(This essay was published in South China Morning Post on 30 December 2015.)

 

The Poverty Commission has just released its long-awaited policy consultation document Retirement Protection Forging Ahead. The public consultation process was plunged into controversy before it began by leaks that the government would frame the retirement protection options as “regardless of rich or poor” or for “those with financial needs”. The powerful lobbies for “universal retirement protection” are incensed. This is not surprising because this issue deeply divides society.

 

The government proposal contains some interesting budgetary comparisons for granting a monthly payment of $3,230 (in 2015 dollars) either to all elderly individuals (above 65 years of age) under the “regardless of rich or poor” option, or to “those with financial needs” (maximum assets of $80,000 for a single person and $125,000 for a couple).

Under a “baseline scenario”, the expenditure on elderly social security would increase from $25.3 billion in 2015 to $49.8 billion in 2064 as the elderly population grew; from $27.9 billion to $55.8 billion under the “those with financial needs” option; and from $47.9 billion to $106.1 billion under the “regardless of rich or poor” option.

 

Funding the latter is a particular concern because either profits tax would have to increase from 2.8% in 2015 to 4.6% in 2064, or salaries tax from 4.9% in 2015 to 9.1% in 2064, or a goods and services tax would need to be introduced, reaching 5.0% in 2064.

 

The issue at stake is not strictly affordability. There are those who view a universal retirement protection scheme as a grave threat to our freedoms and prosperity, which they see as founded on preserving a limited government, low tax rate regime, and free open economy.

 

One should also not ignore the fact that if society begins to subsidize everyone in old age it will alter everyone’s propensity to save for old age.  Consider the effect of rising government social welfare expenditure on work incentives, which has resulted in the percentage of those age 20-59 choosing not to work to increase from less than 1% to over 3.5% in a span of two decades (see Figure 1).

Moreover, our commitment to a linked exchange rate regime imposes severe discipline on fiscal spending to maintain the credibility of our monetary and financial system.

 

Introducing a universal retirement protection scheme now, especially when Hong Kong has a rapidly ageing population and rapidly rising pressure to spend on healthcare, could unravel our exchange rate regime if government were to give in to populist political pressure.

 

In contrast to these concerns are those who are committed to serving their constituencies among the elderly.

 

The past three decades have been a period of rapid economic transformation that has created a more unequal society. Although many elderly households were able to move into public rental housing as a result of government policy under Donald Tsang, there are still high concentrations of elderly poor living in private housing in a few neighborhoods. This has made old age poverty more politically popular and their constituents easier to mobilize.

 

At the same time, the lower-middle income groups in particular are finding it more difficult to achieve a comfortable standard of living. Universal retirement protection holds out the promise of alleviating their contributions to the upkeep of their ageing parents, and would represent an indirect transfer of benefit to these households who pay very little tax.

 

Although our community embraces humanistic relief for the poor and compassion for the elderly, the two ideas are not the same. Our elderly poor need relief and the “those with financial need” option makes the best sense. Meanwhile, our other elderly population needs support in health care.

 

A more robust intergenerational contract would be if the elderly living in government-subsidized housing could own their homes, which their children could inherit. If compassion cannot be fostered within the family, then it would be a stretch to believe it would thrive in the community at large.

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