Tuesday, December 1, 2009

Iron-clad guarantees? No such thing in the real world

I'm surprised that even at this age, there's still people who thinks that there's such thing as iron-clad guarantees. I remembered reading somewhere about someone requesting the annuity payouts from CPF to be guaranteed (iron-clad).

Well first of all, there is a reason why it's called an annuity payout, and not a pension payout. The annuity provided by CPF is basically a longevity insurance product where a series of payouts will be given until you have passed on. The amount of regular payouts given depends on the initial lump sum that's put into the annuity and the investment returns of that sum of money.

Why couldn't CPF guarantee the payment amount? As much as I would love that, this will not happen because money doesn't fall down from the sky. If these payouts are guaranteed, the money will come from somewhere and it will either translate to higher income taxation, or GST. Either case, I'm not in favour of it. I'm also totally against borrowing money to fund this kind of expenditure. Look at the Dubai World fiasco now and you'll understand the reason why. Even a GLC company in Dubai can default on its loan.

Comparisons can be made to the private sector annuities and some of them are more attractive. However, there's one thing that everyone seemed to forget. CPF will never be bankrupt (I hope so), but private companies will. That's one of the main reasons why CPF took over the management of the annuity instead of leaving it to the private sector as it was originally planned. Many people complained about it, myself included. Just imagine... Even a hundred + year old company like Lehman Brothers can collapse, so which company won't?

Seriously, I would think that a basic finance cost for all secondary or JC students is in order. With this kind of education, it would be easier for the public to understand why are certain decisions made in the future.

There is no such thing as iron-clad guarantees in the real world. Anyone who does any form of investments will know that.

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