Hong Kong’s population is aging rapidly and the burden of any income guarantee program now will fall on the working youth. The city missed the boat 20 years ago. It has to pay a higher price now to fix that negligence. Oswald Chan reports from Hong Kong.
Twenty years ago, the local economy was fueled by vigorous economic growth, global trade, tourism, and direct investment flows, driving its property, hospitality, restaurant, aviation, logistics, and financial sectors, with full employment. A comprehensive retirement benefits fund which incorporated a monthly income guarantee program for the elderly, was well within its capacity.
But an addiction to the low, flat, income tax regime for individuals (15 percent) and corporations (16.5 percent), militated against social welfare, which was outsourced to the Hong Kong Jockey Club. The HKJC has done a sterling job of contributing tax and running homes for the elderly, handicapped, orphans, etc. But the government is expected to fill all the other gaps. There are many.
Society now shoulders a rapidly aging population, declining productivity, pandemic-induced global financial meltdown, weakened family safety nets, and general gloom. Overhauling its inadequate retirement regime is a much harder challenge. This will require proactive leadership, a multi-prolonged approach, and willingness to innovate. Few Hong Kong retirees have long-term financial protection. That is both a burden, and the responsibility of governance.
Govt rejects expert study
In May 2013, the government’s Commission on Poverty engaged Professor Nelson Chow Wing-sun of the University of Hong Kong to study options for retirement protection. One year later, Chow proposed that all residents aged 65 or older receive a pension of HK$3,000 ($387) a month, without a means test. Another 180 scholars in 2015 also suggested a universal retirement pension contributed by the government, employers, and employees, that could sustain beyond 2064. The government rejected these proposals.
The government lost 30 years dithering over a retirement protection model before implementing the Mandatory Provident Fund in 2000. Blinded by the free-market ideology, and non-interventionist economic policy of inherited British Hong Kong attitudes, the government never had the political will to resolve the retirement protection issue.
Only as political pressure flared through democratization of the Legislative Council since the 1990s, was the government pressured to launch the MPF as a minimalist compromise between assertive stakeholders. The pro-business sectors had disproportionate voting power in the legislature, and predictably, stymied retirement protection proposals.
In 1966, 1975, 1987 and in 1991, there were repeated attempts by lawmakers to review the Singapore-model Central Provident Fund proposal. The government released a consultation paper in 1992 for a compulsory pension system. After a year of consultation, it ruled out the CPF as a retirement protection option.
Pension system ranks 17th
The Global Pension Index 2020 released by the Mercer, CFA Institute and the Monash Centre for Financial Studies, ranked Hong Kong’s retirement income system 17 th among the world’s 39 retirement income systems, covering almost two-thirds of the globe’s population.
Hong Kong’s overall 61.1 score revealed that its adequacy and sustainability are poor. Adequacy refers to whether pension assets sufficiently cover retirement incomes, while sustainability gauges whether a pension system can effectively function long-term, with other interrelated variables.
The Netherlands and Denmark offer the best benchmarks in the global pension system survey. Both offer a hybrid of retirement income streams, supported by a public pension program, fully funded defined contribution programs, and mandatory occupational programs from industrial agreements.
Not sustainable
Hong Kong trails on all measurements of adequacy and sustainability. In adequacy, Hong Kong’s major shortcoming, compared to the Dutch and Danish system, is the absence of a universal pension program that offers basic retirement benefits to all residents. In addition, the city’s net replacement ratio — pensioner’s income as a percentage of earnings before retirement — is only 44.5 percent.
Worse, less than 2 percent of the total assets of the MPF, the Occupational Retirement Scheme Ordinance, and other private pension programs in Hong Kong, convert to an income stream. Benefits provision is insufficient to cover retirement needs. Financial authorities must review the contribution cap or find other ways to increase contributions.
Hong Kong fails the three measures of sustainability, indicating the city’s pension system is fragile. Only 61.6 percent of the working population join the MPF private pension plan. The labor participation rate for those aged 55 to 64 is 58 percent — lower than the 70 percent global benchmark.
The city’s current pension fund assets, including MPF, ORSO and other private pension programs, only account for 50.4 percent of the city’s GDP i.e., the current pension fund assets are not enough to fund future liabilities.
Contrarian caution
Joe Wong Fuk-kin, senior lecturer at Hong Kong Shue Yan University’s Department of Economics and Finance, calls for establishing a universal pension system where pension benefit should be equal to one-third of retirees’ monthly income. Wong says it is financially viable for the Hong Kong government to establish such a public pension fund, if it transfers MPF, Civil Service Pension Reserve Fund and the Land Fund, in whole or in part, to the redesigned retirement protection fund.
“The government should have adopted the public pension program 20 years ago when the city’s economy was buoyant. Now, beleaguered by economic recession, the government’s primary concern will be to boost economic recovery, rather than expand social welfare.”
Vera Yuen Wing-han, Lecturer at HKU Business School
Wong says a universal pension program can force those in the low-income category to save, to ensure the quality of life for the elderly later. The government can correct market failures in the private pension market due to information asymmetry. Furthermore, the government can reduce transaction costs by allocating people’s income and consumption expenditure across time, for effective income redistribution policies to promote economic prosperity.
“If most people in Hong Kong expect to receive a pension when they get older, this represents a huge social policy success and can lead to public sector pension reform,” says Wong.
Other scholars reject the idea of a universal pension program, saying the government does not have a track record for accurate long-term funding projection. They dismiss indiscriminate cash handouts through a public pension, as not effective. The proposal violates intergenerational equality, expecting the younger generation to pay now to support the retirement of the 1950s baby boomers.
Vera Yuen Wing-han, an economics lecturer at HKU Business School, says that “Hong Kong has already missed the window of opportunity to launch a public pension program. The government should have adopted this option 20 years ago when the city’s economic growth was buoyant. Now, beleaguered by economic recession, the government’s primary concern will be economic recovery, rather than to expand social welfare.”
The long-term economic growth prospect is not optimistic. The Sino-US trade tensions and COVID-19 shutdowns have plunged Hong Kong into recession. Although the government holds billions of dollars in fiscal reserves and it does not incur significant government debt, its capacity to support retirement benefits through GDP growth will be limited.
One-size fits all?
Billy Mak Sui-choi, an associate professor at the Department of Finance and Decision Sciences at the Hong Kong Baptist University, says we cannot rely on just the public pension program to support the whole retirement system in Hong Kong. The adequacy and sustainability of the city’s retirement regime can be improved without establishing a public pension program, claims Mak.
“We cannot rely on just the public pension program to support the whole retirement system in Hong Kong. The adequacy and sustainability of the city’s retirement regime can be improved without establishing a public pension program.”
Billy Mak Sui-choi, Associate Professor at Department of Finance and Decision Sciences in Hong Kong Baptist University
Mak says: “The government must scrap the MPF offsetting mechanism that undermines the effectiveness of retirement protection. It should increase the mandatory contribution rate up to 20 percent by both employers and employees. The government should allow MPF members to switch the fund assets of the employer contribution part to any other MPF providers, and introduce more tax incentives to attract more voluntary MPF savings, to boost investment returns.”
PwC Hong Kong Financial Services Consulting Leader Albert Lo says, “There is room for improvement by relaxing the MPF contribution cap to strengthen the adequacy of the MPF system. The current system adopts a one-size-fits-all approach, whereas the retirement protection needs of the 25 percent high-income earners may be crimped as their MPF contribution is capped at HK$1,500 per month.”
“Other MPF return enhancement measures such as eMPF or relaxing investments in different asset classes, should also be regarded as measures to improve adequacy of the MPF,” adds Lo.
Integrated overhaul needed
To tackle the situation, the city’s current pension program has to be overhauled and parallel social and labor policies must be revamped. All derivative factors have to be integrated into a comprehensive reform, instead of piecemeal tinkering.
Besides a public pension program, retirement industry experts believe the government should embrace a cross-departmental approach to enhance adequacy and sustainability of the city’s retirement protection regime.
Global professional services firm Mercer believes the retirement protection issue involves different government departments, for example, deferring the age of retirement is under the purview of the Labor and Welfare Bureau.
Retirement extension
Hong Kong desperately needs to enhance older adults employment to defer the retirement age of elders. The aging trend is getting worse. By 2069, 38 percent of the population will be aged 65 plus. The ratio in 2019 was 18 percent. By 2069, each retiree will be supported by 1.4 working age adults while the ratio in 2019 was 3.77 working age adults, according to MPFA figures.
HKU Business School’s Yuen says most of the European countries have already extended the official retirement age to 67 or 68. She suggests the government should take the lead to extend the retirement age, recruit more elders, and give incentives to insurance companies to provide policy cover for older recruits aged 65 plus.
Credit rating agency Moody’s Investors Service says Hong Kong’s dependency rates are soaring, with the unemployed outnumbering those working, which will further depress productivity growth. “As the system matures, there is opportunity to improve the index value if the government allows part of the retirement benefit to be converted into an income stream, and enacts policies to enable labor participation at older ages,” says Adeline Tan, Mercer Hong Kong’s wealth business leader.
The idea of pledging residential properties and life insurance policies as collateral, to convert into a constant income stream, seems novel to local pensioners. Older adults were reluctant to pledge property as collateral. This explains why the ratio of accumulated retirement benefits that can be taken as an income stream, is so low in Hong Kong. The government must do more persuasive educational work to meet the 60 percent global benchmark.
Hong Kong’s family structure is getting smaller as most families raise two children, and some couples opt not to have children. The family factor will diminish as financial support for the elderly. The government should formulate a comprehensive policy package to raise the city’s fertility rate too.
Contact the writer at oswald@chinadailyhk.com
