Unionists say bosses are treating workers' compulsory retirement savings accounts like a "piggy bank" by dipping into them to fund severance payments.
The labour groups are calling on the government to quickly phase out rules under which companies can save money by offsetting payments to departing workers against the employer's contribution to Mandatory Provident Fund accounts.
They want Chief Executive Leung Chun-ying to announce a ban or limit on the practice in his policy address next week.
"The offsetting arrangement is unfair and is ruining the image of and trust in the [MPF] system," said Federation of Trade Unions lawmaker Tang Ka-piu. "Our concern is that if [the administration] cannot suggest any measures this year, the Legislative Council will not have time to make any legislative amendments [before its term ends]."
Under the MPF scheme, employers and employees must each contribute 5 per cent of the worker's salary, up to a combined total of HK$2,500 per month, into funds run by banks, insurers or fund houses. Employees can usually only access the fund when they reach 65. But bosses can offset severance payments and long-service payments against the MPF.
Among those to lose out was a former seafarer who retired in March 2009 after 13 years with his last employer. He believed his HK$195,000 long-service payment and the HK$200,000 he had in his MPF account would help him enjoy a modest retirement lifestyle for a few years.
However, when he turned 65 recently and attempted to access his MPF savings, he discovered that the employer's contribution had funded his long-service payment, leaving him with about half of what he expected.
"If they can do this, I don't think the MPF is a good retirement protection scheme … Employers save and employees lose," he said. "I don't know how long this amount will last me. If it runs out, I guess I will try to apply for [welfare]."
The FTU says 37 per cent of early withdrawals of MPF benefits between 2008 and last year - HK$10.6 billion - came from offsetting by employers. Some 30 per cent was withdrawn by people leaving Hong Kong, while 28 per cent was for early retirement.
But business groups are alarmed by the prospect of a ban.
Federation of Hong Kong Industries chairman Stanley Lau Chin-ho said an outright ban would increase hiring costs and force companies to give workers shorter contracts. He said on Saturday that employees could intentionally try to get fired.
"An employee who is in need of money may think of ways to make the company dismiss him to get his severance," he said.
But Labour Party chairman Lee Cheuk-yan said employees would not get severance if they did intentionally get fired, which would be misconduct.