(This essay was published in Hong Kong Economic Journal on 28 November 2018.)

 

The recent Hong Kong Poverty Situation Report 2017 announced that the number of persons below the poverty line in 2017 was 1.377 million, 25,000 more than the figure in 2016. The poverty rate thus rose 0.2 percentage points to 20.1%. After government cash transfers including the Old Age Living Allowance (OALA) and Low Income Working Family Allowance (LIFA) are factored in, the poverty figure fell to 14.7%, or 1.01 million, a rate similar to the previous year.

 

But instead of trying to understand why the number of persons below the poverty line had increased, the critics are faulting the government for not doing enough to alleviate poverty. First, they charge that the minimum wage has not been adjusted upwards frequently or sufficiently enough to alleviate poverty among the economically active. Second, they claim the number of elderly poor has increased by over “forty thousand” over the past 5 years.

 

Both criticisms are wrong.

 

A great battle over poverty alleviation policy in Hong Kong was fought in 2013, and the social advocates (such as Oxfam and the Hong Kong Council of Social Services, among others) won the day when the government agreed to adopt the poverty line definition used in Europe. Households in poverty are deemed to be those that earn less than 50 per cent of the median household income of the population – a relative economic concept of poverty.

 

The government’s poverty alleviation policy – the Low Income Working Family Allowance (LIFA) – was a direct application of the poverty line concept to reduce the number of economically active households deemed to be in poverty under this definition. The measure has surely decreased the number of economically active households below the poverty line.

 

However, the numbers coming forward to apply for LIFA have been only about half of that initially projected by social advocatesand expected by the government. The fact that the numbers have fallen so short of the target is proof that the poverty line overestimates the true number of working poor. Otherwise, why wouldn’t they step forward for assistance?

 

To economists, the concept underlying the poverty line adopted in Europe and advanced by many social advocates here has long been known to be deeply flawed. I wrote extensively about it in these columns when the big battle over the definition was being fought, but sadly the voice of flawed analysis triumphed. This is not to imply in any way that LIFA has not alleviated poverty among the working poor, only that the extent of poverty among the economically active population was exaggerated by the poverty line.

 

Would raising the minimum wage help alleviate poverty among the working poor? Not really, because empirical evidence from Hong Kong and elsewhere has time again revealed that around three-quarters of the individuals with minimum wages belong to households whose incomes are above the poverty line. In fact, most are around the median and some are even in the top quarter of the income distribution. The overwhelming effect of increasing the minimum wage will not be to alleviate poverty.

 

Why then have the numbers of households and persons living below the poverty line increased? The simple reason is that the number of elderly have increased over time. In the past five years, 2013-2017, the number of elderly households above the age of 65 has increased by 83,000. This significant increase should come as no surprise given the ageing of our population.

 

The number of elderly households found below the poverty line has increased significantly in the past five years by 68,000. After government cash transfer intervention measures are taken into account the increase in elderly poor was reduced to 27,000.

 

Another source of public support for the elderly is public rental housing, which is not included in determining whether one’s income is below the poverty line. Today half the elderly households live in public rental housing. The corresponding number for those below age 65 is less than a quarter. No wonder the youth are angry and agitating.

 

I would surmise that government has shouldered most of the heavy lifting for alleviating elderly poverty and the question of elderly poverty is exaggerated, despite press reports and public sympathy. Of course, there is always room for private philanthropic effort to help specific elderly needs here and there.

 

A far more serious question is that measured elderly poverty is likely to grow artificially over time for the simple reason that the elderly population will continue to grow. Our poverty line is uniquelyunsuitable for measuring economically inactive elderly households and fails to take into account in-kind transfers like public rental housing.

 

One would expect the measured number of elderly poor to keep on growing artificially for at least another thirty years, from 2017 to 2047, because the number of persons age 65 or above is projected to increase on averageby 46,200 each year. Our present poverty line will become an increasingly misleading indicator of relative poverty and especially elderly relative poverty.

 

Removing the elderly population (or non-working age population) from the calculation of the poverty line would improve the usefulness of the present poverty definition as an indicator of relative poverty. It could then become an indicator of poverty among the working age population rather than a hybrid measure of two completely different populations that require different poverty alleviation policy measures.

 

A separate poverty line for the elderly population could be readily constructed that is anchored in consumption spending like the one used in the United States, which is largely driven by multiples of food consumption expenditures. Housing expenditure could then be isolated and separately treated. The European conception of poverty line, by comparison, is an unsuitable indicator because it is anchored in income and the elderly are mostly economically inactive. This is the primary problem with our poverty indicator.

 

Poverty is not a huge insurmountable problem today and misleading news headlines that suggest so are most unfortunate. Child poverty, to the extent that it arises from low parental income, can be tackled directly through LIFA. The real challenge for Hong Kong is near poverty and it is primarily a problem of the younger working population. Their problem is low earnings relative to their desired expenditure on housing, which is expensive.

 

For those who are unable to get subsidised housing and do not live with their parents, near poverty is a deterrence to family formation. For young married couples, the demand for housing is not merely an adequate shelter to raise a family, but homeownership. Empirical evidence in Hong Kong has shown that divorce propensity is reduced by more than half among families that are homeowners than among renters.

 

Homeownership is a source of savings that allows a young couple to make long term savings plans that are essential for old age retirement, have security against the risk of starting a business, and have a vehicle for inclusive sharing in the present and future prosperity of the city.

 

History has demonstrated that in Hong Kong and all other major metropolitan centres in the world, the appreciation of housing prices has outstripped that of most retirement and pension funds. Housing assets have also been used as collateral for raising working capital to finance a business investment – indeed, the early growth of the Pearl River Delta was in part financed indirectly by Hong Kong investors in this manner.

 

The new digital economy is a major driver of rising inequality in earnings and wages. A small fraction of the working population will be able to receive significant increases in income, but the large majority will not. The benefits of rising prosperity will not be shared in an inclusive way. This creates a very fertile soil for misguided radical political thoughts on both the left and the right.

 

A young family without their own home that is facing rising housing prices and meagre income growth is in near poverty. This problem cannot be adequately addressed by LIFA or OALA, and not even a massive public rental housing program. Such is the predicament of the young who live in rising and prospering metropolitan centres. This situation needs to be addressed through a housing strategy that helps young people to become homeowners through access to housing finance.

 

The real challenge in rising Hong Kong is not the relative poverty of the elderly or of children, but near poverty of the young working adult that cannot save enough to become a homeowner in time to share in the growing prosperity of the city.

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