(This essay was published in the South China Morning Post on 10 September 2014.)
Public discussions of old age retirement support have always been very confusing because they involve two different concerns: alleviating poverty and getting votes (or building political support).
In Hong Kong, there are several social transfer schemes to support the elderly poor without means. While one could query their effectiveness and how they could be enhanced, politicians and social advocates have instead demanded a universal scheme that provides benefits to all, regardless of whether they are poor.
Consider a recent suggestion by Professor Nelson Chow in his study Future Development of Retirement Protection. This involves the actuarial evaluation of five proposals put forward by politicians and social advocates, plus a sixth proposed by Professor Chow.
His proposal has three objectives. First, to consolidate existing old age support schemes into a single simplified scheme and pay every elderly person a monthly sum of $3,000.
Second, to enhance the level of support for the elderly poor – a long time concern of the good professor for which he is greatly respected by the public.
Third, to provide the same level of support to the middle class and even the rich, a much larger group of elderly households.
Because only half of Hong Kong’s working population pays payroll taxes, that would mean about half of the middle class would contribute nil or a minimal amount in order to receive $3,000 a month in old age.
Those who are retired would also see the benefit of such a scheme. So would those close to retirement.
If individuals considered only their own interest and ignored that of their children who would be burdened by taxes, then the scheme would have a formidable political support base.
The unspoken objective of using a universal old age social transfer scheme to provide retirement protection is, therefore, ultimately political.
But there are dangers in this approach. Professor Chow’s calculations reveal that four proposed schemes (including his own) will be in deficit by 2028, and the other two, which would be financed by recurrent government expenditures, would cost 2 to 2.38 per cent of projected GDP in 2041 (when Census and Statistics Department projections end) – more than double what the government currently spends on old age support (about 1%).
Even these estimates are on the low side for three reasons. First, the ratio of elderly–to-working population is expected to continue to worsen until 2060, then flatten, according to UN projections .
Second, the monthly sums paid out are adjusted only for cost of living. It is inconceivable there would not be further adjustment upwards as the economy grows.
Third, it is doubtful the population figures take full consideration of the upward trend of future life expectancy. Current estimates are likely to be underestimates by at least ten years for those born in the 21st century.
What then should we do about retirement protection? For rich countries straddled with insolvent schemes, there is no solution except to delay the start of payouts by a few years to restore solvency.
For Hong Kong, a much better solution is to address the most expensive and important items of expenditure that the elderly are most concerned about.
Hong Kong should (1) invest to expand medical and health care services, (2) radically reform the mandatory provident fund so that savers will get their money’s worth, and (3) privatize public rental housing and lower land premiums on all subsidized housing.
Housing policy reforms alone would directly benefit about half the population in Hong Kong. They would also provide a valuable asset to help those without means to finance their spending.
This battery of policies could do miracles to address our old age retirement protection challenge, especially for those without means.