(This essay was published in South China Morning Post on 4 March 2015.)

 

The ageing of Hong Kong’s population is a rapidly approaching challenge that will be around for decades to come. How can we turn this challenge into an opportunity for our future?

 

This problem is unfortunately perceived by the Hong Kong public as one of poverty and social security, one that politicians and the social welfare lobby have argued requires welfare support, including a universal old age social pension.

 

But I do not believe poverty and social security are the most important challenges facing Hong Kong’s ageing population; rather, it is health care and homeownership.

 

Consider the respective impacts on the fiscal budget. I have calculated that old age payments as a share of public spending would rise by 9.10-12.45% by 2060, depending on whether they are means-tested. Public health expenditures, however, would jump by 21.75%.

 

These projections assume that real GDP will grow at similar rates to the past, and that the government will be able to hold public spending on health care at its recent historical level of 50% of total health care spending. If not, then public health care costs will rise even higher.

 

Taken together, the impacts of an population ageing on health care and social welfare expenditures will push public expenditures as a share of real GDP from 20% today to 28% by 2041 under the most optimistic scenario. If we factor in education, housing, and other forms of social welfare spending, then the figure could easily rise to 30% even under the most conservative assumptions.

 

This would obviously have very serious fiscal budget consequences and completely alter Hong Kong’s fiscal foundation of low taxes and limited government. Public housing expenditures had been declining in the recent past, but will rise again with renewed recent emphasis.

 

Should we then reduce other public expenditure to balance the books? Reducing spending on education and social welfare is unlikely to be popular nor politically achievable.

 

It appears to me there are only two policy options for balancing the long-term fiscal budget and meeting the challenge of our ageing population. The first is to adopt an innovative way to fund public housing expenditures. The second is to moderate the rising share of public health care spending by investing in training and the health care industry.

 

Let me explain further. On housing expenditures, the demand for public housing is increasing rapidly because of the rising divorce rate and because young households are queuing for public rental housing to improve their chances of getting into the Homeownership Scheme (HOS). These two sources of demand were not foreseen by the government.

 

But public rental housing and HOS flats could be turned into an asset if they were unified into a single subsidized program that is available for both rent and purchase, with tenants having the option of renting first and purchasing later, similar to Singapore’s public housing scheme. This could be made feasible by not requiring purchasers to pay exorbitant land premiums, as is currently the case for HOS buyers, and also restart the Tenant Purchase Scheme for existing public housing tenants.

 

Turning these flats into affordable privately owned assets would provide our ageing population with a reliable asset to finance their living in old age and have other benefits for society. I have analyzed how such an approach can be implemented in my book Long Term Housing Strategy and Homes for Hong Kong Residents.

 

One of the other benefits would be to end rising pressure on the government’s fiscal budget, which brings me back to health care spending.

 

Health care will be an unusually large growth area in Hong Kong as the baby boomer generation retires. We have hugely underinvested in this area, yet it is a no-brainer for Hong Kong and it is affordable.

 

Adopting policies to build more hospitals, relaxing the admission of foreign-trained doctors into medical hospital practice here, orienting our Science Park and Cyberport towards medical and healthcare research and development, and establishing a separate Medical Research Council will create a strong base for fostering a medical and health care industry for Hong Kong.

 

Hong Kong needs to act now to reap the benefits. A revised housing strategy would not only make low-income homeownership self-financing, but allow for scarce public resources to be reallocated towards health care spending.

 

Our elderly population would then receive a home they own and access to reliable quality health care. I suspect they will become the most fervent supporters of balanced budgets, low taxes, and a free society. I trust the growing political divisions in society can also be so alleviated.

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