Jake's View

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

PUBLISHED : Thursday, 29 May, 2014, 12:44am
UPDATED : Thursday, 29 May, 2014, 12:44am

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.