected by economic growth, global trends, etc etc.

    We can be here until next year and unless one of us go and do a thesis on what cause Singapore property prices. I already showed you work of researchers which you can't totally accept. So we have to move on.

    ::::I understand where you are coming from Lucky. I reiterate that I agree with your general point. ::::

    Okay.I hear you. But to be very clear my point is our CPF a/c would have more money at retirement if the govt didn't tinker.

    ::::HDB is indeed a large supplier of new flats. But given the STOCK of flats, the new flats are not that big. The resale price index of public housing reflects the private transactions in the secondary market.:::

    I take your point that there is a secondary resale market that HDB does not totally control. But I maintain the prices in this secondary market is higher because we can use CPF.

    :::::but in principle allowing individuals greater control should be a good thing.:::::

    Can't be a bad thing if we are consistent. The govt can't say take care of yourself while at the same running a nanny state that control the media and information. ..and they also control a large number of GICs, unions...etc etc.

    By Blogger LuckySingaporean, at 11:28 am  

  • Hello Lucky & Bart,

    Interesting exchange. Seems to the KTM that this is fundamentally an argument of "individual responsibility" vs "protecting Singaporeans from themselves". There is no right answer one lah. Depends completely on one's leanings.

    At the end of the day, Govt tell people that they can use their CPF to buy property doesn't mean that they HAVE TO what, they can still continue to keep their money in their CPF account (and earn that 2.5% interest) and cough out cash to buy their HDB flats.

    Lucky,

    Can't be a bad thing if we are consistent. The govt can't say take care of yourself while at the same running a nanny state that control the media and information. ..and they also control a large number of GICs, unions...etc etc.

    Actually, I'm not sure I understand the argument here. The Govt seems pretty consistent to the KTM. Everything economic - free market; everything else - control. :-)

    Are you suggesting that if Govt doesn't control media, yada, yada, then it's okay to leave Singaporeans to fend for themselves? Doesn't quite follow either.

    Agree with you that the number of beggars on our streets seems to have increased visibility in recent times. :-( It's a symptom that there's fomenting issue that needs to be dealt with.

    That said, for those who are able to work and who are in their present predicaments because of their own inability to think, should just keep working to earn their keep.

    Bart's taxi driver uncle is not unique. It turns out that the KTM also has an aunt who only has Sec 2 education and worked all her life as a clerk. Again, one can hardly guess that she worked as a clerk all her life from looking at her retirement savings (cash hor, not CPF). Those who do not have the sense to be frugal ought to face the consequences when they retire. Why not? We reap what we sow.

    But to be very clear my point is our CPF a/c would have more money at retirement if the govt didn't tinker.

    This statement is absolutely accurate, but there are those like the KTM who would rather use his CPF monies to buy property and have more cash on hand instead of spending cash and collecting 2% interest in the CPF. Perhaps you can explain why the KTM should not be allowed to use his CPF money to buy property? KTM needs to be protected (from himself)? :-)

    These people at age 80s should be in nursing homes under good professional care instead of staying alone in rented flat living on PA. Whether insurance can take care of these people etc, it is too late for many ONLY the govt can take care of them!

    Seems to the KTM that your main point here is that there are those who need help (or more help). You are probably right, but do consider the possibility that it's not a problem with the CPF policy.

    Your case on the CPF is rather weak in my opinion (though your point about the HDB prices being higher because CPF can be used is probably accurate. But prices high, high loh, so what?), and so perhaps you might wish to pick on something else. The problem with barking up the wrong tree is that even if you win the argument, you don't win.

    By Blogger kwayteowman, at 12:26 pm  

  • Hi Bart

    1) Many singaporeans are sitting on negative equity (not highly valued housing property). They cant downgrade even if they want to.

    2) You CAN control the property prices in the secondary market with "just" a substantial stock. And especially when you can make all the rules.

    3) Public housing should have never been allowed to be speculative. See also the effect of pegging HDB rates to CPF. the pricing of new flats is ridiculous.

    4) Fixed Deposit in SG is about as "risk free" as you can get. and for most of last year, you can get a FD rate > 2.5%. The CPF system has failed in its purpose to aid retirement. to the extent that it is more or less a TAX on the poor and middle class.

    5) Btw, taxi was a well paying job until the Asian crisis when the GLC operators sold licenses like confetti to the desperate.

    6) I hope you will do the decent thing and make your millions in financial sector (preferably in London) and never come back to Singapore and be a parasite of tax payers money. and rub it in by helping to formulate even more cruel economic polices "for the greater good" as a gahmen economist.

    NoName

    By Anonymous Anonymous, at 12:46 pm  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 1:14 pm  

  • I respect Lucky's social consciousness, but my point is that arguments have to be tight - cannot be as simplistic as if we didn't have policy X, all our problems would go away.

    Look at the recent property price boom - fueled by foreigners according to the media. Why so? Because Singapore's property is deemed underpriced compared to other major cities. I don't want to play this argument too much, but my point is that asset prices here are clearly affected by global conditions.

    Property prices do not exist in a vacuum. Singapore Govt alone cannot engineer artificially high property prices without us losing competitiveness. If that happens, something else will have to adjust.

    I encourage you to think more fundamentally about these issues, in a general equilibrium manner, rather than relying on partial equilibrium logic to make the various claims.

    To NoName:

    I am coming home. Be afraid, be very afraid ;-)

    By Blogger Bart JP, at 1:16 pm  

  • Bart,

    Look at the recent property price boom - fueled by foreigners according to the media.

    Foreigners (not including PRs) cannot buy HDB flats hor.

    The govt obviously increased the CPF contribution rate with intent of letting people to buy property. Would a pure provident fund need this kind of contribution rate?

    Just realized that I do not agree with this statement of yours. 50% is the right number for pure provident fund. Remember also there's a cap on the amount that attracts CPF contributions. It's just not practical.

    No Name,

    Your points are correct -- but you have also highlighted the problem. Perhaps the KTM can summarize:

    (1) Indeed, many people are sitting on negative equity (not in absolute terms, but relative to their outstanding mortages).

    (2) HDB CAN (to some extent) control prices because they can set the price of the new flats that they sell. Flats are clearly sold above cost.

    However hor, think about what will happen if HDB depressed the HDB market by selling flats on the cheap.... the fellas who are sitting on negative equity will have their flat values depressed further and be in an even worse state. In fact, most Singaporeans have their equity locked in their flats and will hence suffer loss. This is not very palatable politically. Therefore suay suay HDB cannot sell flats on the cheap.

    Yep, mistake was made in not curbing speculation when flats were first deregulated. However, at this point, there really isn't much of an option other than to stabilize the market.

    Some mistakes can be undone. Others, like "Stop at Two", cannot. Such is life. We just have to deal with what we have. :-(

    CPF makes sense because it forces a savings rate of approximately 30% (for most folks) in some form (property or otherwise). While this is not the 50% that is necessary to sustain a comfortable retirement, it's better than nothing. People just better be prepared to "consume" their property eventually.

    As Lucky says, some people already have a hard time making ends meet. It really doesn't make sense not allowing the people to use their CPF to pay for their HDB flats. To do so will make their lots even worse than what they are today.

    The KTM agrees with Bart that the logic in Lucky's arguments are not compelling. Public policy cannot be made based on faulty logic. Otherwise, might as well just throw darts.

    On the taxi problem, I think you have to apportion blame correctly. It's MOT/LTA's fault and not the GLCs. Supply of licences not controlled by ComfortDelgro. :-) Actually hor, spoke to quite a few taxi uncles recently. Their lots seem to have improved this past year. :-P

    By Blogger kwayteowman, at 4:10 pm  

  • KTM,

    Ah we meet AGAIN!!!!

    "Personal Responsibility" vs "Govt Role or protecting Singaporeans from themselves"?

    There is some latitude to discuss this if not for the simple fact that people today can work full time jobs and cannot make ends meet...let alone save for CPF. It doesn't help if 'low cost' housing is not low cost.

    But suppose hypothetically Singaporeans make enough, it is a matter personal choice whether they overspend or live frugally.....you can argue that the govt can eliminate CPF and pass the entire responsibility to the people. Ultimately, whether such a system pass or fail, depends on how much discipline we can instill in the people. Still there will be a number will will fall through due to hard luck or they can control their spending...how do we take care of these people? Make them work until they die?..Let them live on the streets?

    :::::Perhaps you can explain why the KTM should not be allowed to use his CPF money to buy property? KTM needs to be protected (from himself)? :-)::::

    For many of us CPF is not that critical. We even have other plans to supplement it like life insurance. However, for a significant number this system may have some value especially for the lower income groups. If CPF doesn't exist something else has to be there. Unless you're saying we should just let people fall through and hit the ground without a safety net. It will only expand the problem.

    ::::Are you suggesting that if Govt doesn't control media, yada, yada, then it's okay to leave Singaporeans to fend for themselves? Doesn't quite follow either.::::

    This is an empowerment issue. Just like our pilots 'fending for their lifestyle' :-) they can do it because they have a union. If you're a slave without rights, your master have to take care of you otherwise he is a lousy master. I'm not saying Singaporeans are slaves but just like you said, "everything else the govt control". This control has to come with responsibility.
    It is debatable whether Singaporeans have "economic freedom" without "political freedom". The govt makes all the tradeoffs faster GDP growth but allowing greater income disparity. If you're are 'traded away' economically and have no political power to address your issues...then how can you be TOTALLY responsible?

    ..... this is the PAP govt, they are paid millions....they are extraordinary, without them our wives & daughters will become maids they have the capacity to control everything (else)..by virtue of this control, they have more responsibility towards the people.

    The PAP, themselves said they are responsible for us not falling into a pathetic state so KTM don't take the responsibility away from this GREAT govt ..!!!

    Bart,

    ::: cannot be as simplistic as if we didn't have policy X, all our problems would go away.::::

    I didn't say every problem will go away okay. There are of course other factors that will cause prices to move up (we can argue endlessly by how much).

    But the fundamental fact remains that there will be more money in CPF for retirement if it is not liberlised...this cannot be untrue.

    By Blogger LuckySingaporean, at 9:42 pm  

  • Lucky,

    Still there will be a number will will fall through due to hard luck or they can control their spending...how do we take care of these people? Make them work until they die?..Let them live on the streets?

    You're right. These are the questions that we should be asking. Your case against the current CPF policies is however relatively weak and WILL NOT in my opinion help solve the problem. Perhaps if the Govt had the benefit of hindsight 20 years ago, things might have been different -- but today, we have to get a grip on the realities of life and react according to the situation.

    Your tirades against the CPF are not very helpful. The current CPF policies represent a balance between protecting those who cannot manage their finances (or more specifically limiting the liability of tax payers in paying for the retirement for these folks) and the access to their money for the folks who (at least think that they) know what they are doing.

    If CPF doesn't exist something else has to be there. Unless you're saying we should just let people fall through and hit the ground without a safety net. It will only expand the problem.

    Again, it's a matter of balance. And the KTM is not arguing that we need not do anything. Just arguing that your suggestion NOT to allow Singaporeans to use their CPF to buy property is impractical -- as you yourself have highlighted that " people today can work full time jobs and cannot make ends meet...let alone save for CPF. It doesn't help if 'low cost' housing is not low cost". No point ranting about the high cost of housing either. The Govt doesn't have very much latitude to lower prices either, as the KTM has explained earlier.

    If you're are 'traded away' economically and have no political power to address your issues...then how can you be TOTALLY responsible?

    You are suggesting that if we have unions that take to the streets, that have the political clout to lobby for protectist labour policies like in France, and recently Indonesia, we will be a better and stronger nation?

    One step at a time lah. Let's be honest with ourselves. There is a problem with the present generation and that's a lack of frugality. The older generation would probably still be able to retire decently without any change to the CPF policies because of their frugal lifestyles -- and we're not talking about the hard luck cases that are sure to be there in any generation.

    People need to learn to take responsibility for themselves and the Govt needs to get out of our face, but that doesn't necessarily mean that having more latitude to whine for help is the answer. :-P

    As a side note on the pilots' latest union action, the KTM is really unimpressed. Greedy buggers. :-)

    But the fundamental fact remains that there will be more money in CPF for retirement if it is not liberlised...this cannot be untrue.

    This statement is clearly true. Problem is that there is no economically sound and political palatable way to do it -- or at least you haven't proposed any in my view.

    Lest you cite the recent increase in CPF contribution rates, you may wish to know that the corporate taxes were cut to make up for it. So it was a no free lunch deal. Effectively, the Govt gave up revenue to allow firms to pay these people.

    Problem with this approach: (1) the two sides may not balance, i.e. loss in revenue may not be commensurate with people's gain in CPF; and (2) it's fundamentally regressive. People with higher pay gets more CPF yada yada.

    Why is this done? 'cos the Govt's goal is to move toward indirect taxation (which reminds the KTM: Bart still owes the KTM a treatise on why indirect taxation is the right way to go for Singapore). We are not likely to see more cuts in corporate taxes for a couple of years until they analyze the effects of the latest policy.

    By Blogger kwayteowman, at 7:25 am  

  • KTM,

    Can I say that it is unrealistic to save 50% of income. Only realistic option is for people to consume their property asset post retirement, unpalatable as it may sound.

    I think part of the difficulty also stems from the very Asian mentality of having a bequest. Of course, like I suggested, people might be unwillingly to cash out on property given the high degree of uncertainty it would entail.

    By Blogger Bart JP, at 8:15 am  

  • How about increasing the returns from our CPF?

    If Temasek could give 18% year on year since 1974, why not have an option for CPF holders to channel some funds into the Temaseks or the GICs to earn "stellar" returns?

    Temasek and GIC's asset accumulation power rivals any hedge fund.

    Since they are investing for Singapore, why not Singaporeans as well?

    That way, our investment income year-on-year is pegged to how well Singapore performs in its investment porfolios.

    Or at least give us "risk-free" 30 year US Treasuries at 4.85%.

    By Blogger nec tamen criminosus, at 2:29 pm  

  • KTM,

    :::Your tirades against the CPF are not very helpful. :::

    Why do you accuse me of a tirade? I'm also seeking for solutions. It is not helpful in discussions when you accuse people of a tirade when you disagree with them.

    :::The current CPF policies represent a balance :::

    Look it is not much of a balance if many cannot retire properly at retirement age. Lets look at outcomes instead of subjective assessment. What is balance to you may not be balanced for others.

    With pension schemes gone, in a no welfare system, something has to be in place.

    I'm NOT against CPF. I just want the CPF to function as CPF - a provident fund that plays its function well. I'm for the CPF in its original form without all the tinkering and liberalisation.

    ::::You are suggesting that if we have unions that take to the streets, that have the political clout to lobby for protectist labour policies like in France, and recently Indonesia, we will be a better and stronger nation? :::

    Oh come on I did not say that! We all know the politics in Singapore. Between Singapore Now and France, there are alot of levels!

    You talk about balance. Is having their highest import of labor per capita balance? Is removing retrenchment benefits balance? Is having the highest GINI among developed countries balanced?

    You go balance it for me.

    :::::But the fundamental fact remains that there will be more money in CPF for retirement if it is not liberlised...this cannot be untrue.

    This statement is clearly true. Problem is that there is no economically sound and political palatable way to do it -- or at least you haven't proposed any in my view:::::

    What I made is a statement on how we got here to this problematic point. Whether it is an honest mistake to liberalised or we are all speaking from hindsight...I mentioned earlier that there were dissenters to the govt policy and many voices spoke against liberalisation at the point when the govt considered it. What we face today, was also brought up many years ago.

    It may be too late to unliberalise and I did not suggest this.

    nec tamen criminosus ... made a very good suggestion to give higher returns on our CPF. This is actually done in Chile where the govt DARES to invest the provident fund and answer to the people. How it is done is actually quite SOLID. The investment strategy is out up front and discussed transparently. The govt hires the best people to manage the funds and ready answer should things go wrong.

    There is a study between Chile vs Singapore:

    http://www.adamsmith.org/policy/pub
    lications/pdf-files/singapore-v-
    chile.pdf

    Their scheme achieved a 13% annualised rate of return...and their ministers don't get paid millions.

    KTM, you keep questioning if 'our' demands are 'reasonable' demanding the impractical from our govt. ...and your constant effort to 'try to balance'. Oh come on, we are all amatuers here, our govt has a team of thousands of top scholars and policy makers who won't allow a single good idea to escape them. If our govt goal is perfectly aligned with our goals, we can all sleep at night and shut down all our blogs, comments and Straits Times forum. The purpose of being freely able to voice our concerns is to align the govt to the people, whether there is a practical solution at the end after all the tradeoff is a matter for the govt to answer and tell us. You don't have to trying to compete against the 1000 top govt scholars to try to out-think them and come up with a all singing all dancing practical solution....there is useful function to just raise our concerns and let our great govt stand up and answer....

    By Blogger LuckySingaporean, at 2:17 am  

  • Lucky,

    Why do you accuse me of a tirade?

    It should be clear to you by now that the KTM is a straight-talking kay poh and he will call a spade a spade. No accusation or offence was intended. Apologies if you took offence.

    I'm for the CPF in its original form without all the tinkering and liberalisation....It may be too late to unliberalise and I did not suggest this.

    There might perhaps be some confusion here. So exactly what are you suggesting again? No tinkering or more tinkering?

    On the issue of balance, please excuse the KTM for his sloppiness. When the KTM says "balance", he does not mean "balance" in the sense of a compromise, or meeting halfway.

    The point here is that public policy exists on a continuum from left to right. You seem left-leaning (or perhaps even centre). The KTM is centre-right and our Govt way on the right. When you argue you make it sound like your proposal is the only reasonable view and the KTM's point is that that's not true. There is always an opposing and equally reasonable view (depending on where you stand).

    Public policy is about figuring out where on this continuum to sit -- and as it turns out, the decision rests with the government of the day. Whether or not it's a compromise depends on the style of the govt and in the case of the CPF policy, the KTM unfortunately doesn't even see the possibility of a compromise based on existing circumstances (i.e. agree with you that we shouldn't let people use their CPF money to buy property).

    Next, nec tamen criminosus has highlighted a very interesting point, i.e. to allow Singaporeans to invest with Temasek. His suggestion is actually NOT the SAME as giving a higher interest rate on CPF (which seems to be the key idea for the Chilean scheme).

    First, two quick points in response to nec tamen criminosus's suggestion:
    1. Temasek is NOT risk-free hor. Just think Shin Corp.
    2. While the 30-year rate on US bonds may seem high, people have to understand the concept of currency risks. If people dun already know, the US is VERY much in debt and they are rolling over their debts every year. Do we know how US intends to deal with its debt? Dunno. Therefore, they need 4.8%. :-) No free lunch lah.

    Intrinsically, the KTM believes that the CPF should only give returns that are commensurate with its risks. What this means is debateable, but certainly 18% is NOT going to be risk-free.

    Is it possible for the CPF to however still give 18% interest? Yes, but people better understand that this means that the country is therefore bearing risk on behalf of the individual.

    There is a price on this risk (which is why you can buy/sell puts). If the country absorbs this risk on behalf of the people, what it is actually doing is giving subsidies in a regressive way since the more CPF money you have, the more you gain.

    Here is where you need to decide which constituent you are rooting for (forget the rich, they don't figure here :-P). If you are pro-middle class, you go for the higher CPF rates; if you are pro-low income, higher CPF rates is a lousy way to go. Believe it or not, the KTM is pro-low income. :-P

    Realistically, there are two reasonable tweaks to the CPF system:
    1. Have gradated CPF interest rates, meaning higher rates for the first $30K and progressively lower rates thereafter. This means that the poor people who don't have much CPF to begin with will benefit proportionally more than the fat cats.
    2. Liberalize the CPF to allow people to invest in *whatever* they want (even junk bonds if they really want, why not if they have the risk apetite?).

    If the KTM's reading of tea leaves is accurate, idea (1) might eventually be a reality. As for (2), it's not as crazy as it sounds, though it's not quite clear such would come to pass. As it turns out, most of the people already have most of their money locked away in their HDB flats and so those who have excess should be okay (maybe?).

    But you know what, neither of these ideas can solve the retirement problem. In fact, the KTM has been thinking about the problem for quite a while and he's convinced the solution does not lie with the CPF -- and we should refrain from any further tinkering (but you dun have to believe the KTM lah).

    On the point about whether Temasek should sell bonds, the KTM has no intrinsic objections. If Temasek sells bonds with 18% interest, the KTM would probably buy also (after reading the fine print).

    The question would however come back to the point about whether Temasek has a need in its fundamental operations to raise capital. To sell bonds for the sake of given Singaporeans another instrument to invest in may be technically equivalent to increasing the CPF interest rate, though not directly (and this will have the issue of regressiveness). And hor, let's us not kid ourselves: Temasek will not be selling bonds with 18% interest lah -- and if it does, the interest rate will be imputed into its price so it's not clear that it'll be a real winner either. :-P

    Oh come on, we are all amatuers here, our govt has a team of thousands of top scholars and policy makers who won't allow a single good idea to escape them.... You don't have to trying to compete against the 1000 top govt scholars to try to out-think them and come up with a all singing all dancing practical solution....there is useful function to just raise our concerns and let our great govt stand up and answer.

    Don't have to be too modest here lah. The way you talk, seems like you're a real expert. :-) In any case, the KTM isn't competing with the 1000 top govt scholars lah. Win them got prize meh?

    You ask yourself why you talk. Because got a lotsa free time right? KTM sama sama lah. :-) Just turns out that the KTM is on the other side of the political spectrum and cannot agree with you on this matter (and has absolutely no qualms disagreeing with you). Neither has the KTM stopped you from talking or say you shouldn't talk what. :-P

    On occasion, it is possible for the KTM to sometimes agree with you, for example: (i) on need to provide insurance for congential conditions; and (ii) no need to tie Workfare to Medisave contributions. What this shows is one's position on the continuum of public policy leanings is also a function of the actual issue. :-P

    The KTM believes that he has finished his case on the CPF. Your turn to have the last word. :-)

    By Blogger kwayteowman, at 5:33 pm  

  • "We live in a world where all prices are determined, and their relationship with each other pinned down, by a general equilibrium."

    not when the supplier is a monopoly that determines its own price which consumers, like it or not, have to take.

    "To suggest that if CPF was not liberalised, housing prices will not increase, and people will have enough is precisely that kind of argument that works in a vacuum - as if all other variables do not matter, as if there is no history or context."

    I agree with the idea that if CPF wasn't liberalised, housing prices might not have escalated as fast as it did. When CPF is liberalised, it adds to the disposable income that is available for people to buy flats. This naturally encourages people to upgrade or buy new flats. When demand increases, surely price increases.

    "Every time there is rapid economic growth, asset prices often rise quickly, often bubble like. China / India and many parts of the world are today experiencing rapid housing price inflation. To blame our 1990s bubble on CPF liberalisation is to ignore the context of those days - where SE Asia was chalking up the kind of stellar growth rates seen only in China today!"

    Economic growth has certainly increased incomes and helped fuel property buying but when you add CPF liberalisation to it, its like putting on an extra pair of wings.

    "Moreover, CPF was first allowed for public housing in 1968, and further liberalised for private property in 1981. You completely ignored this inconvenient history when you lay into the 1990s bubble."

    The bubble may have burst in the 1990s, but its origins might well have begun in 1968.

    "There is a problem of endogeneity here. When you run a regression and it shows a fit, how do you know whether it is X causing Y or Y causing X? Given a common land price and other associated costs, do you need a regression to show private property prices correlates with public property prices? If you regress public property prices against private prices, what do think you will see? Don't confuse correlation with causation."

    Bart, if you read luckysingaporean's reply carefully enough, you would realise that this was what she highlighted:

    "Moreover, the timing of government policies relating to the use of compulsory savings for private housing finance purposes, the liberalisation of rules on public housing ownership criterion as well as for housing finance had a significant impact on private housing prices."

    So that was her main message.

    "If you ask me, Singapore property prices are not only a function of domestic economy. It also depends many other factors, global economy, demographic and immigration trends."

    they are not independent variables but highly correlated with one another. global economy affects domestic economy lots lots because domestic economy is primarilty export oriented. economy affects prices because more income means more buying. demographic also affects buying because moe people means more demand for houses. finally, immigration means that a whole lot more people coming here to settle down and buy houses and increase demand and jack up prices and worsen our currently inflated flat prices.

    "HDB is indeed a large supplier of new flats. But given the STOCK of flats, the new flats are not that big. The resale price index of public housing reflects the private transactions in the secondary market. What has HDB being a big supplier of new flats got to do with it? What so unfree about private transactions?"

    if you look at the number of complain letters to the press about the HDB balloting / queueing system, you would realise there are many unhappy couples who cannot obtain flats. if you look at the HDB queue numbers, you would realise that demand far outstrips supply. What you need to understand is that a huge stock of flats that are already occupied means zero in terms of supply.

    HDB has everything to do with the resale price of HDB. It is because the HDB is not building enough new flats that new couples have no choice but to resort to the resale market. Hence, by controlling supply of new flats, HDB indirectly controls the price of the secondary market.

    Think about it, if all new buyers can buy new flats, who then would buy old flats? Demand would plummet and secondary prices plunge.

    "Look at the recent property price boom - fueled by foreigners according to the media. Why so? Because Singapore's property is deemed underpriced compared to other major cities. I don't want to play this argument too much, but my point is that asset prices here are clearly affected by global conditions."

    Bullshit. It's fueled by govt's affectionate embrace of foreign talents.

    "Property prices do not exist in a vacuum. Singapore Govt alone cannot engineer artificially high property prices without us losing competitiveness. If that happens, something else will have to adjust."

    To a certain extent it can, because the cost is passed down to the people.

    By Anonymous Yours truly, at 2:24 pm  

  • Yours truly,

    You make good points. I will probably respond later cos I am quite busy . . .

    By Blogger Bart JP, at 3:43 pm  

  • KMT, Bart, Yours Truly,

    My last one on this topic.

    This whole debate started when I 'blamed' the govt for the current state of having to 'retire later and work long' - this was the govt's May Day message - on a day when the govt is suppose to express thanks to workers. Instead of doing that they said "work harder..work longer..retire later". It was like a slap in the face for many people. Seldom does my blog get such a blog get such a big response.

    Liberalisation of CPF for property resulted a reallocation of retirement funds to property and hence Singaporeans have less funds for retirement. I haven't seen any argument against this assertion by anyone yet.

    The other assertion I made is that the liberalisation of CPF cause property prices to rise. If you put it in the context of "asset enhancement" which was a stated goal of the govt it does have this effect. There are researchers who looked into this phenomena and made the same conclusion. Bart's assertion is that there are other factors and that property prices should converge to an equilbrium determined by many other contributing factors. This issue is too complex to settle here.

    KTM makes the argument that the contribution rate was too high and liberalisation merely moved us to a better balance and he favors personal responsibility over govt controls. My take is personal responsibility is that it works if you can get most people to be responsible. You don't need rules on littering if everyone acts responsibly. However, in today's world of cosumerism, instant gratification, getting everyone to be responsible may be impractical. KTM is perhaps right to blame the people for their lack of thrifty behavior. But how does that solve the problem? We can educate ...but against the billions of dollars asking people to spend, spend, spend ...we are fighting a losing battle. I suggest that we are not at a good balance...we are off-balance and something needs to be done...

    There is also a separate and sad problem of people who don't even make enough for their living on full time jobs...let alone save for retirement. Are we telling these people they have to work until they die? This is inhumane! If there is little choice but to spend tax payers money to solve this...then I say do it...the govt is not poor and broke and will not be if they help these people.

    People living longer is also highlighted by Bart as yet another problem. I think it makes no sense for each person to plan based on the worst case(or should I say best case) of living until 90. I still don't think we are talking about a huge % of people unless some new "youth for ethernity" drug is invented. Insurance or some kind of govt aid should fix this.

    By Blogger LuckySingaporean, at 7:36 am  

  • Lucky,

    Of course you are right in some sense, I agree with you from the onset about the lack of cash. But your argument is much incomplete.

    If retirees can monetise/cash out on their property converted to annuity, then high asset prices should not be a bad thing. Investing CPF moneys into property assets would in fact have boosted their returns. The more challenging question is why this seemingly simple step has proven so difficult.

    By Blogger Bart JP, at 8:52 am  

  • Keep up the good work.

    By Anonymous Mariel, at 8:00 am  

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