Wednesday 2nd March, 2011

The Business Times - 02 Mar 2011

MONEY MATTERS
Demographics, fertility and happiness

There are two low-cost ways to solve our problem of a declining population and to enhance our national happiness

By JOSEPH CHONG

DEMOGRAPHICS are an important investment trend. Warren Buffet has written about it often and it is a recurring theme in his portfolio. How a country's population is expected to change over time has repercussions on the value of equities, bonds and real estate.

A good example is Japan. It has been grappling with deflation for the last 20 years. One of the major reasons why consumer prices continue to decline and Japanese equities and real estate have done poorly over the past two decades has (partly) been its stagnating and ageing population. There is little public support for immigration to boost population numbers. On the other hand, as finance theory predicts, Japanese government bonds have done very well.

The US housing market also provides interesting lessons in demographics. During the huge US housing boom from 2005-2007, virtually every major city saw big increases in home prices. One exception was Detroit. The auto industry was doing badly during this period. This resulted in a contraction in employed households.

On the other hand, Florida saw some of the largest increases in prices, which caused massive overbuilding. Prices have since collapsed and in recent auctions there have been cases of oceanfront condos selling for less than four-room HDB flats; in other words, Sentosa Cove at HDB prices. Will this anomaly persist?

The answer lies again in demographics. Florida is the favourite state for retiring US citizens. The first of the baby boomers are entering retirement age. Over the next 10 years, these numbers are expected to climb sharply and Florida is likely to see improved demand from out of the state. The anomaly is not likely to persist.

The key to indigenous population growth is fertility. If a society does not achieve a rate of at least 2.1, it will eventually become extinct. Most countries use immigrants as a temporary solution until fertility can be increased. However, increasingly, immigration is seen as undesirable because of the problem of social cohesion. Singapore is not alone here. Social cohesion may not be important now but it is critical in adversity. A united UK defied Hitler alone in late 1940 despite facing defeat and invasion. A disunited US in 1968 enabled the communists in Vietnam to prevail.

What drives fertility rates? I had read many unconvincing explanations until I recently had a eureka moment while reading an article on happiness (The World's Happiest Places) on Forbes.com. The article can still be accessed on the Forbes website. The issue of happiness is of increasing importance to investors because there is an apparent link between happiness and economic productivity and creativity. In this article, the world's happiest places have been ranked by Forbes according to a poll conducted by Gallup between 2005 and 2008.

Looking at the table in Forbes, it struck me that there appeared to be a correlation between the level of happiness in developed societies and their fertility rate. The Gallup poll asked the respondents a range of questions on their well-being. Forbes then ranked the places according to the percentage of respondents who said that they were thriving.

I selected a sample of developed industrialised countries from the Forbes ranking with a GDP per capita cutoff of about US$27,000 and tabulated this against their fertility rates. The accompanying table

summarises my analysis. Non-industrialised countries with a large dependency on traditional agriculture have been omitted because children are a necessity on farms as they are often important captive labour.

A plot of the 'per cent say they are thriving' (happiness) against fertility rates threw up a good correlation with an R-squared of 0.71. R-Squared is a statistical term, between 0 and 1, saying how good one term is at predicting another. If R-Squared is 1.0, then given the value of one term, you can perfectly predict the value of another term. If R-Squared is 0.0, then knowing one term will not help to determine the other term at all.

Just to confirm matters, I also plotted 'per cent say they are thriving' and fertility rates against GDP per capita. In both cases, the correlation was weak with R-squared of 0.33 and 0.17. Once a society reaches a certain level of income, money apparently does not buy more happiness or babies.

P + H = Babies

That happy people produce more babies was recently supported by a 2010 paper published by the Max Planck Institute for Demographic Research (www.demographic-research.org ) authored by Macquarie University professor Nick Parr using data from Australia ('Satisfaction with life as an antecedent of fertility'). The concluding equation is Partner + Happiness = Babies. Humans are therefore not dissimilar to other animals. Zookeepers will attest that animals need to be happy before procreation can happen.

Unfortunately, Singapore ranked 81st on the happiness ranking. Countries with similar population sizes such as Denmark and Norway are right at the top. However, this means that there is potential for improvement, that Singaporeans can become happier. So, cheer up.

What then makes people unhappy? Worry is the crux of unhappiness. Worry is the chattering monkey inside an unhappy head. It is difficult for procreation to occur when there is a chattering monkey bothering us all the time.

As the CEO of New Independent, a wealth management firm, I have been privileged to have reviewed many financial plans in the past 10 years. The common thread running through all the plans is worry, even among clients who are already millionaires. There are three main worries:

·  funding personal retirement

·  the cost of having children

·  funding parents' retirement, which is now also a legal obligation.

Related to the above worries is perhaps, even among millionaires, the rhetorical question: 'Will our children have a better life than us?' Although the financial plans flag worries, they also offer us solutions at the personal and, perhaps, national level.

What can a government do to ease worry, as a start to a happier society which will then produce more children? Here are two low-cost solutions, among many that could enhance our happiness:

·  One, reduce the cost of having children. I believe our fertility incentives have failed because they fail to recognise the true cost of having a child in Singapore until they are financially independent. Most financial planners will tell you that it is probably more than $500,000 cumulatively. The main cost is education and the culprit is the cost of our parallel education system: private tuition.

Parents collectively spend more than an estimated $1 billion per annum - about 10 per cent of our official education budget - on private tuition, and it is a growing industry. A booming tuition industry is a sign that our education system is malfunctioning and becoming more regressive as the cost of tuition disadvantages the poor. We need to reverse the growth of private tuition. The Education Ministry and every school, as one of their key performance indicators, should be measured on how many hours of private tuition students consume. We should impose that private tuition consumption decrease at least 10 per cent per year every year for the next 10 years. This will focus the ministry and schools to manage curriculum and teaching techniques such that private tuition becomes a tiny industry.

·  Two, reduce the anxiety over funding personal retirement. Even a professional investor like me has anxiety about my own retirement even though I am totally immersed in market analysis daily. I estimate the current market value of our reserves (not including Temasek's holdings) to be in excess of $500 billion. The technique for estimating this undisclosed number was first published by The Business Times in August 2006 (A closer look at Singapore's reserves), which I wrote. (The article can still be read gratis at http://www.ni.com.sg/index.asp).

We should redesignate, say, $200 billion of the reserves into a citizens' pension fund managed by GIC to provide each current and future citizen with a basic pension at 65. Unlike other state pensions in other countries, this would be fully funded from the outset with existing money that already belongs to the citizens of Singapore. Hence, there would be no need for new taxes or contributions. I would also advocate that all mothers and National Service key appointment holders receive a bigger allocation, while emigrants forgo claims to this pension fund.

The writer is CEO of financial adviser New Independent. He welcomes feedback at : josephchong@ni.com.sg

This article is for information only. Readers should seek independent advice before making any investment decisions