• Thu
  • Dec 18, 2014
  • Updated: 11:09am
Monitor
PUBLISHED : Tuesday, 14 January, 2014, 1:37am
UPDATED : Tuesday, 14 January, 2014, 1:37am

Spending on old folks isn't the problem - it's the solution

Our finance chief may fret, but let's use HK's massive surplus to set up a Health and Welfare Fund, and then we can retire off talk of tax rises

Financial Secretary John Tsang Chun-wah believes the Hong Kong government's accumulated fiscal reserves could be run down to nothing over the coming decades by paying for the care of the city's growing number of elderly.

What an excellent idea! Way to go, John!

After years of running hefty surpluses, the government is now sitting on something like HK$1.5 trillion in excess reserves.

Of course, prudence dictates that the government should set some money aside for a rainy day. But we don't need HK$1.5 trillion. During the long slump that lasted from the Asian crisis to Sars, the government ran up a cumulative deficit of HK$186 billion, or just over 14 per cent of Hong Kong's annual economic output at the time.

That suggests the most we need to set aside now to tide us through the next down-cycle would be HK$300 billion.

That leaves us with an HK$1.2 trillion. This is money the government has sucked out of Hong Kong's economy over recent years, to the detriment of everyone's income. Now it is time to put it to work.

The government should ring-fence the cash in a new Health and Welfare Fund, to be managed by the Exchange Fund and dedicated to providing a social safety net for the city's growing population of elderly.

The government is now sitting on something like HK$1.5 trillion in excess reserves

Officials often bleat that by 2030, 30 per cent of Hong Kong's population will be aged 65 or more. But with such generously stuffed coffers, that shouldn't be a problem. First, the government should raise the retirement age to 70; no bad idea considering Hong Kong's average life expectancy is now well above 80.

That would allow it to grant a means-tested state pension to those elderly who need it.

Considering that half of Hong Kong households own property, let's assume half the city's elderly wouldn't be eligible . In that case the Health and Welfare Fund could easily pay a monthly stipend of HK$4,000 (at constant 2014 prices) to the remainder - enough to support them above the current poverty line.

That would cost a little over HK$7 billion this year, rising to HK$24 billion in 2041, which is as far as the government's population projections extend.

Such a modest programme wouldn't even make a dent in the Health and Welfare Fund's assets. Assuming it continues to generate an average annual real return of 3.8 per cent in line with the Exchange Fund's long-term performance, by 2041 the fund's assets would stand at HK$2.9 trillion (again at today's prices). That would be almost double its initial value, even after paying out pensions for nearly 30 years.

Of course, there are still health care costs to consider.

Old folk tend to need more medical attention. As a result, the combination of an ageing population with the rapid rate of inflation for health care services has led to horror stories about Hong Kong's unsustainable future health bills. For example, one insurance company estimate sees the city's total spending on health doubling between 2012 and 2020.

Happily, these projections tend to be exaggerated. They assume health care costs rise steadily with age. But for most people, health costs remain relatively flat, only rising sharply in the last few years of life.

Still, knowing that on average Hongkongers aged 65 and over go the doctor or into hospital twice as often as their middle-aged neighbours, let's assume their health costs are four times as great (and twice as great as children's health costs).

Let's also assume that over the coming decades health inflation continues to outstrip general consumer inflation by the same rate as it has done since 2000. As a result, a back of the envelope estimate shows Hong Kong's health bill rising from HK$112 billion this year to almost HK$400 billion by 2041.

If the Health and Welfare Fund had to shoulder the entire cost, the burden would indeed be unsupportable. But bear in mind that at the moment the government only covers half of Hong Kong's medical bills, spending just 2.5 to 3 per cent of the city's gross domestic product on health.

If the government were to cut its spending on infrastructure from recurrent revenues, it could afford to raise public health spending to 4 per cent of GDP, which is still only half as much as Canada spends.

The Health and Welfare Fund could then finance the rest of the city's health spending, precluding the need for out-of-pocket spending by households, which currently covers a third of our medical bills.

The cost to the fund this year would be in the order of HK$23 billion, rising to more than HK$100 billion in 2041.

That would be a major drain on the fund, reducing its assets to just HK$330 billion by 2041.

As a result it wouldn't be able to care for the following generation. But with nearly three decades to make provisions, hopefully they should be able to look after themselves.

Of course, these are very rough figures. But it looks as if Tsang has hit the nail on the head. If we run down the government's reserves over the coming decades to care for the city's elderly, there's no need to raise taxes on the rest of us. Well done, John!


tom.holland@scmp.com

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This article is now closed to comments

John Adams
Great article Mr Holland ! Right on the nail.
I only hope Mr Tsang reads, marks and inwardly digests what you have written.
.
I write this as a HK PR who, with adequate savings for retirement and my own private property, can never possibly personally benefit from any increased spending on the elderly. But I would indeed like to see much more of my hard-earned taxes to be spent on those old people in HK who labored as much as I did over their lifetimes, but did not have the chance to earn so much..
.
When history writes Mr John Tsang's epitaph as FS it will not say say "Scaremonger" , "Short-sighted" or just plain "Stupid", even though all those titles are apt.
It will simply say one one word : "SCROOGE" .
rpasea
There can be no more important role for govt than spending money on the health and welfare of its citizens. Good column.
lexishk
Hilarious. The whole world is involved in an anti-Chinese conspiracy and apparently this is worth mentioning on half the articles in the SCMP.
r6b
"Just plain stupid" is far more appropriate than you realize. We have a short term problem of mainland mothers-to-be, wanting to deliver in HK - and who are prepared to pay for the service.
I say - welcome !! The increase of health care facilities needed for these moms, will be somewhat offset by their payments ( which should be at market rates, even in public hospitals ).
Over time, this fad will disappear and HK will have the needed infrastructure that can be easily converted to elderly care. Neither group requires full service hospitals.
But they do need facilities that have some medical care capabilities.
There is no better time than now, to accomplish this.
singleline
Is the government debt a burden on our future generation?
This is a common fallacy in economics.
'This fallacy is repeated so often that it has entered the collective unconscious.
The argument is that if the current generation spends more than it earns, the next generation will be forced to earn more than it spends to pay for it.
But this ignores the fact that holders of the very same debt will be among the supposedly burdened future generations.
Suppose my children have to pay off the debt to you that I incurred. They will be worse off.
But you will be better off.
This may be bad for the distribution of wealth and income, because it will enrich the creditor at the expense of the debtor, but there will be no net burden on future generations.
The principle is exactly the same when the holders of the national debt are foreigners, though the political opposition to repayment will be much greater.'
(****www.project-syndicate.org/commentary/robert-skidelsky-explains-why-post-2008-economic-policy-has-so-often-missed-the-mark#Z3fo8xqJ9A0Q6K7f.99)
singleline
At such low real interest rate level right now, the bond market is actually screaming and begging you to borrow.
The concerns over subsequent rises in interest rates disappear because the low borrowing costs can be locked in by the government.
(****www.ft.com/intl/cms/s/0/e7b172b2-c1ff-11e2-8992-00144feab7de.html?siteedition=intl#axzz2qHoSb7Ta)
dienw
Foreigners donate massively to Chinese charities and Western charities are hugely involved in helping the poor and unfortunate in China.
lexishk
Tom Holland for FS.
pragmatist
ban/ limit this category of people? heard of that idea?
sammckhk
Where have you been in the last 6 months ? How about the demand for school places ? The need for additional facilities doesn't stop at health infrastructure. The Donald administration was just as stupid to not realise this would be a consequence of their ineffectual management of he mainland mothers birth issue.

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