TL;DR – Probably should invest it, right?
It’s that time of the year again. Chinese New Year.
And you know what that means. Yes. That’s right. The annual Hong Bao Toto draw!
This year, the prize is a cool $12million. For the last few years, I would get a ticket (or two, or 10) every year. I can’t resist the temptation of the possibility of winning a few million dollars and never ever having to work for money again.
And sometimes, on a lazy Sunday like yesterday, I would even think about what I would do if I actually won the money.
Probably want to invest it…
There is the option of spending the winning on anything and everything I wanted. You know, to buy that house I’ve always dreamt of, buy that car that has always caught my fancy, take a really long holiday all around the world. But if I did that, I run the risk of spending all that money too quickly. Then I would still have to work for money, rather than do things I want to do. And I probably won’t have anything to leave behind for my children.
There have been too many stories of how some people had won big and lost everything.
So what should I do?
I should probably invest the money. And only spend the returns from the investment. Should I spend all the returns from the investment? Let’s say get a steady annual return of 4% on my investment of $12 million. That’s $480,000 a year. If I spent all of it every year, that means I get to spend $40,000 a month. Not bad! And I would still have that $12million left at the end of every year! Even better!
And only spend a portion of the returns
But wait. There’s such a thing as inflation. Last year, inflation was quite low. It was about 0.61%. But inflation can be quite high too. In 2008, the inflation was 6.6%. I’m sure you know what I mean. One bowl of bah chor mee used to cost $2 when I was a kid. Today, one bowl of bah chor mee costs at least $3.
So if I want to ensure that I can keep getting the same amount of value out of my $12 million that I win this year, I would have to ensure that I grow my capital. So I can’t spend all the 4% of the annual returns on my investment. I should reinvest some of the returns of my investment.
Given the ups and downs of inflation, I suppose that I should reinvest about half of my returns. That would mean that my capital of $12 million would grow by about 2% every year. Which should mean that my capital would, on average, grow slightly faster than inflation. That, in turn would mean that I would be able to get the same amount of things in the future as I can get today from what the returns of the investment of my Toto winnings.
And 2% of $12million is about $240,000. That’s $20,000 a month. And I would be able to get what I can get with $20,000 a month now for the rest of my life. I think that’s quite good. And when I eventually leave this world, I would be able to leave some to my children.
That’s what our government does
Hey. Doesn’t that sound familiar? Yes. That’s what our government does.
Singapore has considerable reserves. But the government didn’t “win” it at some lottery. It was accumulated by the hard work and financial prudence of earlier generations of Singaporeans. And the returns from the investments of our reserves, also known as Net Investment Returns Contribution (NIRC), pays for 17% of our country’s annual budget.
Some people would want us to dip into our reserves. The most extreme I’ve seen is this:
Firstly, it’s uncertain how that person came to think that we have at least $4 trillion in our reserves. Secondly, the government does give money to everyone of us in cash and kind. If a Singaporean went to a Singaporean school, that person would have gotten some money from the government already. By some estimates, it costs the government about $20,000 a student a year. Then we also enjoy the safety and security provided by the Home Team. That also costs money.
Sure. Not every Singaporean gets $10,000 in cash outright every year throughout their entire lives. For example, I don’t. And that’s OK. Because I have a good job. I don’t need any cash handouts or subsidies. Better give those who, for whatever reasons, can’t hold on to a good job, and thus can’t earn that much and need a bit more help. And for those with lower income, I’m sure they get more than a total of $10,000 a year from the government in the form of subsidies, grants, and various other services.
Incidentally, DPM Tharman also mentioned about Singapore’s progressive tax and benefits system in his super-long interview a month back. DPM Tharman had said stressed on the importance of keeping our overall system of taxes and benefits fair, even as we raise taxes.
“Our fundamental approach is to keep our overall scheme of taxes and benefits fair and progressive. Even as we raise taxes, which we must do in good time, we must keep the system fair. That means those who are better off pay more of the taxes and get less benefits. Those with lower incomes pay some taxes – because everyone must contribute – but they get more of the benefits.”
“Currently, for the lower income group (those in the bottom 20%) for every dollar they pay in taxes, they get $4 back in benefits. For the middle income group, every dollar they pay in taxes, they get $2 back in benefits. That’s the result of the shifts we made in the last ten years, to tilt the balance in favour of the lower and middle-income groups.”
So that we spend money in a sustainable way
And, because we have a sizeable reserve, we are able to fund our expenditures using the returns from the investments of our reserves. That’s something very rare. In a lot of countries, like USA, things are the other way around. They spend money from their annual budget to pay the debts accumulated by their forefathers. DPM Tharman said,
“Critically too, we must avoid shifting the burden to our children’s generation, and their children’s generation. It’s a basic conundrum in most democracies: governments don’t want to admit that the system requires higher taxes, but they want to provide additional benefits to voters.
The only way you can do both of those things is to borrow more today shift the burden to the next generation. And that’s what’s been happening in a whole range of countries.”
We should, as far as possible, grow our reserves faster than inflation. Only by doing so will we ensure that our budget is sustainable. If we don’t do that, then, as a nation without natural resources, we probably will find ourselves in a very precarious situation very quickly. We may not bear the brunt of the suffering.
But our children probably will.