Perspective Unlimited

Tuesday, September 25, 2007

CPF Reforms: Why Government's Critics Mostly Miss the Point

The major piece of CPF reform was supposed to be about the Compulsory Annuity Scheme (my views here and here). Nevertheless, the relationship between Government investment vehicles (namely GIC and Temasek) and CPF has received much of the attention instead. I was absolutely tickled with Chua Mui Hoong's quip, "The more you know, the more you realise you don't know."

Indeed, we do not have complete knowledge on how the government channels savings into the various investment vehicles. But the fundamental dissatisfaction with the CPF system is simple - the low returns relative to what the government reports on its investments. The bugbear is therefore the difference between the high investment returns of the government's investment vehicles (reported as 9.5 per cent for GIC and 18 per cent for Temasek) and low CPF interest rates.

The Famous Bank Analogy

When pressed on the difference, the Manpower Minister deflected the questions with the bank analogy - that depositors enjoy a fixed rate and cannot go to the bank to ask for higher returns. Not surprisingly, many bloggers disagree with this line of argument and continue to argue for CPF rates to be in some manner pegged to GIC or Temasek returns. Since some of these calls come from politicians, I shall refrain from making any explicit links here. My point is totally apolitical.

Why Returns are Not Low

My concern is strictly that of an economist. I maintain my stated view that CPF returns are not low on several accounts. First, it is risk-free, a position also reiterated by the government. Second, young Singaporeans also borrow at this preferential rate (0.1 percentage points above) to fund their housing purchase. Borrowers do benefit from this same cheap rate. Third, there are also other investment possibilities through CPFIS if a member is willing to tolerate higher risks and takes responsibilities for his own financial decisions. Fourth, property prices have seen a long run secular appreciation way in excess of 2.5 per cent. Those who borrowed at the cheap preferential rates would have made good excess returns, in addition to not having to pay rent.

Is a GIC Peg the Solution?

Let's just assume that there is one government investment vehicle, GIC. Let me then move on to address the pegging of CPF to GIC returns: Is this a good idea? Again, I am only concerned about the optimality of the institutional arrangement between CPF and GIC. I am therefore not addressing the socio-economic or even political consequence of the current relationship between GIC and CPF.

Let's take at face value that CPF board purchases government bonds that pay a 4 per cent return, risk-free, year on year. The government then, directly or through various channels, invests the proceeds which over the long run get 9 per cent returns. Is there an institutional arrangement that can somehow transfer these returns to the millions of CPF account holders?

A Principal-Agent Problem

The difficulty here lies in the principal-agent problem. Consider a simple example. The boss (principal) pays the worker a fixed wage for the worker (agent) to put in effort to maximise profits for the company, but the boss does not observe the amount of effort which the worker puts in. The optimal response of the worker is always to shirk since the boss cannot tell. Because of the asymmetry of information, this contractual arrangement results in suboptimal outcomes. The worker will never put in effort for the company.

The only way to overcome this is to make the worker the residual claimant or the profit owner. That is, the boss collects a fixed rent and leaves the rest of the profits to the worker. Since the worker now gains the benefits, he puts in effort and this arrangement results in optimal outcomes. The economic principle is simple: whoever controls the amount of unobservable effort must be made the final claimant of the rewards that come from this effort.

GIC and CPF: An Optimal Arrangement?

The institutional arrangement between CPF and GIC is therefore an optimal one. Here, the CPF Board, which is the custodian of people's savings, can be thought of as the principal. GIC, which invests the money, is the agent.

The optimal arrangement is therefore one that CPF receives a lower fixed amount while the GIC receives the higher excess. This point is further reinforced by the fact that the principal in this case is risk-averse. It therefore makes most economic sense for risk-averse citizens to get a fixed rate while allowing the government to bear the risk. To extend the argument a little, can CPF board demand a high fixed return, say 7 per cent, and leave GIC with the rest? Think about a real life principal-agent problem. If you pay the CEO with stock options that have very high strike price, the CEO simply takes on huge risks in order to have any chance of seeing the money, again to the detriment of the company. The principal-agent problem strikes again!

To peg CPF returns to GIC is therefore bad on several counts. First, it transfers investment risks to risk-averse citizens. Second, it potentially makes GIC behave sub-optimally. Worse, since investment assets are 'fungible' and returns not fully observable, it creates incentives for false-reporting. The agent will find ways to realise losses, postpone gains, and cook the accounts to reduce the payout to the principal.

In the end, the point is a simple one. The only way to make government watch over the country's money as best as it can is to let it behave as if it owns the money! Any other institutional arrangement will not achieve this optimality. Rather than increasing returns to CPF account holders, a GIC peg may become an institutional nightmare that creates more problems than it solves. The argument will run on.

88 Comments:

  • Hi Bart,

    Your post has been featured in The Singapore Daily. Thank you for linking us and your support. Keep blogging!

    The Singapore Daily http://singaporedaily.wordpress.com

    By Anonymous The Singapore Daily, at 3:14 am  

  • When you're putting your money into the hands of people who has absolute power over it, it is not "risk free".

    The interest rates can change anytime (it just did).

    The draw out timeframe can change anytime, and not likely to be earlier (it just did).

    The amount that can be drawn out can change anytime (now there is a minimum amount of $20000 that has to be maintained).

    Singapore can "turn into a 3rd world country" anytime. (Sarcasm here)

    Putting all my money in Global Balanced Index Mutual Funds, spread among a few of the largest Fund Houses in the world is maybe more "risk free" than putting it in CPF, while giving better returns.

    By Anonymous Anonymous, at 3:31 am  

  • To be honest, you cannot consider CPF money as a "risk-free" instrument in the usual sense of the word.

    When you talk about "risk-free" instruments in general, you're referring to government securities for which there is a liquid market - that is, you can cash in and cash out and enter and exit at any time.

    For CPF funds, you are compulsorily locked in. If you start working at age 21 and get the larger part of your CPF money out at 55, you will be compulsorily locked in for 34 years.

    34 years is a long time. There is, for instance, no guarantee that the Singapore government will remain AAA-rated for trhe next 34 years.

    There is no guarantee that DBS or OCBC will be financially sound for the next 34 years either, but the point is that you can always withdraw your DBS / OCBC fixed deposits in a hurry, if you hear that DBS and OCBC are in trouble.

    Because longer-term financial instruments are higher-risk, and your money in the CPF is effectively a long-term instrument, you should be compensated by considerably higher returns than, say, 2.5% in CPF OA.

    By Blogger Mr Wang Says So, at 4:26 am  

  • Another way of assessing CPF risk is how the terms of withdrawal is constantly changing to fit one policy or another.

    No need for me to parrot all the changes in the CPF in the past decade alone, but seriously if you have a "safe" and "secure" fund (whatever way you define it) that gives you the following conditions, would you thinks it is risk free?

    (1) fund has the right to change your withdrawal/maturity date any time. As a matter of fact, it has increased your maturity date by 12 years, while still demanding payment of premiums.

    (2) fund has the right to allocate your funds into other sub funds such as payment for only selected medical bills, which is not refundable upon maturity. The terms of the payment can change anytime and is not negotiable.

    (3) fund has the right to retain a portion of your total portfolio and spread out the return payment over a long term. As a matter of fact, the fund has decided to retain about $100k upon maturity and spread out your payment over 20years, at a "safe" and "secure" interest rate. There is no guarantee that the retained amount or the repayment period of the retained amount will not increase.

    Now try imagine a bank, a unit trust, an investment banker or whatever suggesting a similar product for you with the above conditions.

    Do you think most people would agree that it is a "safe" and "secure" and, er-hmm, "risk-free" situation?

    Lau Min-tsek

    By Anonymous Lau Min-tsek, at 5:32 am  

  • This comment has been removed by the author.

    By Blogger LuckySingaporean, at 6:45 am  

  • Bart,

    I realised I type a long winded post so I deleted it but the gist is this we Singaporeans are the owners of GIC & Temasek. If we want the returns redistributed as interest on CPF, the govt jolly well listen to us. ...unless they think the PAP own the money.

    By Blogger LuckySingaporean, at 6:55 am  

  • Mr. Wang,

    The govt of Chile took the pension fund money of the citizens and put it in the hands of professional fund manages. They returned 11.8% per annum for 18 years. ...and all this money belong to the citizens.

    The PAP took the pension fund as a source of cheap money...use it to invest for higher returns creating jobs for its own network of elites and now say the returns belong to the "govt". If the PAP has lost all the money given it is taking risk, the people of Singapore would have to foot the bill as higher taxes anyway. So we took all the risk without the returns.

    By Blogger LuckySingaporean, at 7:04 am  

  • I just wonder how would you respond to Mr Siew proposal.

    http://siewkumhong.blogspot.com/2007/09/thoughts-on-response-to-cpf-speech.html

    By Anonymous Anonymous, at 7:10 am  

  • Hi Anon, Mr Wang,

    Consider the US Treasury bills, it is considered risk-free (if you hold to maturity) since it is backed by the full taxing power of the US government.

    The US social security system works in the same way - the US security trust fund buys T-bills, that is, park the money with the US government, which sustains the promise to pay out to retirees through its sovereign taxing power.

    However, retirement goalpost can be shifted by legislation. One of the proposals to keep Social Security solvent is to push back the payout age. UK too is gradually pushing back pension withdrawal age.

    There is also nothing to prevent the US government from reducing its debt obligation through inflation, creating a real capital loss for the bond holder.

    Other than operating a defined contribution scheme (as compared to defined benefit in US and UK), there is in principle little difference - the government takes the money, and backed by its taxing power, promises to pay back some in the future.

    By Blogger Bart JP, at 7:23 am  

  • Bart,

    The govt of US is hardly a good example. If you read the book "Greenspan's Fraud", the US govt persuaded the people to contribute more to social security because rising longevity. Then they use the extra money to fund their excessive spending...leaving a big black hole in the social security system. Now they are struggling with this.

    If the US govt is weakening the US$ to inflate away its debt, it is going to be a scary scary world....and we are part of this world...$200 mooncakes soon? Greenspan's book already forecasts runaway inflation....

    By Blogger LuckySingaporean, at 7:40 am  

  • Lucky,

    I am not sure about the Chile system so I cannot really comment. Though the 11.8% sounded attractive - were they guaranteed? Or were the Chilean citizens made to bear the risk of fluctuation? The headline return looks attractive but the devil is in the details. If there are losses, who bears the losses.

    I said in my post, I am not saying whether this current system of paying the citizens a fixed 4% rate and the government keeping the rest is fair or not. How to split the pie is a political question.

    Even though the government is supposed to act in the best interest of the people, we have to be realistic enough to recognise that there are two actors in the country setup - people and government - in a principal-agent relationship, with a great deal of information asymmetry. A peg is no magic bullet, and probably creates more distortions to reduce the overall pie.

    By Blogger Bart JP, at 7:40 am  

  • Anon 7.10,

    I have said enough in my post, and I will leave it to you to think through NMP's Siew's proposals. I think I would refrain from commenting directly.

    By Blogger Bart JP, at 7:45 am  

  • Lucky,

    Exactly my point, see how profligate the US government is. The Social Security Trust Fund essentially holds hundreds of billions of dollars worth of T-Bills, money parked with the US government. Given their debts and deficit, the US government is a big black hole.

    Inflation - which I too think is a threat - is an easy way out to reduce the purchasing power of all these T bills. I find the prospect scary indeed. But there you go, the principal-agent problem strikes again.

    By Blogger Bart JP, at 7:51 am  

  • Bart,

    There is really nothing much to know about Chile, they took the pension money put it in the hands of competent professionals and the people got 11.8% per annum.

    It is common for pension funds to be invested because of the very long time horizon. Not investing it guarantees insufficiency like what we are facing today.

    As for your oft repeated point that we get this 2.5% risk free is a guaranteed from the govt is not as simple as that. How does the PAP guarantee this 2.5%?...If there are losses by the GIC resulting in a shortfall, the PAP will increase GST to make the citizens pay for it. We bear all the risk of their losses but get none of the gains.

    By Blogger LuckySingaporean, at 7:56 am  

  • Haha, maybe you are right!

    But since the government sets a lower nominal returns 2.5-4.0% for CPF, I think it will take a very incompetent manager not to make more than 4.0% over the long run! So, it is risk-free in that sense that the government should comfortably make the margin.

    But Chua Mui Hoong is right, accounts are fungible, the more we know, the more we realise we do not know.

    By Blogger Bart JP, at 8:03 am  

  • Bart,

    You might have missed one of the points. The people are not asking the PAP to guarantee say a 12% return on the CPF. They just one part of the return the GIC ALREADY made to be returned gradually to up its returns on the CPF

    It has nothing to do with risk the money has already been made compounded over decades with huge buffer and in excess of what is needed for the purpose it was set up.

    Singaporeans are not asking for guarantees of 12% for the next 20 years. They are asking for excess returns to be put back.

    By Blogger LuckySingaporean, at 8:30 am  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 8:38 am  

  • I have indeed overlooked another aspect - topping up, or returning a part of reserves to people.

    But the government would argue that high reserves are necessary since we are small with no resources. And that they periodically top up through various schemes (ps: during election times especially).

    By Blogger Bart JP, at 8:39 am  

  • Bart,

    I might be going to a meet-the-MP session and I'll see if I get a chance to ask this question.

    I think the CPF issue and the fact that Singapore has the highest reserves per capita in the world is linked. There is about $55K per man, woman & child.

    1. The GIC used the CPF (via bonds) to generate long term returns of about 9% returning only 2.5% to CPF accounts.

    2. The liberalisation of CPF for housing created billions in surplus for HDB.

    3. The GIC/Temasek operate numerous businesses that have Singaporeans as customers. Pro-business policies allowing say the public transport companies to raise fares despite rising earnings, have a negative wealth effect on Singaporeans resulting in their inability to save for retirement.

    I believe the CPF/Retirement issue is closely linked to the huge reserves held by our GIC & Temasek. Rich govt vs poor people. Ministers with pensions vs 85 yr olds with annuity. Us & Them....Bart are you one of THEM?

    By Blogger LuckySingaporean, at 8:50 am  

  • Well Lucky, I have been most open about my identity and background right from the beginning (whereas you have not).

    Good luck at the Meet the People Session.

    By Blogger Bart JP, at 8:59 am  

  • When I meet the MP he will know who I'm and I'll know what to say and what not to say.

    By Blogger LuckySingaporean, at 9:31 am  

  • Bart:

    I am not altogether familiar with the US system. But I understand that contributions to 401K are voluntary.

    This is an important point. Singaporeans' contributions are NOT voluntary. In effect, it is like being forced to invest in a financial instrument which is long-term (therefore higher-risk) and which you cannot just liquidate and cash out, as and when you please.

    By Blogger Mr Wang Says So, at 10:18 am  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 11:14 am  

  • Hi Wang,

    You can get a basic understanding of US Social Security from Wikipedia.

    Essentially, contributions are deducted from payroll (compulsory) just like CPF. The Social Security Trust Fund generates net surpluses currently, because more workers are paying into it than retirees taking out (this situation expected to reverse dramatically in the coming years). These surpluses are then used to buy NON-MARKETABLE (emphasis needed) US government bonds, which is basically an IOU to say that US Government is obliged to return the money to the trust fund sometime in the future to meet its future obligation.

    Now, replace Social Security Trust Fund with CPF, and US Government with Singapore Government. Lo and behold, you have exactly the same system. The only difference? US operates using defined benefits, and Singapore defined contributions (which means a person gets out only the portion he pays in).

    In the meantime, the government uses the money parked with it. Singapore government invests and generates large reserves. US government spends it. Look at what Wikipedia says


    . . . . . . . . . . . .

    "Under the law, the government bonds held by Social Security are backed by the full faith and credit of the U.S. government. Because the government had adopted the unified budgeting since the Johnson administration, this surplus off-sets the total fiscal debt, making it look much smaller. There has been significant disagreement over whether the Social Security trust fund has been saved, or has been used to finance other government programs and other tax cuts.

    The special series, non-marketable bonds currently held in Social Security Trust Fund are off-balance sheet and are excluded from the U.S. national debt calculation. Unlike traditional bonds, the bonds held in the Fund cannot be sold on the open market. Due to these unique features, some have argued that the bonds held in the trust fund are only "IOUs" that the government has written to itself.

    This means that these bonds represent a promise to pay the trust fund later, whether by increasing taxes, by cutting benefits, or by borrowing more money."

    . . . . . . . . . . . . . .

    What does it say? No one is quite sure if US government has already spent the money!!! Why? Because accounts are fungible. The government operates the Social Security, but the fund buys government bonds.

    The government can give a higher returns to CPF. It can also inflate away and make the higher returns meaningless. Whether the US worker or the Singapore worker will see the money, with its purchasing power intact, in the end depends on the "faith and credit" of the governments.

    By Blogger Bart JP, at 11:39 am  

  • Bart,

    The Social Security Trust Fund (SSTF) and the CPF are not the same. First the former is basically a social security system.

    As for CPF it is a monster with many roles: a macroeconomic policy instrument (i.e. reducing employers' contribution when times are bad or use as a cheap fund for housing development). So before you start talking about CPF being "risk free" you must take into account how it is being used.

    At least in the case of SSTF is based on one instrument of return (i.e. government IOU).

    The bottom line is CPF is essentially a saving schema whereas SSTF is an insurance schema. So comparison between the two is like comparing chalk with cheese.

    Tan Ah Kow

    By Anonymous Anonymous, at 12:01 pm  

  • Hi Tan,

    I did make the distinction - SS is defined benefits, CPF is defined contributions - you only get what you paid in, held in an individual account, and here is no insurance element.

    But other than that, whether it is payroll taxes into SS or CPF deduction, the fundamental point is that contributions are held in trust in the governments - which periodically are known to move the payout goalposts, or worse, renege on their previous commitment.

    By Blogger Bart JP, at 12:17 pm  

  • Bart,

    I know you have made the difference. I was merely pointing out that when you tried to equate the two particularly in the context of your present argument, you have missed the point completely and have used the wrong analogy. I am NOT saying you have not point out the differences.

    The crux of your argument is that you have noted that people have use the "banking analogy" as a point of argument is erroneous. My contention is that those who use the banking analogy may not be as "missing the point" as you put it.

    The basis of my content is that you have chosen to emphasis, to summarised, on the role of government mandated trust as a source of "funding" makes CPF no different from SSTF. And by implication, people should not be moaning about the poor deal they get from such as "risk free" return.

    What I think you have err on is to equate SSTF and CPF as -- to use a British phrase -- same difference. In fact, in doing so, it is terribly misleading especially when the two are, to repeat, what I say, chalk and cheese.

    Tan Ah Kow

    By Anonymous Anonymous, at 12:38 pm  

  • I know you have made the difference. I was merely pointing out that when you tried to equate the two particularly in the context of your present argument, you have missed the point completely and have used the wrong analogy. I am NOT saying you have not point out the differences.

    With reference to the above, I should have added....

    I am NOT saying you have not point out the differences. I do admit I may not have explicitly done so.

    Tan Ah Kow

    By Anonymous Anonymous, at 12:43 pm  

  • No problem Tan, I understand your point. Though I have tried to highlighted the similarities as well as the difference, I concede that it might have been slightly misleading to compare SSTF and CPF without properly setting the context.

    Back to my post: the gist is that pegging to GIC, as so many as called for, is not the solution.

    By Blogger Bart JP, at 1:02 pm  

  • I think the claim that the current arrangement is the ONLY way is rather presumptive.

    For instance, perhaps one way is to set up a passive fund that tracks a set of indices to manage the Special+Medisave Account money. No issue of tracking performance. No issue of who to blame if things go south. Low management fees. May avoid political problems of investing in other countries that more active funds may face. Average returns will be somewhat higher than "risk-free" rates.

    Another possibility is to peg, but not necessarily to 100% of GIC's returns. After all you need to put aside one or two percentage points as management fees. That still leaves a higher average return than what they are getting now. Of course, you have to couple this with an explicit shift in the accounting of the funds - CPF monies will go directly into "GIC", which will have to be much more transparent than its real life namesake :P

    The second suggestion also highlights the issue of the distribution of returns that is at the heart of the debate. We all know that the money is getting invested. Singaporeans just want to find out if they are getting their fair share. That their returns are fixed to cut risk does not address the issue of whether the level it is being fixed at makes sense. If you are getting paid 2.5% while the fellas investing your money is getting 9.5%, is that the right distribution of risk-rewards?

    ASIDE: IMO commentors rightfully move past your application of the principal-agent problem to this case. It seems too contrived -- is the problem in the CPF-GIC case really that of unobservable effort? Even if so, is making the worker the residual claimant really the only way, according to contract theory? Isn't there a whole lot more to contract theory than this?

    By Anonymous jason, at 3:05 pm  

  • Hi Jason,

    I am not addressing whether the current distribution is fair or not.

    Some years ago, I was a net borrower from the system since I bought the flat. I took out the maximum loan from HDB and paid only 2.6%. Whatever I have in CPF I invested, giving me much more than 2.6%. Singaporeans at the early stage of life cycles are mostly net borrowers. What is going to happen to them when you push up the rates? The reason why I don't want to address the equity issue is precisely because whether you gain or lose from the current arrangement obviously depends on whether you are a net borrower or saver, and also on how deft you are in using CPFIS (no magic bullet for pareto improvement here).

    The principal-agent problem is not contrived. Many are calling for a direct or indirect peg of CPF returns to GIC rate. The principal agent problem is very real. For the given strategic reasons, GIC accounts are not made public. How on earth do we peg returns to something we don't even know? When GIC says it made 6% and is paying out 4%, who will be happy?

    Sure, we can try to put the savings into a basket of private funds, who is then watching the fund managers? What happens when funds collapse like they have done in the US and UK? Are we then expecting the moral hazardous arrangement of asking the Govt to bail out using taxpayers money?

    Not that the current system is perfect. But I truly have yet to see something that is convincingly better.

    By Blogger Bart JP, at 3:26 pm  

  • Bart,

    Putting aside your SSTF and CPF analogy appropriateness debate aside, I must admit I still find it hard to see how from your original article you came to your conclusion about the optimality of pegging to GIS. Hence, I decided to re-read it several times before I comment on it.

    Whilst I do not question your conclusion, I am wondering how you came about it purely on the basis of what you wrote.

    There are a number of assertions that was made that seemed to me more speculative than factual:

    (a) That CPF is risk free because the government say so. Unless you fully understand what the government meant when they say risk free, it is at best an assumption from a Academic perspective.

    (b) Your assertion that Singaporean can borrow from cheaply from CPF to buy house and somehow you come to the conclusion that CPF return is not low. I am confuse, are we talking about returns to the savers or benefits to the borrowers? You seemed to have the two mixed up.

    (c) The fact that other instruments can incur other higher risks does not invalidate that CPF returns are not low. The question is whether for the same risk profile instrument, which is giving a better return? I don't think you have answered this question, and bring a totally different kind of instruments to validate a hypothesis is a somewhat bad analysis -- academically speaking.

    (d) This is somewhat similar to point (b). One fact value, your argument that property prices would have recovered more than the interest permitted but then conversely, it could be argued that in which case, CPF is lending money too cheaply to property owner. In which case, should it not be charging borrowers more and then passing on to savers? And again coming back to your question about CPF returns being not low, here again you are making another one of those chalk vs cheese comparison -- in this case bricks and mortar vs saving rates two totally different asset types, by implication risk profile.

    Finally, to your Principal-Agent analogy. Here you have portrayed the relationship as that of a worker and boss relationship, a relationship, the PAP government like to portray. Question, would an analogy portraying Principal-Agent be more adapt if it was a case of lender of money (e.g. CPF) and borrower of money (e.g. GIS)?

    Tan Ah Kow

    By Anonymous Anonymous, at 3:32 pm  

  • Hi Tan,

    (a) CPF deposits, backed by the power of the state, is really as risk-free as it gets. As seen in the recent bank run in the UK, depositors calmed down only when the UK government stepped in with explicit guarantees. I don't think it is any more productive to debate about risk-freeness. We will just have to assume the state has the power to return us the money we deposit in it.

    (b)&(d) Low or high is relative, in this case, dependent on your stage of life cycle. If you are a net saver, 2.5% is not enough. If you are a net borrower, you would rather 2.5% be even lower. So far, every one is asking for higher savings rate, has anyone discussed the consequences it will have on the tens of thousands of net borrowers? Does raising the rate mean more money for their retirement, esp those on lower income taking a 30 year loan?

    (c) Yes, I have not examined other instruments.

    Even a lender-borrower relationship faces the same problem. This is the reason why you lender-borrower typically enters into a debt contract since the lender cannot verify how much borrower is making.

    Furthermore, if a lender demands an interest rate that is too high, the borrower will take on even more risky behaviour. Why? The borrower will say - hey, I have to pay 20% interest, I might as well take more risk, otherwise whatever I earn will have to be returned anyway.

    Of course, real life instruments are a lot more sophisticated to deal with more complicated situations.

    By Blogger Bart JP, at 1:04 am  

  • Bart,

    Yes I know you are not addressing the distribution. But that is why I feel it may be you (rather than the government's critics) that is missing the point. Nobody would be making any noise at all if CPF was offering OA interest rate of 4% while GIC makes 8% on average! People do understand that if you want higher returns, risks have to be taken. But the distribution of returns back to the people is the whole point!

    As for the housing loan interest rate, that is a separate issue because the interest rate for that loan does not necessarily have to be stuck to the CPF OA rate. It is simply a policy decision.

    Regarding the principal-agent problem, of course it is real, but it isn't the key issue here, because lack of observability in effort isn't the problem! The GIC returns are also observable and reportable in principle - the "strategic considerations" only pertain to information about portfolio composition, not the overall returns.

    I have previously made the easy suggestion of using passive index funds. No active fund management required, so not much watching of managers required either. What say you?

    By Anonymous Jason, at 3:41 am  

  • Hi Jason,

    Personally, I think a 4% risk-free rate is fair. Even if I am not paying into SA, I would have prudently set aside a portion of my portfolio into safe assets. Passive funds are still risky isn't it? You can still be hit with a 1997 or 2001. There will still be fluctuations that will could affect your retirement income when you need it. So long as government does not erode the purchasing power of my CPF savings (ie, by inflation), I think SA 4% is fine, honestly. I, like most Singaporeans, empty our OAs for housing anyway for a large part of our lives.

    One the issue of CPF-HDB mortgage, I actually think a peg is necessary. Can you really pay CPF accounts 6% and only charge the same borrower 2.6%? Surely you can see the problem here.

    By Blogger Bart JP, at 6:17 am  

  • Jason,

    Your suggestion has been brought up many times and rejected:

    1. List a number of index linked products e.g. Global equities Index which have low fees.

    2. Provide a default risk free option equivalent to a FD 2.5% or 3%.

    3. Allow the CPF hold to make his own decision on his mixed.

    Nobody will blame the govt because they are making their own decisions.

    By giving 2.5% it condemns many Singaporeans to an prolonged work life especially those with lesser skills.

    Bart, I don't mean to be rude. But for yourself, risk free 2.5% is enough and not a concern because you make enough to have excess funds to invest in equities which you have done so beautifully and prudently in Aug 2007. For many Singaporeans the CPF is their primary source savings.

    CPF is locked up for over 30-40 years. It is imprudent not to invest it. No competent financial advisor will ever put a person through what the CPF takes us through. It is always recommended to take a higher risk profile, then lowering it as one gets older.

    I believe the PAP govt rejected this idea because they want access to cheap funds for its GIC. Money in the GIC most of us will never see until the day we die....except for the elites that collect high salaries in the GIC.

    By Blogger LuckySingaporean, at 8:40 am  

  • Bart,

    In many of your blog, you have often tried to preface your analysis as that of a highly rationale economists devote of political motive. Laudable as that maybe, you have to realise that there is no such thing as being rationale or apolitical. Proof of the pudding can be seen in your responds.

    In this reply, I am not going to argue about the rightness or wrongness about your opinion. Rather I think, I want to debate about the intellectual rigour of your arguments.

    On the question of the degree of risk your respond is:

    (a) CPF deposits, backed by the power of the state, is really as risk-free as it gets. As seen in the recent bank run in the UK, depositors calmed down only when the UK government stepped in with explicit guarantees. I don't think it is any more productive to debate about risk-freeness. We will just have to assume the state has the power to return us the money we deposit in it.

    Yes, you have precisely hit the nail on the head. In the absence of information, you must not make the quote from another source, however, authoritative to be an assertion. You must at all time make that an assumption.

    Consider what you originally wrote about risk freeness:

    First, it is risk-free, a position also reiterated by the government.

    You did not preface your statement as let's just say, "On the basis of government's assertion, let us assume that it is risk free".

    Your statement was emphatic "it is risk-free", even when you preface that being a government position, it read emphatic rather than a case of giving the government's position as nothing more than a benefit of the doubt.

    If I were to consider this as an intellectual and rationale discourse it would be rather disconcerting. If I was your PhD tutor I would have marked you down on this point :-)

    However if it was your personal opinion, such assertion is fine. After all one's entitle to one's opinion. Beside this is a blog not a thesis.

    As an aside -- FYI nothing more -- I came to the UK in the 1980s and have a small saving account, which I have not withdrawn any penny, with Northern Rock even to this day. Over that period, I estimated my interest return, was between 6.5-7.5% (there was a period when interest rate went as high as 10% on my deposit account). In strict rationale comparison: is this higher or lower than CPF?

    On the point about savers and borrowers here is your respond:

    (b)&(d) Low or high is relative, in this case, dependent on your stage of life cycle. If you are a net saver, 2.5% is not enough. If you are a net borrower, you would rather 2.5% be even lower. So far, every one is asking for higher savings rate, has anyone discussed the consequences it will have on the tens of thousands of net borrowers? Does raising the rate mean more money for their retirement, esp those on lower income taking a 30 year loan?

    Here you see, if you try to make an argument from an economic rationality view-point it is not easy, right? Which view-point should you take to optimise gain. Savers or borrowers?

    In reality, you can see an element of "political" judgement has to made, particularly if you were a decision maker. Even if you were to come to a mathematical optimal balance, purely on numerical basis (assuming you can get accurate numbers), you still can't get away from the fact that some will benefit some will not. At the end of the day, some political judgement will have to be made when it comes to erring on which side.

    On your Principal-Agent problem. Here is what you originally wrote:

    The boss (principal) pays the worker a fixed wage for the worker (agent) to put in effort to maximise profits for the company, but the boss does not observe the amount of effort which the worker puts in. The optimal response of the worker is always to shirk since the boss cannot tell. Because of the asymmetry of information, this contractual arrangement results in suboptimal outcomes.

    On reading this analogy here I am getting the impression that what you are, for the purpose of illustration, saying is if CPF and GIC were one, albeit imaginary, entity, it would be suboptimal for the imaginary merged entity but with CPF acting as the boss and GIC acting as the worker.

    You then conclude, in your original post:

    In the end, the point is a simple one. The only way to make government watch over the country's money as best as it can is to let it behave as if it owns the money!

    So what I am understanding is that are suggesting in your conclusion a lender-borrower relationship would be optimal. CPF lend money and GIC borrow the money and get the impression it owns the money lend.

    Then in your latest reply you say:

    Even a lender-borrower relationship faces the same problem. This is the reason why you lender-borrower typically enters into a debt contract since the lender cannot verify how much borrower is making.

    Which to me seemed to be contradicting your conclusion. Here is a quick summary of, what I understand of you thought process:

    (a) Boss-worker type relationship no good because it is not optimal.

    (b) Better have a lender-borrower relationship, more optimal.

    (c) But lender-borrower relationship also have same problem as boss-worker.

    To me this seem like a contradiction or have I read it wrongly?

    Tan Ah Kow

    By Anonymous Anonymous, at 9:00 am  

  • Hi Bart,

    I wish to point out a seemingly fallacious argument you have made in "A princple-agent problem".

    You have said that

    "The only way to overcome this is to make the worker the residual claimant or the profit owner. That is, the boss collects a fixed rent and leaves the rest of the profits to the worker."

    Isn't there a third option that can overcome this "motivation" problem and that is to have both boss and worker split the profits while having the boss collect a fix rent as well?

    I don't see why GICs will suffer from a lack of motivation if they pay CPF members a fixed interest rate as well as a percentage of the surplus profits. In this arrangement, GICs "reward" for managing the CPF funds is still performance based.

    In the end, it's just a matter of who sets the rules. There can be a million and one reasons why the CPF should be done away with but the government will still say "CPF is here to stay". It's abit strange to see how little say singaporeans have in the formulation of these rules though.

    By Blogger I must be stupid, at 10:51 am  

  • Hi Lucky, Tan, Stupid,

    I think I would be repeating a lot of the same points. But I am not addressing distribution issue here - which made Jason feel that it was I who missed the point. My rejoinder is that I am addressing those who are calling for a GIC peg, and discussing the merits of such a peg itself. Given the degree of information asymmetry, a peg means nothing to me, it is a "cheap peg". In the end, since our savings is held in trust by the government, a competent and good government is the only guarantee to good retirement. A government that has the finances to pay out, and to maintain the purchasing power of the payout.

    Lucky says that because I have extra savings, I am therefore content with the 4%, whereas those lower income do not have outside savings. But Lucky, the poor are more loss-averse than the rich. The loss of a dollar matters a lot more to the poor (due to diminishing marginal utility). A higher loss aversion would actually suggest that the poor would be better off with a steady, guaranteed rate, than to trade it off for a higher average but fluctuating rate.

    But let's see. In 6 months time, more details would be out, including the annuity scheme. Shall see how the whole package is like.

    By Blogger Bart JP, at 2:15 am  

  • Hi Bart,

    Your post and reasoning is quite interesting and quite reasonable. I do agree with the analogy on principal-agent problem. However, I would like to point out:

    1) 2.5%, as a risk-free rate, is low if you are getting your CPF in 30 yrs' time. SGS bonds, at fundsupermart, has a yield of 3.1% for a 20 yr bond. Hence, a 2.5 risk-free rate may be high or low, depending on where you stand.

    2) GIC peg may be workable with a minimium floor of 2.5%. Using hedge fund compensation of say a generous 30% of returns to the government (or GIC) and returning the rest to the CPF contributors, I do not see why the principal agent problem cannot be resolved.
    If GIC returns falls below 2.5%, we can have a deficit which can be covered when returns are good.

    3) However, I do note that 2) may be unsound as it aims to distribute the returns to those with most CPF money, not those who need the money most (the less well-off). If government reject 2), government should be transparent and show us the accounting to prove that re-distributing the returns to the poor is better than a GIC-peg. A simple analogy of depositor/bank earnings will not do.

    4) We should not forget that we have choices over CPF OA. We can use the CPF to buy house, buy unit trust and buy stocks. Hence, for those unsatisfied with the 2.5% returns, they should consider investing in unit trust or buy a bigger flat, if they think that over a 20-30 year period, the returns of unit trust/flat will exceed 2.5%. (Oh, pls do aim for the lowest cost and plain vanilla approach for unit trust.)

    5) Finally, it may be the less well-off that have less CPF funds and more risk-averse with their CPF-OA. Thus if the government can re-distribute the returns in such a way that the less well-off benefit more, a GIC peg may not be necessary.

    By Blogger ThinkNotLeft, at 1:03 pm  

  • Hi All,

    I think there are quite a few articles on ST today on the CPF/GIC issue.

    By Blogger Bart JP, at 3:50 am  

  • Bart...information overload.

    I'll do an objective summary + some comments from myself on the side on if I have time this weekend...its like 2 full page + 1 forum article + 1 front page article.

    See the explainers have been set loose....everything is explained everything has been done for our own good...

    By Blogger LuckySingaporean, at 4:34 am  

  • Hi Lucky,

    I do find the official analysis convincing - CPF and GIC returns should be completely de-linked since they are completely different and cater to completely different needs. Very difficult to give a high guaranteed returns any much higher tha 4% in my opinion.

    Will wait to hear your analysis of course, you always give a good opposite interpretation.

    By Blogger Bart JP, at 5:21 am  

  • Bart, please clarify. Does the CPF money belong to it's account holders or to the Government of Singapore, who happens to be your esteemed employer.

    By Anonymous ted, at 5:53 pm  

  • Ted,

    Sorry to butt in but even employers with pension funds invest these for the benefit of the workers. I haven't seen a company that uses pension fund via some kind of arrangement then delink the returns..keeping it as profits for itself.

    To do this and ask the workers to pony up some for annuities is something that even the most profit oriented companies will find it hard to do.

    By Anonymous Anonymous, at 1:50 am  

  • At the peak of 1987, DJI was ard 2722. Today DJI is 14000+.
    So a lousy index fund bought at the worst day in the last 20 years would still outperform CPF SA? Yes\No?

    Whats the role of CPF\GIC\Temasek again?

    NoName

    By Anonymous Anonymous, at 5:25 am  

  • Stock market has seen quite good returns over the past 20 years, that's true. But pensions needs are on demand. Between DJI 2000 and DJI 14000, there are period with sharp losses, eg during dot com bust, and it would be a disaster to retire then. It is probably not useful to make this kind of market comparison.

    I am aware of some pension funds that take less than market beta just to ensure that they will not be hit by stock losses, because they have obligatory payments to pensioners.

    By Blogger Bart JP, at 6:27 am  

  • Thanks for regurgitating Ng Eng Hen's argument.

    The American Institute of Certified Public Accountants recommed this:

    A popular rule of thumb is to subtract your age from 100. The difference represents the percentage of stocks you should keep in your portfolio. For example, if you are age 40, 60 percent (100 minus 40) of your portfolio should consist of stock.

    http://www.360financialliteracy.org
    /Life+Stages/Retirement/FAQs/Invest
    ments/How+much+of+my+portfolio+shou
    ld+I+keep+in+stocks.htm


    What Ng Eng Hen said is baseless and puts the citizen at risk of inadequecy. We are put on a plan that no accredited financial planner would recommend. It would have still worked by setting aside unusually large amount of income but the PAP blew that by liberalising CPF for housing.

    The HK EPF allows investment in stocks. The Chilean system returned 11% per annum for 18 yrs. Calpers ....there is a long list...

    Not only did the PAP put the people on a plan that would not work, they allowed the GIC to borrow the money at 2.5%...and GIC earned abt 10% with that. Now they want to implement annuities for 85 yr olds, they want to push back withdrawal age...

    By Blogger LuckySingaporean, at 8:58 am  

  • This comment has been removed by the author.

    By Blogger I must be stupid, at 10:53 am  

  • Isn't it clear cut that CPF is inferior as a retirement plan given that almost half of singaporeans (if i'm not wrong) are unable to meet the minimum sum despite saving such a huge percentage of their salary over 2-3 decades?

    If this is not considered proof of CPF's inadequacies, nothing will qualify as proof of it.

    By Blogger I must be stupid, at 11:03 am  

  • No, not fair to make this statement. Lucky proclaimed Chile's system to be good at delivering adequate retirement funds. But Chile does not have a housing system like HDB as best as I know. Hence retirees have to somehow pay for housing.

    Now, CPF system means that most Singaporean households have already owned their flats by retirement age. The necesssary amount is therefore different since in principle no more rent is paid. If households want to monetise their housing property, they are free to do so.

    I think the returns on property for most family would be very high indeed.

    By Blogger Bart JP, at 12:41 pm  

  • bart,

    The house that one lives in is more akin to a liability than an asset. This is especially true for families with only 1 property. Every year you live in a house, you forgo the chance to collect 1 yr's worth of rent.

    Overall, it's more beneficial to live in a cheap house with more cash than to live in an expensive house with little cash.

    By Blogger I must be stupid, at 1:49 pm  

  • I am against is comparing with Chile. Singapore has a housing component tied to CPF. I also disagree with you that it is a liability, just look at the long run propertty price index. A flat bought in the 80s with <$100k is easily worth $300-400k in the open market today - very good returns.

    It is up to individual choice what to do with this asset. Aged folks may choose to move in with children, and rent out their property - which is in a way monetising it. Or they may downgrade. It is up to them.

    But once you are done with the mortgage, you pay no more out of pocket rent. In principle, one does not need such a high retirement payout to live comfortably.

    By Blogger Bart JP, at 1:59 pm  

  • Bart,

    CPF is set up as a retirement fund not a housing fund.

    A house is not liquid and with so much money meant for retirement locked up in housing retirees may be forced to "consume" their own home through reverse mortgage..which mean they lose their home when they die.

    If CPF money is not used for housing, HDB has a mandate to provide affordable housing....people who have a home and more money for retirement and that would be a better situation.

    You missed my point anyway. I was talking about how the minimum sum is best managed to accomplish adequency and overcome the effects of inflation. Housing or no housing, this issue of how to best manage the minimum sum exist.

    By Blogger LuckySingaporean, at 2:46 pm  

  • Bart,

    A flat bought in 1980 for 100 would only have compounded at around slightly more than 5% per annum to be worth 400k today. And the 400k price tag today would be in the midst of a property boom.

    Ownership of a highly priced house is by no means a good thing if you live in it.

    Consider a 500k house and a 1mil house. If rental yield for those 2 houses is at 5% pa, a person living in a 500k house would have missed the opportunity to collect 25k in rent whereas a person living in a 1mil house would have missed the opportunity to collect 50k in rent.

    This is regardless of the rate at which property in general appreciates. The person who lives in the more expensive house will lose out because he has missed out on 50k of potential rent whereas the other has only missed out on 25k worth of rent. That's a 25k difference each year. Over 40 years, it is a world of a difference.

    By Blogger I must be stupid, at 3:58 pm  

  • 20 year compounding - 100k to 400k gives 7%, but don't worry about this. 5.7% if over 25 years.

    Remember, people make their economic choices. If I choose to live in a 1 mil house, and spend little on every thing else, it is because living in a big house is more important to me. Not quite right to say that it is a bad thing.

    I don't quite understand your last point. If property appreciates by 5% p.a, a 1mil property appreciates 50K but 500K property only gets 25K.

    By Blogger Bart JP, at 5:38 pm  

  • It's almost 28 yrs since 1980. The compound return rate is 5.1%

    The thing i'm trying to say about my last point was if the owner of the 1 mil dollar house choose to live in a 500k house instead and bought another 500k house as an investment, renting it out for 25k a yr, he would have obtained an extra 25k per year in addition to the capital gain of his 1 mil dollar worth of property.

    So by virtue of living in an expensive house (i consider hdb flats to be pretty expensive), you are already losing out right from the very start because you could have collect rent if you did not live in that house.

    I hope u get what i mean.

    By Blogger I must be stupid, at 6:06 pm  

  • This comment has been removed by the author.

    By Blogger I must be stupid, at 6:11 pm  

  • I see what you mean now - instead of living in one huge house, live in a smaller house and rent out another one. Actually, quite a few Singaporeans I believe are doing that already, it is possible to live in HDB and rent out the private property.

    But again, this is the choice of the individual household. A bit of digression from the post already.

    By Blogger Bart JP, at 7:47 pm  

  • Not really digressing. It's all inter-linked. Consider that almost all singaporeans will use CPF monies to pay for their property(since it's going to be locking in for eons anyway)price of property in singapore is distorted.

    Now that u agree that living in a property has its cost, the artificially high cost of a HDB flat has a detrimental effect to one's retirement plans.

    In fact, the CPF+HDB combo is really a very stealthy tax. Even if you live in the cheapest flat that exists, you will still be losing out as the price of that flat is in reality artificially high.

    I'm sure you will now be able to emphatise with the plight of the poorer Singaporeans.

    By Blogger I must be stupid, at 12:58 am  

  • Hi Bart

    There have been some fundamental changes since 1980. Namely PAP's asset(HDB) inflation scheme.

    For the average Singaporean, even if u can sell your $100k flat for $400k, you probably still need to buy a $250k 3/4 room flat. After fees, etc, the profit isn't really that fantastic.

    Btw, please tell me over which 30 year period did the DJI/STI not outperform CPF SA?

    NoName

    By Anonymous Anonymous, at 5:42 am  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 7:48 am  

  • Hi NoName,

    There is a feeling we are talking in circles, or past each other. But I think it is impt to reiterate this.

    Yes, you are right - I cannot find a 30 year period which equities didn't outperform fixed income assets.

    But, I can find you a 1-year period, or perhaps even a 3-year period which the stock market has underperformed. STI for example lost around 50% of its value after the dot com bust all the way till SARS in 2003. What will happen to people who planned to retire then? The poor are also more loss-averse. Long run returns alone does not tell the full story or translate to welfare comparison.

    By Blogger Bart JP, at 8:17 am  

  • Bart,

    The way money is deposited into CPF is akin to dollar cost averaging. It comes in instalments helping to reduce the risk of investing at the highs. If you plot a chart of a dollar averaged equity account, the volatility is very low....

    The PAP is doing something very unusual that even our neighbors who roughly emulated our CPF with their EPF is not doing. The EPF (read NMP Siew's article on CPF) much returns higher than CPF adjusted for inflation.

    Locking up vast sums at a lower rate of return to me is a risky proposition.... We are going into retirement with the certainty of a prolonged work life in a job market where structural unemployment is getting worse and no certainty of even getting a job. The PAP should at least give people a choice when it comes to the min. sum.

    In the end the govt will have to answer to the people. Even a number of PAP's own MPs and NMPs of superior intellect find it hard to accept the PAP's logic.

    I've said everything I want to say on this issue...guess we have different POVs on this topic and we will just have to move on. The PAP will do what it wants and we as citizens will live with it in the coming years. In 40 years we will look at ourselves and our peers ..only then we will know for sure if the PAP did the right thing.

    By Blogger LuckySingaporean, at 11:05 am  

  • Hi Bart,

    There is a interesting letter by Dr Vincent Chia Wei Meng.

    It basically says if we accept all your pts on this issue, statistics tells us that this scheme is almost definitely bad for the poor!

    The reason being the rich tend to live significantly longer than the poor and the gap is widening.

    Thus the scheme is basically making the poor pay for the retirement of the rich!

    Given this new piece of information do you still think the scheme is good?

    http://www.todayonline.com/articles/214868.asp

    By Blogger at82, at 9:45 pm  

  • at82,

    Thanks for all the research papers you sent me on CPF, I read them recently and got a good understanding of all the critical issues....the numbers were very useful.

    By Blogger LuckySingaporean, at 3:48 am  

  • Lucky,

    I am glad that you find them useful!

    Maybe you can use them for some of your future posts on the CPF issues, i always enjoyed reading what you write ;)

    Anyway pls do some post on the current stock market trend. The situation now is rather intriguing.

    I would like to hear more opinion from u and Bart on the mkt if possible ;)

    By Blogger at82, at 4:13 am  

  • I accept his point, I have seen research like that before. But that is not an argument against annuities per se, but how to tailor the contributions - we can almost certainly have a scheme that have different premiums according to income. Will see what
    the committee says in 5-6 months.

    As for the market, I have personally wound down a significant chunk of my equities. The market has been in euphoria over the fed cuts.

    But you make the decision yourself on the balance of risk. Have recovered so much since subprime and going so high as they are now - do you think there is a lot more upside to go? Or do you think the downside risk are higher?

    I have this niggling feeling that we are just one piece of bad news shock away from a major decline. But I could be me being cautious.

    By Blogger Bart JP, at 7:18 am  

  • Lucky,

    Regarding you post on West Malaysian CPF, I don't think it is illogical or inconsistent at all. So many West Malaysians cross over to Singapore to work every day, for one job, go back, and possibly come again for another job. They are already very much part of the local labour force. I think the idea not to release their CPF is to level the labour market between them and local.

    By Blogger Bart JP, at 7:21 am  

  • :::::West Malaysians cross over to Singapore to work every day, for one job, go back, and possibly come again for another job. I think the idea not to release their CPF is to level the labour market between them and local.
    ::::

    Level the playing field? These W. Malaysians go back every day to terrace houses that cost RM$100,000 ...so that is a level playing field for Singaporean workers?

    Why let them have the benefit of our wonderful CPF scheme at great cost to singapore citizens? Our govt can borrow money at a lower cost than to hold their money and pay this "as good as it get" rate of 2.5%. It is ludicrous....the Singapore govt works for Singaporeans not Malaysians.

    By Blogger LuckySingaporean, at 8:37 am  

  • Lucky,

    There is nothing stopping Singaporeans from going over JB to buy properties either you know? I know of some people who do that.

    By Blogger Bart JP, at 1:07 pm  

  • Bart,

    I was thinking of doing that ...but too bad cannot use CPF leh...

    By Blogger LuckySingaporean, at 2:02 pm  

  • --

    By Blogger sj, at 2:16 pm  

  • Hi bart,

    "I have this niggling feeling that we are just one piece of bad news shock away from a major decline. But I could be me being cautious."

    I had the same feeling too. Anyway I had offload much my equities just before the major recovery.

    I am just wondering if I should go back in again now.

    By Blogger at82, at 2:58 pm  

  • So very fair lor, W Malaysians also cannot use their CPF trapped in Singapore to buy their JB terrace houses too. If they can, Singaporeans sure complain.

    But seriously, I know Singaporeans who settled in JB and drive in every day.

    By Blogger Bart JP, at 3:03 pm  

  • at82,

    It is probably not wrong to cash out. I'm also looking for exit points, the bull is about 7 years old...the excesses are building up.

    Bart,

    Come on...there is no level playing field and you know it. These Malaysians don't get free workouts in the form of NS or reservists. When they are sick, they have only access to poor cheap medical at RM$5 per day in their public hospitals.

    Level or not is not even the issue. Our esteemed minister said yesterday the scheme is so good, Singaporeans are asking to put money into CPF to be locked up. Such an outstanding scheme that cost our govt so much in opportunity cost should be reserve for Singaporeans....just like NS is reserve for Singaporeans.

    By Blogger LuckySingaporean, at 11:20 pm  

  • seriously, i think there is a need to grasp the whole problem instead of trying to reiterate the error nous assumptions given by the press.
    Wat do you mean by the government bears all the risk of investment? You are talking about the government as some private entity like a bank etc who generates revenues and profits. Just who is the government? The ministers? Who will pay out the losses of GIC from their own pockets? Or is the Civil service, GIC, temesek employees considered the government, whom i presume will take a year long pay cut if they make losses? IN the end, (don't flinch, the next line is probably the most important) the citizens of singapore as the people who elected the government , pay the taxes, who are forced to live with the GLCs will foot the bill!!
    Instead of the silly analogy of the bank as stated earlier, let me given u a better one.

    Let the CPF be depositor A, the only depositor to Bank B. Interestingly, depositor A also happens to own Bank B. Now Bank B guarantees to return 3.5% interest risk free to Depositor A in whatever situation. Bank B takes up a risky investment and loss x dollars. But he still pays depositor A the 3.5%. So who losses? The Bank. But who owns the Bank? Depositor A. The concept is just as simple as this.THe government doesn't make money(Although technically it can print them. ahem ahem) The revenues obtained are from taxes from Singaporeans or indirectly from them, who incidentally are the CPF holders as well.

    So do you now understand what you mean when you say the government undertake all the risk?

    By Anonymous Anonymous, at 12:48 pm  

  • Gentlemen and maybe ladies, let there be light!

    http://utwt.blogspot.com/2007/10/mm-lee-on-cpf.html

    http://utwt.blogspot.com/2007/10/govt-investment-de-linked-from-cpf.html

    By Anonymous ted, at 4:48 pm  

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