Funding a universal pension scheme is no easy matter
Updated: 2014-08-28 07:12
By Raymond So(HK Edition)
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A universal pension is an idealistic concept. Supporting the elderly during their twilight years is a noble ideal. If such support is provided, the elderly can enjoy a decent lifestyle. To many, this is a decent, fair idea. When today's elderly were in their youth, they worked hard and contributed much to the development of Hong Kong. At that time Hong Kong was poor and the concept of retirement planning was not well recognized. So it seems appropriate that society should take care of the elderly through some level of financial support. Because it is an affluent society, Hong Kong clearly has the financial resources to fund such a scheme.
The SAR government mentioned earlier that one of its priorities was to study the feasibility of a universal pension scheme. Society has certain expectations of this. There are pressure groups advocating different types of universal pension schemes. Although these differ, the concept behind them is the same: A universal pension scheme is needed, and there should be contributions from the government, employers and employees. Last year, the government invited Professor Nelson Chow Wing-sun of the University of Hong Kong to conduct a consultancy study on the "Future Development of Retirement Protection in Hong Kong". Earlier this month, the government released its report, which aroused some controversy. It is clearly a subject that will be endlessly debated.
As mentioned earlier, the concept of universal pensions is idealistic. Nevertheless, the problem of how to fund it remains a key issue.
Chow's report presents the idea of a universal pension scheme which will provide HK$3,000 per month to everyone aged over 65. Hong Kong is an expensive city and a monthly pension of HK$3,000 will barely support a pensioner. This is indeed a modest amount. If there were 1 million people who qualified for this scheme, the annual spending would be HK$36 billion. The Hong Kong government is rich enough to support annual spending of HK$36 billion.
Simple arithmetic also tells us this is not the end of the matter. A monthly pension scheme of HK$1000 per month for 1 million people will cost HK$12 billion annually. When the number of elderly people increases and the cost of living rises, a universal pension will become a financial burden. According to government estimates, the number of elderly people aged 65 or above will be around one-third of the Hong Kong population in 20 years' time. Assuming there will be 2.5 million people aged 65 or above in 20 years time, the HK$3,000 per month will translate into annual spending of HK$90 billion. This is without factoring in inflation during this time. The current spending by the government is around HK$360 billion. The HK$90 billion pension money would account for a major share of the government's annual expenditure. Clearly some sort of financial arrangements are needed. At the end of the day, this is all public, or taxpayers' money.
This brings us to a tricky question: How to fund the scheme? Ideally, there should not be any new taxes - either direct or indirect. However, if there are no new sources of revenue, the government will have to cut spending in other areas. The message from Chow's study is clear. No matter which type of universal pension is adopted, the scheme will not be sustainable if there are no new financial arrangements.
Earlier the government also conducted a study on Hong Kong's long-term fiscal position. The government has painted a rather gloomy picture, predicting Hong Kong will face a structural fiscal deficit. These government estimates are about what will happen in 20 year's time. They are not exaggerated. However, those advocating universal pensions are examining the current situation. If the government does nothing about this it will face considerable public criticism.
The World Bank has conducted a study on retirement. It mentioned that there are five key pillars to retirement planning: (i) a government retirement scheme; (ii) private retirement schemes; (iii) personal savings; (iv) social support; and (v) family support. Currently, Hong Kong has the last four pillars. If these four pillars prove effective, there will be no need for the first. Nevertheless, we have to remember that the second pillar, which mainly refers to the Mandatory Provident Fund (MPF), has only been in place for 14 years. It will take 20-30 years for the MPF to become truly effective. If the MPF has the desired outcome, then the need for the government retirement scheme will be lower. Nevertheless, the issue will continue to generate endless debate.
The author is dean of the School of Business at Hang Seng Management College.
(HK Edition 08/28/2014 page9)