Archive for October, 2007

Avoiding two Singapores, remaining one family

October 6, 2007

In thinking aloud (ST, 6 Oct 2007), Jenadas Devan says that he does not understand why people can accept that when they buy a term life or medical insurance, they cannot get back the premiums paid out but when it comes to a longetivity insurance, they cannot accept that premiums paid cannot be fully recovered.

For someone who saves adequately for old age, the difference between a term life / medical insurance and a longetivity insurance is that the former protects against premature end to working life whereas the latter does not. By the time the latter kicks in, the person would have reached the end of his working life and would have no need for protection as far as working is concerned. Furthermore, since adequate savings have been put aside all this while, there is no need for longevity insurance.

Mr Devan is also sure that given two options:

Option A: Payout of $X+ over 20 years, $Y after that infinitely

Option B: Payout of $X- over 30 years and that’s all

People would definitely choose option A (which is the govt’s intended policy) over option B.

I disagree. Again, for someone who has been saving adequately, option B is better because the person knows that he can give himself more than $X- from his savings way beyond 30 years. Furthermore, he knows that if he dies before the end of the 30 year payout period, all remaining money goes to his beloved kin.

On the other hand, option A is less attractive because unless he is sure he can live to 100 years old, part of what he put in will go to someone else instead of his kin.

In any case, Mr Devan trusts Singaporeans to be rational. I agree and believe we should leave them to their rational choices.

Mr Devan also echoes the words of Mr Tharman and MM Lee in saying that investment in the equity market is much more risky than the risk free CPF. However, we cannot talk about risk without mentioning returns. What is important is risk adjusted returns. If CPF members are confined to buying a diversified portfolio of the 30 blue chip companies in SGX’s revamped Straits Times index. Would CPF members be worse off over a period of 30 years? Perhaps not.

We have to be different to survive, says MM

October 6, 2007

MM Lee said (ST, 6 Oct 2007) that America’s stagflation of the 1970s and early 80s were the result of billions spent in the Vietnam war and programs to alleviate black poverty. Indirectly, he is saying that we shouldn’t spend too much on our poor and old for that may impoverish our economy.

But is he right? Everyone knows that the worldwide stagflation in the 1970s and early 80s was the result of a series of oil shocks caused by oil price jack up by the middle east countries.

MM also compares us with countries like Malta and Luxembourg. We are situated in unstable Southeast Asia whereas they are located within the relative security of the European Union. He is probably inferring that since our situation is so much more precarious, it necessitates that we have a stronger, more authoritarian govt than those in Malta and Luxembourg.

But MM should also have compared us with South Korea and Taiwan. Their situations are so much more dire, yet they have so much more democracy than us. They also do not belong to any regional bloc or EU, yet their people are not repressed like ours.

MM also said that the EU went into Yugoslavia to stabilise that corner of Europe, but he forgot to tell us that troops went in only after Serb soldiers have committed massive ethnic cleansing on Albanian women.

MM also compared the numerous primary resources our neighbours have to our sole asset – our location. But everyone knows that many primary resources are bought at low prices and re-exported at a very high premium through our location.

MM also reasoned that racial harmony was the impetus for upholding the English language as the working language for the nation. But in my opinion, the most important reason for promoting English while demoting Chinese to a second language is to eradicate the power base of the Chinese speaking masses.

The industrial harmony represented by the NTUC also represented the suppressing of worker’s rights.

MM also said there is quality leadership at all levels. I believe that quality descended all the way down to ordinary workers. That I believe, was and still is the ultimate basis for the country’s prosperity.

Good leaders can’t always be popular: President

October 6, 2007

President Nathan says (ST, 6 Oct 2007) that a good leader is not necessarily one who is popular but rather one who has to defy public opinion sometimes in order to achieve growth. He has to have the conviction that he is making the right decision and that public opinion will eventually catch up.

It is not that our leaders sometimes defy public opinion, they always defy public opinion whenever public interests are not in line with theirs. It is also not that public opinion catches up, but rather public opinion simply does not count.

Just look at Myanmar, the military junta raised the prices of fuel and basic goods manifold over night. That they were unpopular didn’t mean they were the right thing to do.

So saying that a leader shouldn’t be a populist, is no excuse for him to be dictatorial. He should not pursue growth for the sake of his own glory but should instead consider the resources available and the well being of the people. A good analogy is that of a newly appointed CEO who sets out to distinguish himself by whipping his people to slave harder for him. In so doing, he not only makes life difficult, but also reduces company morale. He is harming the company, not taking it to greater heights.

A good leader is first and foremost one who truly cares for his people. Because he truly cares for his people, he will not force them against their wills. He would never reward himself first before he rewards his people. He would never take all the credit to himself but would recognise the sacrifices of his people. He will never force and bulldoze his way around but would instead motivate the people with his vision and charisma. People would feel for him and would serve him with pride.

Sadly, that solidarity of purpose is not present in our country. Instead, we have leaders pursuing their own agenda at the expense of the people’s well being.

Is the CPF a cheap source of funds for the govt?

October 1, 2007

When asked by Straits Times (29 Sep 2007) whether the govt has been using the CPF as a cheap source of funds, Tharman replied that this is “wrong and plainly misleading”. He says the govt can borrow more cheaply from the market, at 1.7% on average over the last 10 years for one-year treasury bills (instead of 2.5% for CPF ordinary account) and market rate (3%) for 10 year bonds (instead of 4% for CPF special account).

Firstly, it is indeed wrong and plainly misleading for Tharman to quote the figure of 1.7% over the last 10 years. The last 10 years have seen three of the most difficult setbacks to our economy – the Asian financial crisis in 1997, 911 in 2001 and SARS in 2003. The interest rate over this difficult period would be correspondingly lower than the more prosperous times before that.

If we wish to determine the appropriate return for our CPF funds, we should take into consideration market interest rates stretching all the way back to 1955 when CPF first started. Since we can only obtain interest rates as far back as 1988 from MAS’s website, we can calculate the average interest rate from 1988 to 2007 to be 2.1%. This is much higher than the misleading 1.7% that Tharman quoted.

Secondly, we need to also ask ourselves is it appropriate for Tharman to compare the CPF ordinary account to one-year treasury bills? Do CPF members have the flexibility of cashing out their CPF ordinary accounts every year? Obviously no. Only married couples draw out their ordinary account to pay for their HDBs. But that depends on when they get married and if we say that on average, CPF members get married 5 years after they start work, that means their money would be locked in the CPF for at least 5 years. In other words, the CPF ordinary account should at least be compared to a 5-year bond which commands higher interest than a 1-year treasury bill. Bear in mind, we have not even considered those people who remain single and can only purchase a flat at the age of 35 or who never get to touch their CPF until 55 years of age.

Guess what is the average market interest rate for 5-year bonds from 1988 to 2007? 3.5%! So all this while, when they should’ve given us 3.5%, they have only been giving us 2.5% – a short change of 1%.

What does that short change of 1% amount to? Given that the entire CPF sum is $100 billion, the short change amounts to $1 billion annually, more than sufficient to pay for the $2.8 billion grants and subsidies given out by the govt over the last 5 years (ST, 29 Sep 2007).

So you see? The govt has been giving out money that is actually saved from paying us less interest than we deserve. They have been using CPF as cheap funds. How cheap exactly? 1% cheap which they are finally giving back to us.

It is also wrong for Tharman to compare the CPF Special account, which remains locked up for at least 30 years to 10-year bonds. Experts interviewed by ST argued in favour of Tharman saying that the government doesn’t issue 30-year bonds so the nearest duration for comparison would be 10-year bonds. Furthermore they say that since the rate difference between 10 and 30 year bonds in the US is so negligible, it justifies equating a 30-year bond’s interest to a 10-year bond’s interest.

This explanation is not entirely satisfactory because we know intuitively that longer duration deposits fetch higher interest rates than shorter ones. If the market doesn’t pay an equitable premium for 30-year bonds over 10-year bonds, why should people be willing to lock up their money for 30 years when they can get the same rate of return for just 10 years?