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Friday, Jun 6, 2014

Asian Opinions

Mailbox: CPF use a factor behind rising prices?

The Straits Times | Friday, Jun 6, 2014

Having a paternalistic government set well-intentioned policies may lead to unintended negative consequences - some of which worsen the very problems they aim to solve ("Move away from 'Govt knows best' approach" by Mr Tan Suan Jin; May 27).

Letting Central Provident Fund (CPF) members use their savings for purposes such as health care, education and housing may cause prices in these areas to rise faster than normal.

Among the "baskets" of goods and services used to calculate the Consumer Price Index, health care, education and housing saw the fastest price increases over the last 20 years, outstripping the overall inflation rate.

While there may be many reasons for this, one of the main factors could be allowing CPF use for these items, which goes against the fundamental dictum of human and economic behaviour - that nobody spends somebody else's money as carefully as he spends his own.

For example, many patients who use Medisave for their health-care needs would opt for the best and often most expensive medical care their Medisave can afford, rather than scrutinising and comparing prices if they had to pay the cost out of their own pockets.

Or consider the couple who purchase a new flat and "max out" their available CPF monies. They would have every incentive to buy a more expensive home, as their available CPF monies would have limited other uses.

In the first example, doctors have less incentive to keep prices low because the patient does not mind paying more, while in the second example, property prices rise faster than normal because of the additional artificial demand.

The solution then is to rely less on government policies, and instead take personal responsibility for our own well-being. Assuming personal responsibility will not solve all the ills of society, but it mitigates the unintended consequences of a one-size-fits-all policy. More importantly, it reduces the need for others to run our lives.

Alan Ng Zhi Yang


This article was first published on June 04, 2014.
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