I have read Roy Ngerng’s speech he recently made at Hong Lim. In my opinion, it is full of emotion but short on facts. In fact, he got some of the facts wrong based on a faulty understanding of finance and economics. I am like him an ordinary person. Also like him, I get my information from publicly available sources but have come to very different conclusions.
Firstly, he raised the non-issue of whether Temasek and GIC managed our CPF money. Technically, they do not. Anyone reading the CPF and other government websites should understand what has happened.
Our government, like all governments has various sources of revenue. Our government’s cash inflow comes mainly from the following sources:
1)taxation
2)CPF
3)land sales
4)borrowings
and in recent years,
5)our reserves - up to 50% of its annual profits
Our government then spends some of this money on infrastructure, education, defence, civil service salaries etc. Fortunately, it does not spend all of it. Instead the surplus is given to GIC and Temasek and perhaps MAS to invest. The money collected from CPF has been mixed up with money collected from other sources. So as far as Temasek and GIC are concerned, they are only getting a checque from the government. They do not know if the cash comes from CPF, land sales, borrowings or taxes. That’s because money is fungible. A dollar from CPF is the same as a dollar collected from taxes. So even if the PM sits on the board of GIC, he cannot tell you where the money comes from.
Roy Ngerng is making something out of nothing, probably out of ignorance. Another complaint is that GIC and Temasek are not transparent and he is demanding transparency. Here is a quote from Roy’s speech:
“So I ask again, did the GIC and Temasek Holdings use our CPF money?How long have they been using our money to earn for themselves?How much money have they earned with our CPF?We want full reports. Not just from today. But for all the years since 1974, when Temasek Holdings was first started.What have they done with our money?”
Roy is obviously unaware that Temasek holdings is the most transparent sovereign wealth fund in the world, according to SWF Institute, an US based organization that monitors sovereign wealth funds (SWF). If you click the link, you will see that Temasek scored 10 out of 10 for transparency along with 9 other SWFs. GIC is less transparent, scoring 6 out of 10. But this is still respectable. You can get all sorts of information from their annual reports.
Roy also complained that Temasek and GIC are earning return of 16% and 6.5% respectively but are paying CPF members 2.5% to 4%.. Here is a quote from Roy’s speech:
“It is now a known fact that the government takes our CPF to invest in the GIC, the government’s investment firm. The government takes our CPF to earn 6.5% but only gives back to us a low 2.5% to 4% interest on our CPF. This is the lowest interest rates in the world.”
Elsewhere in his speech he said:
“Temasek Holdings earn a 16% interest. If our CPF was invested in the Temasek Holdings, then we should get our interest back.”
There are a couple of errors or incorrect understanding of how finance works in his words. Firstly, Temasek does not earn an interest of 16%. Its rate of return is 16% over the past few decades, a sterling performance. There is a difference between interest and rate of return that anyone with a basic knowledge of finance or economics will know.
Interest is something guaranteed while a rate of return is not. When we put our money in a fixed deposit, there is a contract between us and a bank where the bank guarantees a fixed return known as interest. So unless the bank goes bust which rarely happens, we know for sure how much we will be getting. But when we invest in a business, we cannot be sure of a profit. It is impossible for anyone to earn interest at a rate of 16% over the past few decades. Singapore interest rates never reached this high in the past three decades.
What Temasek does is to invest in stocks which are businesses. There is no guaranteed return and the investments can go bust. There were years when Temasek made losses or a negative return. If Roy wants CPF members to share in Temasek’s good years, then it follows that CPF members must also share in its bad years ie lose money. This brings me to the next point.
Roy is therefore wrong to compare the 2.5% to 4% interest that CPF pays us to the return of 6.5% or 16% that GIC or Temasek made. He was comparing apples with oranges. According to basic finance and economics, the higher the risk the higher the return. Temasek takes risk to earn 16% while we do not take risk with our CPF money.
For a fair comparison, Roy should compare the CPF interest rate with the one year fixed deposit rates our banks pay. The credit rating of our government is much higher than our big three local banks. So according to the laws of economics the interest rate that CPF pays should be lower than what our banks pay. But the reverse is true. A one year OCBC fixed deposit is currently paying only 1% p.a. A $50,000 fixed deposit at DBS is currently paying an interest of only 0.25% p.a! Therefore, our CPF is very generous paying us interest rate from 2.5% to 4%. If they paid us higher in the past, it was because the interest rates paid by banks in those days were also much higher.
Interest rate is low because Singapore has a strong reputation of good governance. They do not expect our currency to depreciate and so people from all over the world prefer to put their money in Sing $ instead of US$ or Euros. The Americans and Europeans on the other hand have to pay higher interest rates to attract deposits because investors think their currencies will decline.
This is a good time for me to give Roy some friendly advice. Roy, if you are reading this, please do yourself a favor and read some basic text books in finance and economics. Some of the things you said was plain wrong. I respect your courage and idealism but ignorance could prove costly.
Now let me get back to my essay. Roy seems to think (against the evidence) that our government is worse than First World governments. Let me quote his speech again:
“After nearly 50 years, Singapore might have a First World economy and we have First World costs. But do we have a First World government? Do we have First World lives?”
In my opinion, our government is better than the majority of First World governments. Under our government we have better healthcare, better schools, lower unemployment, higher per capita income than most first world countries. So yes, we have First World lives with good health, schools and income. We achieved all this with lower government spending and hence lower taxation. Despite low taxes, we managed to saved up huge reserves managed by GIC, Temasek and MAS while most First World governments are heavily in debt. Also Singapore’s home ownership is one of the highest in the world. So our government has done better than most First World governments.
I know some of you are skeptical. So I will run through the numbers and give you links to prove what I say is true.
According to the IMF, our per capita income is third highest in the world. This means we are the third richest country in the world. I know that Roy complained that there are poor people in Singapore. But which country does not have poor people? Remember, the richer the country, the fewer poor people there are.
The World Health Organization (WHO) has ranked Singapore’s health care to be the 6th best in the world. That was some time ago. Bloomberg recently ranked ours as second most efficient.
According to Newsweek, we have the fourth best education system in the world. This is corroborated by a recent international test where our students came in first for problem solving. Singapore’s unemployment rate is about 2%, one of the lowest in the world. Compare this to 10.6% in the EU and 6.3% in the US. All this was achieved with one of the lowest taxes in the world. VAT (similar to our GST) is 20% in the UK for example. The total tax revenue collected (including COE) as a percentage of GDP is only 14.2% as compared to 26.9% for the US and 39% for the UK.
Home ownership in Singapore is the third highest in the world. Don’t forget, home ownership is an indication of affordability. The more unaffordable the price of a home, the lower the home ownership rate. Of course, there are people who can afford to buy a home but prefer to rent. But what the numbers tell you is that 90.5% of Singaporeans want to buy a home and can afford it. Compare that with 65% in the US or 67% in the UK.
So I think our government has done a better job than most other First World governments. I encourage you to click the above links. Singapore has better health care, better schools, higher home ownership (which implies housing affordability), lower unemployment, higher standard of living than what the majority of First World governments provided. Also all these goodies were provided despite lower taxes. On top of that they managed not to spend all the tax revenue collected and saved up huge reserves while most western governments are heavily in debt. President Obama spent nearly $1 trillion to stimulate the economy and the unemployment rate is three times ours. The US government is today in debt to the tune of $17 trillion. That is very lousy economic management.
Next, Roy complained about the minimum sum. Now I know that most of us want to take our money out at 55 in one lump sum. But the government wants to keep this a minimum sum. There is a good reason for this. Many people simply do not know how to handle their money. They may squander it away or get cheated in some business venture. Recently, there was a widow who received $1 million in insurance money and donations following the unfortunate death of her husband. The money was all gone in one year!
If it is possible to spend or lose $1 million in such a short period of time, what more if the sum involved is smaller. A foolish person's hard saved CPF money could be gone in a few months. The problem is that some people, especially those who lack education, will exhaust their CPF savings if taken out in one lump sum. The minimum sum is simply for their protection.
Cass Owary
TRS Contributor