When it comes to retirement protection policies, it’s tough to get the incentives right
Alex Malley says encouraging people to save for old age while also looking out for the most vulnerable is a difficult balancing act, but Hong Kong is on the right track
With Hong Kong facing an ageing population and a large income gap, the government is to be commended for taking a measured and methodical approach to reviewing retirement protection policies. Such policies are highly connected with other important areas, particularly tax. Get the design or balance with other policies wrong and we are likely to see constant tinkering for years to come.
Our experience in Australia shows that retirement protection policies are best developed after a holistic review that includes consideration of the consequences on other policy areas and broad community engagement.
The challenge for Hong Kong is striking the right balance while limiting the overall impact on the public purse. One of the key questions is whether a publicly funded pension should be a uniform payment to all elderly people, or should it target those most in need?
The economically responsible approach – which the government has already indicated it favours – is to limit a publicly funded pension to those most in need through means-testing. We suggest a further review of the asset limits associated with payment eligibility, and the level of the payment. From an equity and balance perspective, both appear to be too low. Whatever the final design, any impact on taxes should be limited to ensure that one of Hong Kong’s competitive advantages – its low tax regime – is maintained.
If government support is to be limited to protecting those most in need, then it is even more important the Mandatory Provident Fund is fit for purpose and incentives for voluntary savings are in place to ensure those who can save sufficiently in their own right do so.
The government recognised in the consultation paper that it’s important to consider whether the offsetting provisions for severance and long-service payments should be removed and, if so, how. In our view, the MPF – like all retirement savings schemes around the world – should be a retirement savings vehicle exclusively. We do not support early access to the MPF, as it can have a significant negative impact on retirement savings.
Agreement on transition arrangements away from the existing offsetting provisions is needed and the consultation has brought forth varied views on this.
Whatever policies are adopted, it is important they enhance retirement protections, especially for the most vulnerable; are economically responsible; and that where there are changes that have a negative impact, such changes are made prospectively and after consultation. On all these counts, the government seems very much on the right track.
Alex Malley is chief executive of CPA Australia