Three Points Down and Three Points Up

There is a well known problem in economics - the problem of time inconsistency. We all know that the policy maker always has the incentive to deviate from the announced policy (ex-post cheating) if he could get away with it. And because we citizens understand this incentive to cheat, we never believe what the policy maker says. We build in the expectation (ex-ante) that cheating will occur. In the end, every one is worse off for it because we cannot credibly commit to a stable policy that will benefit us in the long term.

The classic example is inflation expectations, something we already learnt from economics textbook. But there is an equally compelling local illustration to the problem of time inconsistency - employers' CPF contribution rate.

How often have we told ourselves that the CPF contribution rate is a blunt instrument? How many times have we convinced ourselves that CPF rate should be geared only towards meeting the (long term) retirement needs? How many times have we said that it should not be used for short term economic management?

Yet, how many times have we cheated? I used 'we' because we the citizens often abet the process. When the economy was down and potential CPF cut loomed, we often gave reason so and so (like those mentioned above) why CPF policy should not be adjusted so indiscriminately. But when the economy went up, we could not help but demand an increase in the contribution rate, an extra bite at the cherry. However much we professed it was not good policy to use CPF rate this way, it always ended being a cyclical policy tool.

The temptation to cheat is so palpable - it is like giving a child sitting an exam the model answers and then asking him not to use it, fat chance. So here we go again. The talk is that CPF is to be restored to 16 per cent.