Universal pension won't meet needs of greying Hong Kong

Michael Somerville disagrees with the populist cry for a universal pension

PUBLISHED : Thursday, 09 May, 2013, 12:00am
UPDATED : Friday, 10 May, 2013, 8:53am

Here we go again. Some legislators have sought to hijack the governance of Hong Kong by demanding a quick fix to retirement protection through the introduction of a universal pension. If only the solution were that easy and made financial sense.

Not so. The challenges of retirement protection are far more complex and today's decisions have to be paid for by future generations for many decades to come. Retirement income is only one facet of this.

Too many reformers seem mesmerised by the past rather than by the priorities and needs of today. Britain was one of the first to introduce a means-tested non-contributory pension scheme, in 1908, followed by a contributory pension for low-paid workers in 1925.

In those days, post-retirement life expectancy was five years or less and there was no universal health care. The initiative was therefore a relatively inexpensive way of protecting retirees from abject poverty. Even when the universal, and regrettably only partially funded, National Insurance scheme was introduced in 1948, the objective was still to lift individuals from absolute poverty in their declining years. At that time, post-retirement life expectancy was still 10 years or less. Universal health care was a new concept.

The issues of retirement are now vastly different. Life expectancy on retirement is 25 years or more, and increasing. Far more people in retirement live healthy and active lives for many years but eventually face the burdens of chronic care.

With retirement representing up to a third of one's lifespan, it is now more appropriate to break down retirement protection needs for the majority into three phases.

For those aged 65 to 75, the primary emphasis is on recreation, some continued economic activity, community activity and healthy living. For those aged 75 to 85, the emphasis changes to issues of chronic health care, housing, dwindling assets and increasing needs for care. For those over 85, shelter, care, protection and overcoming loneliness are the major challenges. Their income needs are relatively modest.

Have legislators now demanding a universal pension stopped to consider the scale of the human resource, health, land and housing resources that would be needed over the next 20 years, when retirees come to represent about a third of our population, while those in employment will have shrunk from five to only two per retiree? It seems not.

Here is a sobering number. If one concludes that half the 1.5 million people who pay salaries tax can make adequate personal provision for at least half their retirement years, the total unnecessary payout of a universal pension of HK$3,000 per month would still exceed HK$325 billion over the next 25 years, even without any future increase.

A reasonable projection of pension growth takes this figure beyond HK$500 billion. This massive sum, nearly 10 times the current total annual social welfare budget, would be far better spent targeting other retirement protection needs and those in most need.

Other countries may still be preoccupied with trying to maintain universal state pensions. We do not carry that historical baggage and have the opportunity to tailor-make sustainable long-term solutions to the real needs of our own particular ageing society. Our government is right to take time in thinking this through carefully. Populist band-aids are not a solution - they are a threat.

Michael Somerville is a member of the Working Group on Income Protection for Retirement, co-ordinated by the Business and Professionals Federation of Hong Kong