As Hong Kong's population ages, people's worrying lack of retirement funds is akin to a ticking time bomb, according to financial services pundits. And to offset a potential crisis, the government needs to introduce a tax incentive to encourage Hong Kong's workforce to make voluntary contributions to their Mandatory Provident Fund (MPF). 'A move towards such a policy would encourage people to save more for their retirement,' says Billy Wong, vice-president - institutional business development, pension services, with pension administrator BestServe Financial. 'The culture in Hong Kong is such that people focus on the short term and, even with their MPF investments, tend to favour risky investment strategies.' It appears that Hong Kong is headed towards a crisis. By almost any objective measure it can count itself among those countries often referred to as mature economies. Yet, there is one area in which Hong Kong glaringly lags and that is the failure of its people to adequately prepare for their financial retirement. A survey by investment product and service provider Fidelity International reveals that Hong Kong has the lowest 'readiness' figure among mature economies surveyed by Fidelity's affiliates, ranking just below Japan at 47 per cent, and well behind the United States, Germany, Britain and Canada at 58, 56, 50 and 50 per cent, respectively. According to the 'Fidelity Viewpoint: Hong Kong's Retirement Challenge' report, Hong Kong had a retirement index score of 43 per cent last year, signifying that households were on track to generate income in retirement that was only 43 per cent of their final pre-retirement income. In Fidelity's view, a replacement level of 67 per cent of pre-retirement income is required for a comfortable retirement existence, with up to 85 per cent needed to enjoy a more varied and active lifestyle. The report also found that those aged 35-54 years, and 55 and above, were less prepared for retirement than those aged 25-34. This situation is particular to Hong Kong compared with other mature economies surveyed, where older age groups were considerably further along in terms of their retirement readiness. Hong Kong's population is rapidly becoming older. According to the latest statistics from the Census and Statistics Department, people aged 65 or above account for 16.2 per cent of the city's population and are estimated to increase to 25 per cent by 2033. The cause of this jump is the city's baby boomers. Next year alone, 93,000 baby boomers will turn 60 years old, a development that is prompting calls for a comprehensive policy that addresses Hong Kong's retirement age and the health care and pension arrangements. The associated lack of long-term thinking when it comes to savings and investments is translating into poor preparations for retirement. Introducing policies that encourage people to save more for their retirement - policies regarding choice of MPF funds, the ability to transfer accrued benefits from one scheme to another without changing employment and, of course, tax incentives - are part of the solution to encourage people to save more for their retirement years. Having a tax incentive to encourage people to contribute more is a positive move, according to Hong Kong-based Philip Tso, principal investment consultant with global consulting firm Watson Wyatt Worldwide. 'We know from surveys conducted from many different institutions that Hong Kong people do not save enough for their retirement,' Tso says. 'They don't have a long-term mentality when it comes to investing and tend to make investment decisions based on market reactions. 'Saving for retirement is a long-term exercise but, without a suitable incentive within the MPF system, members are likely saying to themselves that they can find better returns elsewhere rather than putting their money into the MPF system, especially for such a long period of time. 'We believe that having a tax incentive could encourage some people to save more for their retirement, but whether it will prove to have a huge impact no one yet knows.' Education will be key to ensuring the success of a move to incorporate greater tax incentives. Each stakeholder, from the providers to the employers, and financial advisers to government, has a role to play, as do employees in terms of educating themselves, Tso says. Ultimately, the question remains as to whether increasing the tax-free limit on voluntary MPF contributions will make that big a difference to retirement savings in the long term. The short answer is no, because there are larger issues at play - speculative investment behaviour, little education about retirement needs and a tendency among local people to seek short-term investment returns over long-term gains. 'It is important for the government to take the lead now and set policies that encourage more retirement savings,' Wong says. 'Retirement savings are nowhere near sufficient.'