[h=1]HDB FLATS SHOULD NOT BE USED AS RETIREMENT SECURITY[/h]
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8 Aug 2014 - 8:03pm
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What is the strategy for Singapore’s retirement security? According to the government the pillars are:
a. Central Provident Fund: The Central Provident Fund (CPF) enables working Singaporeans to set aside funds for retirement.
b. Home ownership: Public housing helps Singaporeans own long-term assets that can be monetised upon retirement.
c. Healthcare subsidies and the “3Ms”: The Medisave, MediShield and Medifund schemes provide a sustainable healthcare system for all Singaporeans.
d. Workfare: The Workfare Income Supplement scheme and the Workfare Training Support scheme encourages older, low-wage workers to continue working, while helping to meet their retirement and medical needs. (http://www.mom.gov.sg)
And if you measure this strategy by the number of ‘pillars’ it probably beats the rest of the world hands down, 4 to be exact. However, if you are into Fengshui, ‘4’ in Cantonese sounds like death or disaster.
I am not superstitious. But are the pillars disastrous?
However;
What is clear is that from the government’s point of view, HDB is part of the retirement security for most of us. And in that view, selling your HDB to fund your retirement is central to their calculations. And the reason is obvious CPF was never going to be enough as most international studies have shown.
But does it make sense to have HDB as a retirement security which is akin to saying it is an investment? Is it liquid enough? Does HDB as an investment solve the inter-generational transfer aka high taxes for social security? Bear in mind that avoidance of high taxation is the Holy Grail that underpins the economic policy of this government.
HDB as investment
If HDB is to be used as a retirement security, government needs to ensure that it appreciates overtime. However, since HDB is also a public housing project, it must ensure affordability. This conundrum can be shown by the tables below.
Table 1: Average price of a new 4-room flat (Straits Times, 4 August 2010)
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</tbody>
Table 2: Median Income (Singapolitics 18 Jun 2013)
<tbody>
</tbody>
A new 4-room HDB that averages $20,000 in the 1970s, now is about $375,000 in 2010 that is an increased of 18.75X. Median wage in 1975 was about $286 and in 2010 was $2710, or about 9.48X.
This means that a new 4 room flat has increased almost 2 times the rate of median income; at this rate, the legitimate question to ask, is whether HDB is an investment house or a public housing developer? Because HDB obviously cannot be both.
Donald Low in his excellent article, Rethinking Singapore’s housing policies, also asserted that HDB is a ‘questionable security’ on two levels:
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If for example, the old folks cannot monetize their flats for retirement in a property down-cycle, the government then can stop the flow of new flats into the market forcing the young to buy from the resale market, and by doing so also fix the pricing. This in effect becomes a direct intervention of how inter-generational transfer happens after all; ‘taxing’ the young through the resale market via profits for the retirees.
* Median Resale Prices of 4 room flats in 2nd Quarter 2014 ranged from $380,000 (Yishun) to $700,000 (Queenstown). (HDB website).
Conclusion
There is no question that HDB is a retirement security from the government’s perspective. And it follows that as part of the retirement security strategy, HDB holds the bulk of a citizen’s ‘savings’.
Asset enhancement of HDB by the government serves two objectives:
1. Appreciation of land sales from Singapore Land Authority to HDB drives up the revenue for the government. This in turn satiates the budgetary and reserves requirements of the government who can afford to keep personal and corporate taxes low.
2. Politically popular to harness goodwill and to garner votes.
HDB as an investment is anathema to many Singaporeans’ concept of a home. This is shown by the fact that 76% want to live out their lives in a place they have built and called home.
And in the role as a public housing developer, HDB will increasingly find its role of building affordable flats for the young versus asset enhancement for the retirees contradictory.
Even though the government says that tax-funded pension is going to cripple the country and especially the young, by strategizing HDB as a retirement security it will find that inter-generational transfer will have to take place anyway.
But what will happen is that the transfer will mask itself as profits to the retirees instead of social benefits. And the other ‘advantage’ is that big business and the rich do not have to play a role in such a transfer through higher taxes. This shows that HDB as a retirement security is regressive!
Certainly, I think Donald Low has made a point that HDB as a retirement security is fraught with risk. It pretends to be more benign than tax-funded pension but, as shown, it is not. Lets keep a home a home, and relook at our entire way of securing our future for both young and old.
BK
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8 Aug 2014 - 8:03pm
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What is the strategy for Singapore’s retirement security? According to the government the pillars are:
a. Central Provident Fund: The Central Provident Fund (CPF) enables working Singaporeans to set aside funds for retirement.
b. Home ownership: Public housing helps Singaporeans own long-term assets that can be monetised upon retirement.
c. Healthcare subsidies and the “3Ms”: The Medisave, MediShield and Medifund schemes provide a sustainable healthcare system for all Singaporeans.
d. Workfare: The Workfare Income Supplement scheme and the Workfare Training Support scheme encourages older, low-wage workers to continue working, while helping to meet their retirement and medical needs. (http://www.mom.gov.sg)
And if you measure this strategy by the number of ‘pillars’ it probably beats the rest of the world hands down, 4 to be exact. However, if you are into Fengshui, ‘4’ in Cantonese sounds like death or disaster.
I am not superstitious. But are the pillars disastrous?
“Computations of IRRs for Singapore by some international agencies indicate much lower IRRs. In the annual Melbourne Mercer (2012) report on the global pension index, the net IRR for a median income earner in Singapore is below 20%. The OECD (2012) reports the gross IRR for Singapore to be 13% for a working career of 40 years and 9.3% for a shorter career of 30 years (See OECD, p. 36).”
IRR is the Income Replacement Rate.
“Pension economists commonly rely on the concept of Income Replacement Rate (IRR), which represents retirement incomes/payouts relative to pre-retirement earnings, and use the IRR to evaluate and compare the different social security systems.”
“The World Bank recommends a net IRR of between 53% and 78% for middle-income earners. (The World Bank 1994, p.294). The average net IRR amongst 34 OECD countries for median income earners is 72%. (OECD 2011, p.125).”
Based on the above estimations, Singapore’s retirement security seems to be in BIG trouble.
However;
“In the case of Singapore, the CPF enables the majority of Singaporeans to own their homes, which is an asset that can be tapped on to supplement retirement income should the need arises. Even if this asset is not monetized, it enables one to save on rental costs in retirement. The ability to incorporate the housing asset adds an important dimension in measuring the IRR for Singapore.” - ADEQUACY OF SINGAPORE’S CENTRAL PROVIDENT FUND PAYOUTS: INCOME REPLACEMENT RATES OF ENTRANT WORKERS. By Chia Ngee Choon and Albert Tsui Department of Economics National University of Singapore, November 2012; commissioned by MOM.
Notwithstanding that 70% of Singaporeans surveyed in the recent National Conversation said that a home is not an investment. And a survey by Lien Foundation showed that 76% of Singaporeans wish to die at home.
What is clear is that from the government’s point of view, HDB is part of the retirement security for most of us. And in that view, selling your HDB to fund your retirement is central to their calculations. And the reason is obvious CPF was never going to be enough as most international studies have shown.
But does it make sense to have HDB as a retirement security which is akin to saying it is an investment? Is it liquid enough? Does HDB as an investment solve the inter-generational transfer aka high taxes for social security? Bear in mind that avoidance of high taxation is the Holy Grail that underpins the economic policy of this government.
HDB as investment
If HDB is to be used as a retirement security, government needs to ensure that it appreciates overtime. However, since HDB is also a public housing project, it must ensure affordability. This conundrum can be shown by the tables below.
Table 1: Average price of a new 4-room flat (Straits Times, 4 August 2010)
| 1970s | 1980s | 1990s | 2007 | 2010 |
| $20,000 | $80,000 | $170,000 | $290,000 | $376,300 |
| 75 sqm | 90 sqm | 95 sqm | 90 sqm | 90 sqm |
<tbody>
</tbody>
Table 2: Median Income (Singapolitics 18 Jun 2013)
| 1975 | 1980 | 1990 | 2001 | 2010 |
| $286 | $398 | $1000 | $2100 | $2710 |
<tbody>
</tbody>
A new 4-room HDB that averages $20,000 in the 1970s, now is about $375,000 in 2010 that is an increased of 18.75X. Median wage in 1975 was about $286 and in 2010 was $2710, or about 9.48X.
This means that a new 4 room flat has increased almost 2 times the rate of median income; at this rate, the legitimate question to ask, is whether HDB is an investment house or a public housing developer? Because HDB obviously cannot be both.
Donald Low in his excellent article, Rethinking Singapore’s housing policies, also asserted that HDB is a ‘questionable security’ on two levels:
“First, in view of how volatile house prices can be, it is by no means assured that the elderly who need to monetise their housing assets can do so at the right time in the housing cycle. As the population ages rapidly in the next two decades, a surge of elderly Singaporeans (the population above 65 is expected to more than triple in the next 20 years) seeking to monetise their housing assets might easily cause prices to fall sharply (in other words how liquid is HDB in such situations?).
A second and more fundamental objection to the use of housing as a form of retirement security is that it is highly regressive and inequitable. The people who benefit the most from housing as a form of social security are those who have the means to own more than a single property.”
HDB is a form of inter-generational transferA second and more fundamental objection to the use of housing as a form of retirement security is that it is highly regressive and inequitable. The people who benefit the most from housing as a form of social security are those who have the means to own more than a single property.”
“The Government has a general aversion to inter-generational transfers through the fiscal system (of taxing the young to pay for the benefits of the old); this is why Singapore does not have the tax-financed pensions found in most developed countries.
But the current approach of relying on house price appreciation to finance the retirement of the elderly is, de facto, a form of inter-generational transfers too, since it is always the next generation that has to bear the burden of rising house prices…“. Rethinking Singapore’s housing policies by Donald Low.
The Singapore government owns 80%+ of all land in Singapore, and with reclamation that will increase. This is a monopolistic position that allows it to manipulate supply and demand.But the current approach of relying on house price appreciation to finance the retirement of the elderly is, de facto, a form of inter-generational transfers too, since it is always the next generation that has to bear the burden of rising house prices…“. Rethinking Singapore’s housing policies by Donald Low.
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If for example, the old folks cannot monetize their flats for retirement in a property down-cycle, the government then can stop the flow of new flats into the market forcing the young to buy from the resale market, and by doing so also fix the pricing. This in effect becomes a direct intervention of how inter-generational transfer happens after all; ‘taxing’ the young through the resale market via profits for the retirees.
* Median Resale Prices of 4 room flats in 2nd Quarter 2014 ranged from $380,000 (Yishun) to $700,000 (Queenstown). (HDB website).
Conclusion
There is no question that HDB is a retirement security from the government’s perspective. And it follows that as part of the retirement security strategy, HDB holds the bulk of a citizen’s ‘savings’.
Asset enhancement of HDB by the government serves two objectives:
1. Appreciation of land sales from Singapore Land Authority to HDB drives up the revenue for the government. This in turn satiates the budgetary and reserves requirements of the government who can afford to keep personal and corporate taxes low.
2. Politically popular to harness goodwill and to garner votes.
HDB as an investment is anathema to many Singaporeans’ concept of a home. This is shown by the fact that 76% want to live out their lives in a place they have built and called home.
And in the role as a public housing developer, HDB will increasingly find its role of building affordable flats for the young versus asset enhancement for the retirees contradictory.
Even though the government says that tax-funded pension is going to cripple the country and especially the young, by strategizing HDB as a retirement security it will find that inter-generational transfer will have to take place anyway.
But what will happen is that the transfer will mask itself as profits to the retirees instead of social benefits. And the other ‘advantage’ is that big business and the rich do not have to play a role in such a transfer through higher taxes. This shows that HDB as a retirement security is regressive!
Certainly, I think Donald Low has made a point that HDB as a retirement security is fraught with risk. It pretends to be more benign than tax-funded pension but, as shown, it is not. Lets keep a home a home, and relook at our entire way of securing our future for both young and old.
BK
