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.
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!