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  • Dec 23, 2014
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Jake's View
PUBLISHED : Sunday, 03 March, 2013, 12:00am
UPDATED : Sunday, 03 March, 2013, 3:32am

An age-old problem and the sums that just don't add up


Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.

According to the latest projection, the number of elderly people will increase significantly to 2.56 million by 2041, representing 30 per cent of our population.

John Tsang Chun-wah
2013 budget speech

Let's start by setting the precision of this forecast into perspective. The chart shows you three official forecasts for Hong Kong's long-term population growth. The middle one is the one referred to in the budget.

So if two different forecasts made by our statisticians over the space of just two years can barely get within half a million people of each other for the year 2039 and entirely ignore an external forecast of an actual population decline, how can John Whiskers know that we will have exactly 2.56 million elderly in 2041?

But let's say that his forecast is right. He then poses a dilemma for us to consider. The forecast implies that in 2041 there will be a ratio of only 1.8 working people to every elderly (and presumably retired) person. How can we possibly support them all? Just think of the medical bills alone.

And on this argument he then delivers us a finger wagging lesson - Don't mess with our reserves. We have HK$734 billion saved up in the kitty and a good deal of it is already spoken for. We can't just throw it away in handouts. We may need it to keep our elderly alive in 30 years.

Once again, the first difficulty I have here is with the numbers. Mr Tsang's HK$734 billion in reserves includes only the government's deposits with the Exchange Fund. It entirely ignores placements by other statutory bodies and the fund's accumulated profits. The real reserves figure is HK$1.6 trillion.

But I have a bigger quibble with the notion that much of the money is already spoken for. Specifically, Mr Tsang cited civil service pension obligations with a net present value of HK$600 billion.

He forgets two things. The first is that his forecasts of government operating expenditure already include pension payments.

He double-counts them by also talking of them as a future lump sum obligation. This is somewhat like having your cake and eating it too.

Of more importance, he forgets that in 2000 the government moved the civil service from a defined benefit to a defined contribution pension scheme. The people who were already on that lip-smacking defined benefit scheme at the time get to keep it, of course, but new hires after 2000 get only what they themselves put in plus any investment returns on that money.

Crucially, the government's own estimates project that all civil servants with defined benefit pensions will have retired by 2040. This says that one year later, the year that so worries Mr Tsang, all of that HK$600 billion he wants to keep safe for (doubly-counted) pension obligations will no longer be needed for that purpose.

The money can be used for anything at all then and, what is more, the regular pension payments from the operating account will also start to decline rapidly from that point onwards.

This is HK$600 billion in today's money (and much more yet with accumulated investments profits by 2040) that can be used for old age benefits. Mr Tsang has little need to worry about supporting the elderly in the distant future.

I'm mystified as to what makes him such a miser with our money. Is it purely a bureaucratic mindset that shudders at any uncertainty and seeks to stave it off by squirrelling away money?

I do recognise the likely outcome, however. Others will see that treasure hoard and eventually get their hands on it and squander it. They won't spend it on supporting the elderly.



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This article is now closed to comments

John Adams
Jake, Tom Holland a couple of days ago raised exactly the same point as you have done about these govt pension scheme "reserves". I'm neither an accountant nor a economist, but must assume that both you and Tom are correct, therefore Tsang is wrong - totally and horribly and idiotically wrong.
But if so, why has no-one in Legco picked up on this fact ? Surely it must be blindingly obvious to all his staff - or at least those who are true accountants, and not politicians. And it must be equally obvious to the 30 - 40% of Legco members who have some accounting and/or business skills ( the representatives of the banking and accounting sectors for starters !). But I don't see anyone saying anything to set Tsang straight on this apparently simple and basic matter , which has been going on for several years as I recall.
What on earth is happening in the govt financial services dept that they let their chief trot out this rubbish year after year?
This is as stupid as if Tsang said he was keeping several hundred billion under his pillow for HK's lunar space rocket program or the tunnel that we plan to dig to Australia.
"Mr Tsang cited civil service pension obligations with a net present value of HK$600 billion....his forecasts of government operating expenditure already include pension payments."
Exactly! I expect Mr. Tsang to know at least something about accounting, but not economics. Employee retirement lump sum payments are one item of the expenses account. He gets it mixed up with the balance sheet.
Hong Kong government is a going concern. As such, period surplus or deficit must be used in such a way so as to maximize our TOTAL satisfaction (utility) when present and all future generations are considered. Satisfaction is a function of consumption. Period savings rate is the control tool for maximizing satisfaction.
We must also not allow Ponzi scheme. Government running deficits until the kingdom come is forbidden. Cumulative deficit (surplus) means net public debt (savings). Translated, this condition means that for the time horizon of maximization, all future period surpluses, or deficits, up to a terminating point discounted to the present should sum to zero.
The US and the EU are apparently violating this constraint with too much debt and Hong Kong with too much savings.
A reader takes issue with Jake’s position. But Hong Kong is not saving wisely by violating the transversality condition.

In all likelihood taxes will be increased to show up the 'deficit' when the time comes. The government hoards its surplus, as this earns rent.
Hong Kong is a town that most of its professionals live in fear. They fear in offending government or the tycoons. Not much different from the local academics. The professionals keep their mouths shut while the academics in addition when they do, talk rubbish. The Lego bunch is diverse but unanimously dysfunctional. So, the civil servants still are the king. Tsang, as the Financial Secretary is the emperor of Hong Kong finance. Again he parades around town baring his incompetency. Saddest of all, so few are telling Tsang he has gotten his numbers deadly wrong.
Or the political parties that are so vocal against Leung’s government, why are they so quiet – for a reason not to offend John Tsang who comes from the old camp?
The academics doing all the talking to the media are the wrong kind. As a Chinese schoolboy trying to master a second language over 5 decades ago at SJC, there was this aphorism in the English Ballard series: Empty vessels make the most noise.
Jake and Tom are good eggs. I challenge them all the time. But limited space didn't allow me to explain everything in my last note about accounting.
In a firm, pension obligations projected for all vested employees are funded and kept in a separate account - a lockbox if you like. If investment return falls short of projected obligations, the deficiency must be made up from company's income as a deduction from earnings.
Strictly speaking, governments don't have balance sheets. They disclose pension liabilities to give the public an idea its size compared to revenues. Don't let this number fool you. On any given year, the pensions payout is only a small fraction.
"why has no-one in Legco picked up on this fact ?" What do you expect from a bunch of popularly elected turkeys?
I remember a conversation long ago when Emily Lau grilled Joseph Yam. My impression is she doesn't know squat about accounting. I hope she had gone back to a local school since then to audit an accounting course. Mind you, she is the Chair(wo)man of Legco's Finance Committee. If these are the people who are going to run the government, may God help Hong Kong.


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