As the government kicked off the public consultation on retirement security, two roughly similar notions of Hong Kong’s future pension system were introduced.
One proposal is for a “universal” pension system that offers a basic level of benefits for all the elderly. The other scheme, coming from the government, proposes means-tested benefits for elderly individuals under a certain asset threshold.
Although the public debate is likely to focus on how retirement benefits will be financed, the design of the pension system has deep implications for Hong Kong’s future economy and the government’s role in it.
Under the universal system suggested in a policy white paper released this year by government consultant Nelson Chow Wing-sun, all individuals over the age of 65 will get HK$3,000 monthly, regardless of asset holdings.
In contrast, the government proposal would provide pension payments for elderly couples with assets under HK$125,000 and individuals with assets under HK$80,000. The government plan would cover 23 percent of the current elderly population.
Financing for either of the pension options would fall on employers or citizens in the form of higher profits tax or salaries tax.
Some scholars have proposed that a mixed funding package, including use of existing government funds, would result in a substantially lower tax burden.
Before assessing the proposals, we should start by asking, why does retirement security need to be improved? The most obvious answer is increasing poverty among the elderly.
Indeed, regardless of the statistics used, Hong Kong arguably has a relatively higher elderly poverty rate compared to similar economies such as Taiwan or Singapore, albeit with a higher standard of living.
This result, however, is simply the effect of a much larger systemic problem.
Indeed, Hong Kong lacks a comprehensive retirement security system that allows individuals to sufficiently save.
The World Bank assesses retirement security for a population via the number of “pillars” of financial support. Three pillars exist: the first pillar is government-funded and focuses on poverty alleviation; the second is corporate/individual plans, such as defined contribution; the third pillar is composed of voluntary savings.
While the current consultation is primarily concerned with the first pillar, most economists would argue that Hong Kong needs to improve the second pillar, the Mandatory Provident Fund, which covers roughly 70 percent of the population.
The MPF’s low contribution rate relative to income, coupled with relatively high administrative fees and poor returns, means it does not offer adequate protection as a mandatory option.
The government is offering to reform some of the system, including the offset system. However, without a wholesale rethink of the contribution and administration scheme, retirement insecurity may become a permanent feature of the landscape.
If the consultation is unable to strengthen the financial pillars for retirement, it will have far-reaching implications for Hong Kong’s economic future.
With the territory already grappling with a rapidly deteriorating demographic profile, fewer workers and more elderly people will mean less individuals paying more taxes, putting pressure on public finances.
At the same time, a growing elderly population without disposable income will augur a shrinking base of private consumption, a key driver of economic growth composing up to two-thirds of Hong Kong’s GDP.
Thus, a government decision to focus on poverty alleviation rather than retirement support may be penny wise but pound foolish as it will also be a de facto decision to transition the economy away from its main base without a plan on how the future economy will function.
Overall, the government’s position on pension reform is clear. Although it would certainly like to see less poverty among the elderly, the government does not want to become, similar to other western countries, an underwriter of substantial future pension liabilities.
Thus, if one pictures pension reform as a triangle with three main actors, the government, employers, and workers, the heaviest burden is likely to fall on workers to provide for their future.
This decision will have profound implications not only on the current elderly population but also on Hong Kong’s future.
– Contact us at [email protected]