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9/03/2007

A simple illustration of Thinkall's article

What Thinkall said is very simple. If money has to be paid out but delay to a later date, there is a huge carrying cost. The CPF was supposed to pay a depositor all his savings at 55. Now it is 62/63 or 67. There is a delay of 7 years or more. An another portion is delay to 85. A much longer delay. Example. if there are 20,000 people hitting 55 annually, and each expecting $100k withdrawal, that is $2 billion. Now with the minimum sum, only a small sum will be withdrawn. The rest will be kept with compound interest at 4%. Seven years delay means at least 30% more to pay out. In the mean time the money is reinvested. Hopely the return is higher than the 4% when the delayed withdrawal is due. Otherwise it will be trouble. At the moment there is hope that the super talents and fund managers will do their jobs. If they do, fine. If they don't, not only we don't make the 4%, there is a high carrying cost to pay these super fund managers. And they don't come cheap. The Americans are in some way doing the same thing. Delay payment to the future generations. And they do it by issuing bonds year after year. Still someone must pay some time in the future. We are delaying our CPF payout to be paid in a much larger sum some time in the future. So life can go on. Who is going to inherit the problem in the future if our investments turn sour? Of course the investments can turn into a golden goose. But before the goose turns golden, all the fund managers are going to get their bite first. And there are sharks and all kinds of events trying to turn those investments to ashes. While time has been bought to pay later, the time must be used urgently to generate more funds for the payout. Could this be the reason why all the fees are pushed up, selling assets, privatisation to raise fund? If we are so rich, there should not be such a pressing need to up everything and incur the ire of the people and more hardship for the lower income group.

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