Making a case for Hong Kong's pension fund
Foibles of Greenspan's homo economicus play out with need for enforced retirement savings
Shareholder activist David Webb wrote an excellently funny piece on the Mandatory Provident Fund (MPF) recently, mocking the government leaflet which announces increased contributions to the compulsory retirement savings system.
The leaflet featured two men leaping for joy with a skipping rope. "Why are they so happy?" Webb asked. "No, they have not just become Hong Kong's first gay marriage - that happy occasion will have to wait. They are elated about something else."
Their joy was triggered by the increase in MPF contributions which begins in June.
But Webb, who is no fan of government meddling, argues that it is no cause for celebration.
He thinks Hong Kong citizens would do better being allowed to save on their own and is particularly peeved that even top-quartile earners - presumably some pretty sharp tacks - have to hand cash over to be managed by lesser mortals under an MPF-approved scheme.
But such criticism ignores a basic fact of human nature: people are dumb.
We can be grateful Hong Kong has come up with a much less risky forced savings scheme
As an American, as well as a journalist, I am double-qualified to know something about this subject.
For instance, people will coast along with huge debts and not one penny in the bank, but when something happens - like the world's financial system blows up - you have to bail them out. And even more costly, you have to bail out their bankers.
Former US Federal Reserve chief Alan Greenspan, smart as he is, only came to recognise the limits of his fellow mortals recently.
In a post-mortem on the global financial crisis published last year, he explains that the risk models of the world's policymakers and financial leaders failed to properly account for the "irrationality of homo economicus".
This is no joke - it is a point Greenspan makes very clear in "The Map and the Territory: Risk, Human Nature and the Future of Forecasting".
The former chairman of the world's most powerful central bank concluded that he and many other very smart folk did not put enough risk premium to cover the capacity for human error - in this case the capacity to panic and, apparently, mistakenly sell all those bonds backed by collateralised subprime loans.
If investors had just hung on to them, AIG and Lehman Brothers would not have gone bankrupt, and the crisis would have been forestalled.
The shortcomings of homo economicus are surely just as relevant when it comes to planning for retirement.
One recent survey by the Employee Benefit Research Institute showed that only 44 per cent of working Americans report they and/or their spouses have ever tried to calculate how much money they will need to have saved for retirement.
Others do things like give their money to Bernie Madoff to invest. Indeed, the government of New Zealand has cited "insurance" against Madoff-like investment mistakes as one of three core rationales for its mandatory savings scheme. The other two rationales: i) some people don't accurately calculate their future needs or have the discipline to save even if they do; and ii) they don't save because they know the government will not let them starve in the street - aka "rational prodigality."
If you have a government that provides any kind of welfare net, then New Zealand argues you should expect to pay an "insurance premium" because you may end up using it. Moreover, you have rational reason to want others who might use it to pay that premium.
Before the US started a social security system nearly 80 years ago, there was still hope people would die before old age came. But odds are against us today.
In Hong Kong, the average life expectancy is now north of 83 years. And the population is rapidly ageing. In 2011, people aged 65 and above accounted for 13 per cent of the population. This proportion is estimated to increase to 19 per cent by 2021, and to 30 per cent by 2041.
In other words, even if just some of these people are dumb, Hong Kong has a problem on its hands. We can be grateful that Hong Kong has come up with a much less risky or meddlesome forced savings scheme than many other places.
It did not adopt a US style pay-as-you-go system which is heading towards self-implosion as the ratio of workers to retirees shifts. As it is, a two-income couple of average wage retiring right now in the US can expect US$877,000 in payouts before they go on to greater glory; compared to the $523,000 they paid into the system.
This doesn't mean Hong Kong's MPF should be a wasteful project with uncompetitive pricing and limited fund choices. Indeed, we can thank the many critics of the MPF for their campaigns that have lowered administration costs and fees, and surely there is plenty of room for more savings.
But it is completely reasonable for a government to look to the future, see a huge increase in pensions, and make the decision to force the young to put aside at least a little of their current earnings. If not, taxpayers will be paying for someone to wipe their noses in their old age.
