Incentives can increase Mandatory Provident Fund contribution rates

PUBLISHED : Thursday, 23 June, 2016, 5:49pm
UPDATED : Thursday, 23 June, 2016, 5:49pm

I refer to Jake van der Kamp’s column (“Using MPF funds to buy homes a bad idea”, June 16).

Saying that Hong Kong should not copy Singapore in allowing the use of Mandatory Provident Fund money to buy homes, and reinforcing this with a shallow analysis, to show Hongkongers are better off contributing less to MPF in order to have higher current disposal income than Singaporeans, is misleading.

Ensuring Hongkongers have adequate retirement funds and allowing the use of MPF funds to buy homes are separate issues.

The first is a choice between current and future consumption. Modifying one’s consumption pre-retirement to save and invest via a funded pension system like the MPF is an increasingly urgent endeavour for Hongkongers as the population ages and lives longer.

Indeed, the Global Ageing Institute concluded in a recent report, “The advantages of the funded model for ageing societies … are large and important. At the micro level, funded pension systems can generate higher rates of return than pay-as-you-go systems can, and hence can offer higher replacement rates at any given contribution rate.”

As to whether Hongkongers should use their MPF funds to buy homes, the argument against it should not be because of a potential higher contribution rate to the MPF.

In the case of Singapore, it is precisely because so much is locked away that it makes sense to have “flexibility” to tap the funds for critical spending decisions so long as they lead to greater personal security (like housing and medical expenses), or improved income generating ability (like education for you or your children).

Perhaps creating the right incentive through policy flexibility is what’s needed to encourage Hongkongers to increase their contributions to the MPF. At the current 10 per cent contribution rate, the MPF will not provide adequate income replacement for Hongkongers at retirement. To achieve a 70 per cent income replacement at retirement, the contribution rate needs to be closer to 18 per cent.

To make housing more affordable for Hongkongers, this is a function of housing development and land management policies; it has nothing to do with raising MPF contribution rates nor whether MPF funds should be used to buy homes.

Thomas Cheong, head of North Asia, Principal Financial Group