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  • Dec 27, 2014
  • Updated: 2:58pm
Jake's View
PUBLISHED : Thursday, 29 May, 2014, 12:44am
UPDATED : Thursday, 29 May, 2014, 12:44am

Pension funding figures don't add up

A state pension would either be paltry or would have to be funded through higher MPF payments, further undermining people's savings

Everyone would be entitled to a flat-rate monthly pension from the age of 65 under an option being considered by an expert commissioned to lead a year-long government study of retirement proposals.

SCMP, May 27

The sad thing about that great invention of the accounting profession, double entry bookkeeping, is that people so often look only at one side of the book and ignore what the matching entry on the other side shows them.

Take this matter of a pension for everyone over the age of 65. That's the entry for where the money will go and everyone likes it. Hurrah, hurrah, no one need worry any longer about grinding poverty in old age. The government will provide.

And now for the entry on the other side of that double entry, the side that says where the government will get the money for this pension.

Hmmm … yes … well … maybe the rich should pay.

There, that's that question settled, and now let's get back to how big the pension will be.

HK already has more than one million people aged 65 and over and the number will keep rising

Fine, let us start just that way and take a figure of HK$4,000 a month, which is the only sum I have yet heard mentioned. It may be just enough for the purpose provided that all housing, medical and special needs costs are separately met and that the beneficiaries have no taste for gambling.

Now put this into context. Hong Kong already has more than one million people aged 65 and over and the inertia of the demographics is relentless. The number will keep rising.

Take those million people alone, however, and you get an annual cost for this assumed pension of HK$48 billion.

It might just be possible to do it without adding to the tax burden. Our government has about HK$1.6 trillion in net savings at present. Put all that money to investment work at an assumed return of 3 per cent a year and you get the necessary HK$48 billion a year.

But 3 per cent a year is actually quite high in the present low-yield environment and it takes no account of inflation that will steadily erode the purchasing power of a HK$4,000 a month pension or the fact that we might need this savings income to fund the health costs that we have assumed are taken care of separately from the pension.

In any case our government is of no mind to use its savings for social services. It wants the money for a pointless, budget-busting new railway to the border and for the gaping maw of the vanity projects of the West Kowloon Reclamation.

So what it comes down to is that we must either have a pension that is much less than HK$4,000 a month and which does not cover living costs, or we must raise the money by imposing higher contribution rates to the Mandatory Provident Fund.

And the problem with the MPF is that although it nominally takes only 10 per cent out of wages, this can be up to half of personal disposable savings, money that people desperately need if they want to start a business of their own.

Instead of seeing a return on that money of 20 per cent, which is the sort of return people reasonably expect from a small personal business, it is taken from them to be put into boring old go-nowhere stocks and stolen through ridiculously high management fees.

It is thus my opinion that the MPF has done easily as much to undermine the savings of Hong Kong people as it has to build up those savings.

There was never any evidence anyway that Hong Kong people do not provide for their retirements. It was just the bureaucrats' assumption, taken from their own lifestyles and based on no studies or surveys.

Nor is there reason to assume that all people cease paid employment at age 65 at the latest and then need pensions. It is true of bureaucrats but the figures indicate that better health has made most people happy to stay in work much longer.

I think this latest flat-rate pension proposal will sink again as soon as it is floated, all of which would long have been apparent if we gave double entry bookkeeping our full attention.



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$1.6 Trillion in reserves should be able to support 1M people with $4000 per month.
Combined With a more progressive taxation system - the books are balanced.
JVDK is doubly wrong; on both the accounting side and (ethical) taxation side.
JVDK is an extremist example of one that advocates low taxes in HK , but in the mean time attacks gov expenditure on large wasteful projects.
JVDK has not offered any practical solutions ; his is part of the problem itself.
The only figures that really don't add up are Mr van der Kamp's. He starts off talking about revenue and expenditures and then, halfway through, switches to a entirely different story about assets (MPF).

A universal, 'national' fixed-benefit pension scheme would have to be paid out of tax revenue, sure. So can we afford it?

1. Hong Kong had a budget surplus of HKD 64 billion in the 2012/13 tax year. We could begin paying those 1m people aged >65 their 4k a month tomorrow and we would still have a surplus at the end of year.

2. The total government budget is about HKD 430 billion (22% of GDP), so this supposedly would increase to around 470 billion (25% of GDP). There is nothing shocking about getting this extra 3% of GDP in through tax rises, especially because:

3. Between 2000 (its start) and 2012, MPF contributions totalled 340 billion HKD (employers and employees). That's nearly 30 billion per year (>2% of GDP). I don't know what they currently (2014) are, but I guesstimate at least 32 billion per year. Abolish the MPF, and collect this money through taxes instead: a simple 'national' pension premium paid by employers and employees of roughly the same amount they now pay MPF contributions.

Just with this back of the envelope calculation, I haven't touched already accumulated MPF savings, nor the government reserves, and I have already found the lion's share of the money, without even touching net disposable incomes or instituting a new tax.
In principle I agree with (1), but since most people 65+ have no (taxable) income anymore, it becomes a tricky thing to assess whether they are wealthy. You'd have to look at their assets, and in the absence of any tax on assets in Hong Kong, the required new bureaucracy, legislation and so on would be enormous.

It raises so many questions. Is property included in the assessment? If so, then only investment property or also the primary residence? Does it include overseas assets? If so, how do you come even remotely close to enforcing your policy in terms of verifying accuracy? If not, then is this meaningful at all?

Pragmatically speaking, it is much simpler to simply give the pension to everyone, and continue to progressively tax income (since most wealthy old people have of course accumulated this wealth through their life-long earnings).

Or you can institute a (modest) residency-based estate tax - meaning effectively that the wealthy elderly will at first benefit (slightly unfairly and unnecessarily) from the pension, but at their demise, some this is de facto paid back by slicing some money off their estate. Some of the aforementioned implementation problems of assets assessment would occur there too, but it is much easier to assess assets once at a single point in time (the date of demise) and when a transfer of titles occurs.
Well it's easy to figure out what is the consequence of such unthought plan : just look at "developped" countries like France. Pushing every year retirement year and digging everywhere to find funds.
A diligent observation.


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