There has been much disquiet in Singapore recently. Inflation is rising incessantly, with cars now firmly out of reach of the middle class. Anecdotally, one hears of an increasing number of professionals, managers, executives and technicians (so-called PMETs) working in the gig economy. People are worried about whether their Central Provident Fund (CPF) savings will see them through their retirement and Singapore’s formidable (but largely untouchable) reserves are once again a hot topic of discussion.

Much of this unease can be seen in other countries too. However, Singapore’s vulnerabilities and unique top-down governance model make this more worrying. Could these problems be serious enough to cause a structural decline in Singapore’s prosperity? After all, Singapore is a young country with much of its economic success in the eighties and nineties buoyed by the tail winds of globalisation. There is no reason this should continue forever, especially since the tailwinds of yesteryears have turned into anti-globalisation headwinds.

History is full of the carcasses of once prosperous countries that fell into decline. Argentina, for example, was one of the richest countries in the world in the 1920s. Now it is a highly indebted country that is in a perennial battle against hyperinflation.

Complicating matters is that in Singapore, things are seldom what they seem on the surface. Issues that deserve serious debate are brushed off with platitudes and euphemistic blather. A combination of a vociferous government propaganda machine, a state-controlled media—whose main job, it would appear, is to keep citizens in the dark—and a society that has been taught to equate critical thinking and questioning with heresy allows many fallacies to be repeated long enough such that they take on the appearance of fact.

Many issues require interrogation. Why do so many senior citizens have a low standard of living in a “wealthy” country? Has a myopic, drill-based educational system led to high levels of dependence on foreign talent for knowledge economy jobs? Does Singapore’s growth model face serious challenges in the years to come?

Only when citizens have a clear understanding of how the different facets of the Singapore model really work can they fully engage with the government on issues confronting the country, and critically examine some of the alternatives proposed by the opposition parties. 

“You see, but you do not observe,” Sherlock Holmes once told Dr. Watson. Similarly, we need to not just see but also observe, deduce and question with a keen eye. So, let us don our deerstalker cap, dust off the calabash pipe and proceed to unravel the mysteries of Singapore’s reserves and CPF.

What are reserves? Why do countries need them? How does Singapore use its reserves differently from other countries? 

Many countries, especially developing ones, accumulate foreign reserves. These are typically comprised of bank deposits, treasury bills (T-bills) and other government securities denominated entirely in US dollars, or a mix of other currencies such as the Euro and Swiss Franc, and even precious metals such as gold. China, for example, is estimated to have around US$3.2trn (S$4.4trn) in foreign reserves and India around US$670bn (S$920bn). 

Foreign reserves come in handy especially during crises. For example, if a country has an emergency need for imports, which usually need to be paid in US dollars; or it needs to defend its currency from speculators who think it is overvalued and attack it, as happened during the 1998 Asian financial crisis. In such instances, a war chest of foreign reserves can be used to buy one’s own currency, thus providing it support and helping avoid a meltdown.

Singapore’s foreign reserves are just over S$500bn, though it is important to understand that the “reserves” the government usually talks about is much more than this. The Ministry of Finance (MOF) defines Singapore’s reserves more holistically as our total assets (what we own) minus liabilities (what we owe). These are held by the government and so called “Fifth Schedule” entities, including Jurong Town Corporation (JTC), the CPF Board, the Monetary Authority of Singapore (MAS), the Housing Development Board (HDB), the Government Investment Corporation (GIC) and Temasek. 

The assets include state land, buildings, cash, bonds and shares. The liabilities include bonds the Singapore government issues, such as the short duration T-bills that are currently popular with savers, and Special Singapore Government Securities (SSGS), which is essentially the CPF money of citizens and PRs. (More below.)

Importantly, Singapore’s reserves are not just used to ward off speculative attacks on the Singapore dollar or as a rainy-day fund. Our reserves—of which your humble CPF is a major chunk—are actively invested in financial markets, much like a mutual fund or hedge fund would do. And as we will see later, the returns from the reserves form a good part of the annual budget.

This is fairly unique globally. Countries with active sovereign wealth funds, such as Abu Dhabi, Malaysia and Norway, mostly deploy profits from their respective natural resources sectors. In Singapore, by contrast, the government actively invests the forced savings of its citizens (CPF) as part of its overall reserves.

Interesting, I thought the CPF Board controls the CPF money? Where exactly does the government invest my money and most importantly, is it safe?

The savings you put aside every month first go to the CPF Board and then flow to the government. In lieu of the CPF funds, the government issues the SSGS to the CPF Board. Think of it as an IOU or promissory note when you loan someone money; the IOU in this case is the SSGS. This makes the government liable for payment of principal and interest on the CPF money.

Simply put, the government borrows your retirement savings through the CPF Board by paying you a guaranteed interest rate on your CPF savings. So, unlike other countries such as the US, where citizens directly control their retirement savings (through so called 401k plans), in Singapore—like much else—the government controls it for you.

The government takes the CPF savings, budget surpluses (if any), proceeds of land sales, any other bonds it issues (e.g. T-Bills), excess foreign reserves from MAS and puts it all in a giant pot called reserves. (Analogous to the SGSS, the government issues MAS what’s known as Reserves Management Government Securities in lieu of the foreign reserves that MAS transfers to the government.) The reserves are invested mostly by GIC but also Temasek and MAS in a host of assets such as listed equities, real estate, foreign currencies, private equity, hedge funds and so forth. The goal is to earn a good return on the investments just like any commercial investor. 

Over the past 20 years, GIC has recorded a 6.9 percent average yearly return in nominal US dollar terms (meaning without taking inflation into account). Contrary to the perception in some quarters, there is a virtually zero chance of the government defaulting on its CPF obligations. In the absolute worst-case scenario, the government can always print money to pay its obligations given that the SSGS bonds are issued in Singapore dollars. (Of course this will have other consequences, such as fueling inflation.)

Why does Singapore need to invest its reserves (a large chunk comprising public retirement savings) to supplement its tax revenues? Are we not a wealthy country?

Government drum-beating amplified by lazy journalists frequently touts Singapore’s high GDP per capita figure—US$84,734 (S$113,789) in 2023, higher than in the US, Australia, Denmark and Netherlands—as a measure of its prosperity. But given that many senior citizens drive taxis and sweep streets during their retirement years, it is amply evident to the average Singaporean that our standard of living simply does not resemble what one might expect for citizens of one of the richest countries in the world.

Why this discrepancy?