Saturday, 16 February 2013

The $900,000 Singapore child

What is the price of having a baby? A financial adviser looks at the dollars and cents of the ongoing debate about raising the fertility rate.
By Joseph Chong, Published The Straits Times, 15 Feb 2013

RECENT economic research on happiness has established a good correlation between a person's sense of well-being and his propensity to procreate. As in nature, animals need to feel well before procreation can happen.

One fundamental factor for well-being is financial sufficiency. One must earn enough to make ends meet, plus save enough for retirement and the proverbial rainy day.

Without financial sufficiency, successful procreation is unlikely because it will make you go broke. Again, nature sets the example. Animals will not procreate or will abort their offspring when resources are inadequate.

It thus makes sense, as a very basic starting point, to look at procreation as a hard-nosed business investment decision.

How financially viable is it to have children, given Singapore's cost structure and available resources? Does it cost too much for us to have our own children as a nation?

The current discussion about procreation financing has largely revolved around who pays - the state, businesses or parents - and for what. But can we, as a nation, even afford to have children? What is the total cost of raising a child?

Unlike in the United States, there is little published official data on what it costs to bring up a child here. Combining my own private data with whatever published data I could find, I worked out a ballpark estimate.

As a former chief executive officer of a financial advisory firm, I have worked on and reviewed many client financial plans. From the cash-flow analysis of these financial plans, we worked out the expected costs of bringing up a child in Singapore for a mid- to upper-income family.

My estimate is about $600,000 in real dollars per child for a one-child family, and about $500,000 per child for a two-child family to raise a child. The lower figure is due to some economies of scale.

This covers the costs of raising a child, including childcare, clothing, food, schooling, imputed rental of a room to house the child. I assume tuition of $1,000 a month for 11 years, amounting to $132,000. Tuition is seen as a necessity in many families, although the amount spent varies. Household expenditure surveys suggest families spend more on private tuition than on university fees, so $1,000 a month is not unduly high. My estimate also includes the approximate costs for a four-year stint at a local university. If the child does not go to university, deduct about $100,000 from the total cost.

For this article, let's take a non-university-going, one-child family's cost of $500,000.

The implications of the $500,000 cost to bring up a child are not trivial. It means that there will be a shortfall of $500,000 in the couple's retirement fund.

Retirement has to be a top priority because it is non-negotiable - it is rarely possible to work until one passes on. An individual has a duty to himself to avoid the fate of being old and infirm but destitute.

Seen in this context, children are an option - to be exercised only if one can afford it. A retirement fund of $500,000 translates into a retirement income stream of $20,000 - using a 4 per cent draw-down rate - each year. The hard-nosed question that needs to be asked is: "Is your child worth an annual retirement income stream of $20,000?"

The above cost-estimates to raise a child do not include the estimated subsidies paid by the state. This amounts to about another $400,000, with about $300,000 going to education - assuming 13 years of subsidised education. My $300,000 estimate is higher than the government's own internal estimates because I have imputed rental. Singapore's public-funded schools do not pay rental for their premises, unlike private ones. Imputed rental cannot be ignored, as it is a substantial real economic cost.

Hence, each child is expected to cost the nation about $900,000 - $500,000 in family funds and $400,000 in state funds.

Based on about 40,000 live births each year currently, every new cohort that is born is expected to cost about $36 billion or about 11 per cent of gross domestic product or about $11,000 per Singaporean every year.

This is far more than the GDP per capita of Laos and about the same as Thailand. If the Laotians and Thais had our cost structure, they would not be able to afford any children.

The trouble with tuition

WHY is it so costly to raise a child in Singapore?

In the US, it costs about $360,000 to raise a child in a one-child US family, excluding university costs. This is about $140,000 less than the equivalent Singaporean situation.

One reason for the difference appears to be the costs of Singapore's parallel education system, which is not prevalent in the US - the expected costs of private tuition, which represents the single largest expenditure for many parents.

Based on the Household Expenditure Survey 2007/08 (HES2007) published by the Department of Statistics, Singapore resident households already spend more on private tuition for their children annually than on university fees, local and overseas combined as of 2007. Based on HES2007 and GDP breakdown data, the private tuition industry was already a $1.2 billion industry or about 17 per cent of the Ministry of Education's budget in 2007. Extrapolating to today, the private tuition industry is probably worth more than $1.6 billion annually.

The education budget increased by 78 per cent between 2005 and 2011, but parents appear to be paying increasing amounts for private tuition, which many complain is necessary because of the way their children are (not) being educated. This is akin to a company whose revenue is surging but shareholders' losses keep widening. As a professional investor, I would say that something has gone awry.

HES2007 showed that the main bulk of spending on tuition is by residents living in private properties and the largest Housing Board flats.

As a society, we need to reverse the growth of private tuition quickly. The MOE and every school should be measured on how many hours of private tuition students consume and given incentives to reduce consumption at least 10 per cent a year every year for the next 10 years. This will focus the ministry and schools to manage curriculum and teaching techniques creatively so that private tuition becomes unnecessary. Schools should also be forbidden to recommend tuition of any sort to parents. Reducing reliance on tuition will remove one great cost-barrier to fertility.

Will immigrants dilute our resources?

HOWEVER, if we decline to reduce our overall child-rearing cost structure but rely on immigration to meet the shortfall, we won't be better off because the costs are far higher than we think. Every new immigrant who is sworn in may be a tangible dilution of the wealth of all Singaporeans.

The reason rests with the balance sheet of the state, that is our reserves. Every new immigrant has a claim to benefits from the reserves. This is unlike in the US where new citizens have to shoulder the burden of federal and state debt. Part of the taxes paid by every US citizen goes into paying interest on the national debt.

The official book value of our reserves is about $308 billion. The current market value is probably about $800 billion or about $245,000 per citizen. The exact value may be moot but the benefit from the reserves is already tangible. In the 2012 budget, $7.33 billion was taken from returns on reserves - about $2,230 per citizen. If goods and services tax had been used to raise $7.33 billion, GST would have had to increase to 13 per cent - a hardship for the average citizen. Unless each new immigrant has an economic value of at least $245,000, Singapore would be diluting citizens' wealth.

When we understand the true cost of raising children in Singapore, we can see that the solution does not lie in importing immigrants. Rather, a more concerted effort needs to be made to reduce the costs of having a baby. A good start can be made from reducing the reliance on tuition.

Unfortunately, the procreation package announced by the Government on Jan 21 does not adequately address the issue of total costs of rearing a child. Instead, it shifts the cost burden from the family to the state, or other taxpayers. At $2 billion a year, it is a non-trivial recurring cost and represents about 4.3 per cent of the state budget. Although I hope it is effective, it is not possible to reasonably forecast its impact until we get a firm grip on the total cost perspective. If the total cost continues to rise aggressively, it would negate any well-intended subsidies from the state.

Until we satisfactorily address the issue of total cost, it would be imprudent to throw any more taxpayer dollars at the problem.

The writer was previously the chief executive officer of a wealth management firm.

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