To start with, Hong Kong people must agree that some pension protection is better than none
Gary Wong says though ideal, a universal retirement protection plan cannot be rushed through, and if no consensus is reached, we must begin with a need-based scheme
Retirement protection has received a lot of attention, yet no consensus is in sight. Given our ageing population, a shrinking labour force and a bleak outlook for the economy, the challenge is to find a viable universal retirement protection scheme.
Those who have contributed to society should be able to enjoy their old age. But the reality is different. In Hong Kong, an elderly person who is single and who has less than HK$45,500 in assets may apply to receive HK$5,100 from the government each month. However, only 40 per cent of eligible seniors actually claim this subsidy. Single elderly people with assets of more than HK$210,000 can claim HK$2,390 from the government each month. This amount is not enough to cover all retirement expenditure. Longevity then becomes a burden to them.
A universal pension scheme is a right, not welfare. And discussion should focus on how society may implement a universal scheme without having the government go broke.
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Not long ago, 180 scholars published a joint suggestion on retirement protection. Their “three-pronged funding model” uses a partially pre-funded system instead of a “pay as you go” system. In this case, the government would inject a HK$100 billion pension fund and corporates that have annual profits of more than HK$10 million would pay an extra 1.9 per cent of profit tax. Meanwhile, employees and employers would have to contribute a total of 5 per cent of the employee’s basic salary.
The goal of this proposed scheme is to give each elder aged 65 or above a fixed monthly pension of HK$3,500 (by 2016 standards). This payment is expected to replace existing government subsidies. The amount of future payments will be adjusted for inflation. The scholars predict that there will still be a HK$160 billion government surplus by 2064.
This proposal has its appeal. But it makes assumptions that need to be explored. First, the scheme assumes that the annual real rate of return of pension funds is 2 per cent. Thus, if inflation stands at 2 per cent, the return on investment has to reach 4 per cent. If one looks at the Exchange Fund, its return on investment in 2014 was only 1.4 per cent. The 2015 figure, meanwhile, was a negative 0.6 per cent. How can the government ever make sure that the return from the government retirement protection scheme can stay at 2 per cent per annum in real terms?
Second, the labour force is projected to shrink, and the overall consumption level is expected to fall. How many corporates can earn at least HK$10 million profit per year? If the government takes an extra 1.9 per cent on top of the current 16.5 per cent profit tax, will it not bust corporate morale and allow competitors like Singapore to take advantage of the new tax rate?
Third, are employers and employees willing to pay out of their salary pocket? Implementation of this suggestion is not as easy as we think.
Although a universal retirement protection scheme is difficult to implement at this stage, I agree with Professor Nelson Chow on his point that Hong Kong society should not just give up but accept a need-based scheme first. In this case, the elderly people who are more in need can benefit first. The city has to find a balance between ideals and reality. If a need-based scheme is to be implemented first, the government should raise the asset threshold of HK$80,000 – the figure mentioned in its consultation paper – so that more people could be eligible.
We also should not assume that money put into the retirement protection scheme has no economic return. Consultation documents state that there are about 1 million elderly people in Hong Kong. If it’s assumed that elders are given a HK$3,230 subsidy every month, a total of HK$40 billion will then be set aside each year. If the money is injected into Hong Kong’s economy, there will be direct benefits to local retail and personal service industries.
Moreover, Hong Kong has the potential to develop a silver-hair market. Consulting agency Ageing Asia stated in a report that the 2017 silver-hair market in Asia-Pacific is about US$3 trillion. Among the 15 Asia-Pacific regions, Hong Kong has a more promising market compared to Japan and Singapore. The research ranks Hong Kong No 1 in silver-haired business opportunities when factors like elders’ deposits, size of the elderly population and life expectancy are considered. If elders are promised basic economic security, it’s more likely that they will be willing to spend their savings. This will in turn boost the purchasing power of the silver-hair market, which is favourable to the economy in the long run.
Hong Kong is no different from many other places that have an ageing population. Universal retirement protection would be ideal, but there’s not much point to a “quick fix” solution that would lead to hefty trade-offs and would not be sustainable.
The debate has already carried on for years. It is time for us to move on. I believe our discussion of retirement protection should not simply focus on asset review. It should also cover Hong Kong’s overall policies for its ageing population, touching on issues like tax reform, broadening of the tax base, reform of the Mandatory Provident Fund, elderly mortgage plans, and a review of the Comprehensive Social Security Assitance scheme. This is how we can gradually pave our way to achieving universal retirement protection.
Gary Wong is a governor at the Path of Democracy think tank and a Chevening Scholar