Tan Chuan Jin explains the CPF returns?

Tan Chuan Jin reproduced this on his Facebook page which I caught last night. It is not wrong but quite unhelpful. Again and again reminding me what poor communicators our ministers are.

The figures inside the red box are correct but what's the point when a growing number of people are thinking of the difference between what GIC makes and what is paid out to them in the end?

But I happen to know a little more than the average guy. Just as something which is legal may not necessarily be moral, so it is the same with analyzing the CPF here, i.e., what is correct might not be right when a larger picture is brought into focus.

The most important fact is that Singapore is a sovereign and not just a very large company. If such a huge company invest our money which in turn is much smaller than the sovereign, it is quite different from the case of giving our money to sovereign Singapore to invest. The textbooks and theories people learn usually do not distinguish between the two.

When you invest with the sovereign, it is a one-sided bet. How so? If GIC does well the government have no problem paying out he promised rates. If GIC were to take huge losses in its investments, the government will still be able to pay the promised interest rates on the CPF accounts because they could always print money. This is not true for a private investment fund much smaller than the government. In the case of the private fund, its investors will face losses. But for the GIC if it ever face catastrophic losses, the CPF account holders will see the Singapore dollar crash. This losses in an unfamiliar form, nevertheless it is also losses. Now a private fund which invests our CPF savings by definition could never be small but will be large enough to become a too big to fail institution. If such an enterprise suffer catastrophic losses in the market, it would have to be bailed out by the government. Again, the Singapore dollar will crash.

In a different world we could wish Uncle Sam was financially prudent and responsible and the USD was as good as gold which is was after the Second World War. Then we could also be as responsible fiscally with AAA ratings and also invest our CPF money in long dated US treasuries. So we have a small country AAA leaning on a superpower AAA. We would have reproduced nationally the equivalent of a much smaller investment fund with a much larger sovereign as safety. Unfortunately life in the 21st century isn't like this. Instead Uncle Sam has been printing money big time!

So what is there to understand from the BT chart Tan Chuan Jin shared on his Facebook page? In a narrower sense he was completely right but we live in a much larger sense than that. The less sophisticated would ask why are interest rates so low and that would allow the authorities to take you round and round until you are either all confused or grudgingly accept low rates as a fact of life. In the end we are actually barking up the wrong tree because we have been asking the wrong questions.

I expect a Grade A government to guide people back to the right questions but they are only the top student in a class of failures. When you do not know what, how and when to communicate effectively you have no hope of getting anywhere near a Grade A performing government. Recently Obama did a first class job communicating his carbon reduction program and that is from a guy with his hands and legs tied. Witness how Thomas Friedman summarized that in his NYT op-ed.