Hong Kong's state-funded pension scheme

Hong Kong should abolish tax breaks on MPF to fund universal pension scheme

PUBLISHED : Sunday, 01 May, 2016, 12:01pm
UPDATED : Sunday, 01 May, 2016, 12:00pm

Chief Secretary Carrie Lam Cheng Yuet-ngor has killed any hope for a universal pension. In a recent speech, she said such a scheme would cost HK$22.6 billion a year, raising questions of sustainability and equity, and much has already been done to support the old. She also said the cost was HK$2,395 billion over 50 years. That kind of projection is statistically irrelevant; the annual cost is the only one that matters.

HK$22.6 billion is just about 1 per cent of Hong Kong’s 2015 gross domestic product. So cost, sustainability and equity seem not to be the real issues. Policy inertia and vested interests are the more likely explanations.

Mrs Lam acknowledged that some old people were still confronted with financial difficulties, so what is the government doing about that now?

Many think that governments should force citizens to save for retirement and give them tax breaks to help them make the “right” decisions. Many also support income-testing the state pension. This is the model favoured by the World Bank. However, international evidence suggests that governments cannot force or encourage citizens to save more than citizens want to save, so tax breaks for retirement saving don’t work. Compulsion doesn’t work either. Both are distortionary, inequitable, expensive, regressive and complex.

Governments should instead concentrate on doing the things that only governments can do and leave the rest to individuals and their employers. The list of things that only governments can do is relatively short:

Reduce or eliminate poverty in old age – only governments can tax and redistribute.

Regulate to enforce codes of behaviour on investment services and tax compliance.

Produce impeccable, deep data – only governments can compel the disclosure of useful information.

Run information and education programmes that help citizens to understand what might be important for them.

Governments should then stand aside and let citizens and their employers decide what might suit their circumstances best.

Hong Kong’s “four pillar retirement protection system” falls at the first hurdle. Poverty amongst the old needs immediate attention.

Here is a suggestion – abolish tax breaks for retirement saving. Tax breaks for the compulsory Mandatory Provident Fund seem particularly unnecessary. If they don’t actually work (given that a saver’s tax break is a taxpayer’s tax cost), the amount saved will more than pay for a truly universal pension.

Michael Littlewood, Retirement Policy and Research Centre, University of Auckland