Mandatory Provident Fund (MPF)

Let’s employ a little creativity in Hong Kong pension reform

Mike Rowse says with the will, and a bit of imagination, a caring government could find a way to introduce a universal retirement scheme without disastrous effects on public finances

PUBLISHED : Sunday, 03 January, 2016, 8:15am
UPDATED : Sunday, 03 January, 2016, 8:15am

When Otto von Bismarck introduced the first old age pension scheme in 1889 in Prussia (modern-day Germany), the qualifying age was 70. The average life expectancy in Prussia at the time was 45. In other words, it was understood from the outset that the vast majority of citizens would never get to receive it. It was more like an end-of-life bonus for those who beat the odds on longevity.

The underlying assumption was that most people would continue to work and support themselves for as long as they were able to do so. Thereafter, they would be supported by their family. Perhaps I am a misfit from another era, but I find nothing wrong with such an approach in principle. Yet somehow, in recent times, the idea has grown up that once a person has reached a certain age or completed a set number of years of gainful employment, he has earned the right to put his feet up and do nothing for the next few decades except play golf or mahjong.

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Perhaps it was expecting a bit much to look for our government to begin the latest consultation exercise on retirement issues by going back to first principles. But by confining the scope to fine-tuning what we already have, I think our community risks missing a major opportunity to debate more fundamental issues.

At a time when life expectancy here is around 85 (slightly more for women, less for men), why do we adopt uncritically the assumption that retirement should begin at 65? Most people continue in reasonable health well into their 70s. Yet the consultation document takes 65 as a given. It then offers us two different approaches, either “regardless of rich or poor” or “those with financial need” and talks about the implications for public finances.

Let me posit an entirely different approach. We should start by scrapping the idea of any fixed retirement age

Under one approach, profits tax would rise by 4.2 per cent to 22.7 per cent while, under the limited option, it would only rise by 0.4 per cent, to 16.9 per cent. Since the vast majority of the population do not pay profits tax, I doubt they care very much about the difference. Similarly with salaries tax, since more than half of the working population do not pay any, why should they care about the difference between increases in the standard rate, of 8.3 per cent or 0.9 per cent? It sounds like (and is) a major redistribution between rich and poor which some would find attractive in principle.

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Let me posit an entirely different approach. We should start by scrapping the idea of any fixed retirement age (as indeed the US has already done). You have the right to work either full- or part-time as long as you wish to do so and are physically capable. You retain the right to retire at any time you can afford to. Thereafter, rather than a stark choice between two radically different approaches, why not combine the two? From a certain age – let us be more generous than the Teutonic chancellor and say 75 – there is a universal government scheme paying a decent sum, say HK$6,000 per month rather than the beggarly HK$3,000 offered in the consultation, to show respect to the elderly. Prior to that age, you depend on your own savings (including employer-paid pension), or support from your family, or – subject to a means test – public coffers to alleviate poverty. Essentially this last part is the same as our present CSSA.

How do we finance this? As others have pointed out, a significant chunk of Hong Kong’s public revenue – the proceeds of various land transactions – is diverted directly into the Capital Works Reserve Fund. This arrangement has served us well over the years as it means we do not have to scrape around for resources to finance essential infrastructure. Rather than scrap the system, we can fine-tune it. Bearing in mind that we already have most of the infrastructure we need, the emphasis in future should be on maintenance, to ensure we keep what we have in good condition. Let us take responsibility for maintenance costs – for highways, drains, waterworks, hospitals etc – out of the recurrent side of the accounts and move them over to the Capital Works Reserve Fund, thereby freeing up resources to meet the ongoing consequences of our ageing population.

There is a strong sentiment that we should have a universal retirement pension of some sort. If we exercise a little imagination, we can introduce such a scheme without breaking the bank.

Mike Rowse is the CEO of Treloar Enterprises and an adjunct professor at the Chinese University of Hong Kong. [email protected]