By: Chris Kuan
In a previous article, ‘Singapore’s economic outlook in the year to come‘ published on 15 Jan 2016, I wrote that the global financial market turmoil will cause Temasek to report a year-on-year loss of 20%.
As markets has fallen further, this has widened to -25% according to Kenneth Jeyaretnam in his own estimate. He has also estimated that GIC will lose 12% whereas my own estimate is a loss of 9%, the difference due to conflicting interpretation of the volatility of its portfolio. We will never know because GIC does not report year on year returns.
On this note, my previous article in which I took an opposing view to Mr Jeyaretnam and Dr Chris Balding in regards to the discrepancies in the Singapore government’s assets and liabilities, had omitted attribution to both in its first version which was corrected.
This subsequently led to a wrong attribution to another blogger by The Independent. My apologies to the two gentlemen and The Independent for the uncharacteristic omission.
Now the important question is whether our CPF is safe from the severe financial markets turmoil. The answer is Yes but in the bigger scheme of things No. Let us begin with Yes.
The CPF Board invests our savings in government debt securities (SSGS – Special Singapore Government Securities). This means the risk of default, i.e. loss of principal and interest is remote because government bonds are safe in any well managed, advanced country.
This safety essentially derived from the tax raising powers vested in the government, that is to say the government can always raise taxes to mitigate the risk that it may be unable to meet its debt obligations.
One can argue that this is a circular reasoning but this is not confined to Singapore alone. Government debt and state welfare benefits elsewhere in the world are no different – governments can raise taxes and/or cut benefits to service their debt.
So far so good, GIC and Temasek may suffer losses occasionally but CPF is invested in safe government bonds so members are “immunized” from market risks as the government likes to say. Most Singaporeans are comfortable with that assurance. Should we really?
Since CPF has invested in safe government bonds, then we do not face potential losses from investment in equities and corporate bonds. But is there a certainty that the interest we received from CPF is enough to protect us from the risks resulting from large rises in cost of living? The answer is No and here is why.
Since 2004, the average annual increase in the Consumer Price Index is 2.4%. There is no published data on cost of living rises but the annual increase in the CPF Minimum Sum can be used as a proxy given the government has said that the MS increase is to maintain standard of living. The Minimum Sum has increased by an average of 6% a year over the same period.
Why the huge difference between the two? Simply because the transformation of Singapore produces price rises resulting from quality and esthetic improvements which are not considered inflation but are nevertheless price increases that have to be faced by citizens.
Think of the difference between cooked food prices between a hawker center and an air-con food court. As a result, even with the extra 1% of first 60k, the aggregate CPF interest rates are not sufficient to compensate for cost of living rises. This is a slow, unseen risk accumulated over years or decades.
There are no government securities issued anywhere in the world quite like those Special Singapore Government Securities in which the government can also change the interest rates at its sole discretion.
If the losses, in particular by GIC, are severe and long-lasting enough, one of the way the reserves can be rebuilt is by reducing CPF interest rates so that when markets recover, the government earns a bigger difference between the returns on its investments and the interests it pays to CPF. This means the risk of retirement inadequacy is increased.
Therefore in reality we are not safe from market turmoil. In actual fact, we should have never thought we are safe because it has been drilled into our heads that there is no free lunch.
We may comfort ourselves with safe CPF but no free lunch means that are always consequences we have to face tomorrow.

Republished from Chris Kuan’s Facebook with permission.

See also  The Two Faces of Meritocracy in Singapore