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Pension plan must strike balance

March 02, 2016


Chief Secretary Carrie Lam

It has been slightly over two months since the Commission on Poverty which I chair issued the public consultation document Retirement Protection, Forging Ahead. The reason why the Commission on Poverty has prepared a weighty document and allowed for a period of six months to listen to public views is to stimulate and cultivate an informed debate on a matter which is so very important to Hong Kong.


Unfortunately, we have only limited success so far. At district public forums, the usual suspects representing radical activists were just yelling and throwing things at us; at forums organised by trade unions, workers' representatives criticised us of adopting delaying tactics in fulfilling the Chief Executive's pledge in his Election Manifesto to progressively reduce the proportion of accrued benefits attributed to employers' contribution in the MPF account that can be applied by the employer to offset long service or severance payments - the so-called "offsetting" arrangement; at forums organised by usually pro-establishment business groups, we were accused of victimising SMEs by advocating abolition of the offsetting arrangement; and at forums organised by social workers, we were described as heartless bureaucrats who turned a blind eye to the plight of Hong Kong's poor elderly.


So, by taking on this major challenge, which incidentally is the first one since the establishment of the Hong Kong Special Administrative Region, to engage the community on retirement protection, we seem to have pleased nobody.


Finding a balance

Our mission and task has always been to find a pragmatic balance amongst competing interests that will serve the greatest common good. On retirement protection, that common good is to ensure that our growing number of elderly people could live with adequate financial means, receive quality medical and care services and enjoy family support through a comprehensive retirement protection system. That common good is to confront our demographic and fiscal challenges while maintaining Hong Kong's economic competitiveness. That common good is not to forsake Hong Kong's long-term stability and prosperity for political expediency or populism. This is what I would regard as the big picture that any discussion on retirement protection must not lose sight of. And the community as a whole must not lose sight of this big picture.


Apart from urging Hong Kong people to discuss retirement protection within that big picture, I would like to reiterate the need to look at retirement protection comprehensively. Some people have expressed disappointment that the consultation document is issued by the Commission on Poverty as if retirement protection is a mere poverty alleviation matter. The fact is since its reinstatement at the beginning of this term of the Hong Kong SAR Government, as Chairman, I have stretched the Commission's ambit to look beyond mere poverty.


The Commission is concerned, rightly so, about upward mobility of young people; it cares about the learning of Chinese by ethnic minority students; and through the Community Care Fund, we "trespass" into areas of better co-ordination for SEN students in mainstream schools and will shortly put in place pilots to provide better support to dementia patients through collaboration between the medical and social welfare sectors. So against that wider ambit, and with the benefit of the Chief Secretary for Administration as Chairman, four Bureau Secretaries as Members and non-official Members drawn from a wide spectrum of backgrounds and interests, I cannot think of a better body to undertake a major consultation on this important subject of retirement protection.


Multi-pillar approach

As anyone who has read the public consultation document would realise, instead of just focusing on one area of helping elderly in need, the Commission is inviting the public to address comprehensively the multi-pillar retirement protection system in Hong Kong, set against the World Bank model.


They include the zero pillar of publicly funded social security benefits now covering 73% of the total elderly population - these include the Comprehensive Social Security Assistance, that is CSSA, the Old Age Living Allowance (OALA), the Old Age Allowance and the Disability Allowance; the second pillar comprising a mandatory, privately managed and fully funded contribution scheme, now provided mainly through the MPF system covering some 2.8 million working population; the third pillar of voluntary contributions to the MPF schemes, retirement savings-related insurance; and the fourth pillar of a wide range of heavily subsidised public services including housing, healthcare, elderly care, public transportation to address the daily needs of the elderly, family support and personal assets. These pillars are complementary to one another in serving the needs of different groups of elderly, not just confined to those who are poor.


This multi-pillar approach is built upon the key principle that caring for our elderly is a responsibility to be shared by individuals, families and the community. But each pillar has room for improvement. Based on detailed research and backed up by facts and figures, we acknowledge the inadequacies in each pillar and have raised some ideas for discussion.


Social security

On the publicly-funded social security, we point out that despite the introduction of OALA at the beginning of this term of Government, which has addressed the usual complaints about CSSA in terms of low asset limits and household rules, our poverty statistics and surveys suggest that some elders are still in need of further financial assistance. We therefore provide a simulated option to provide a higher level of monthly allowance for those with financial needs.


On MPF, which I understand is quite well-represented in the audience, we concur with the prevailing view that fees should continue to be reduced and the offsetting arrangement gives rise to benefits leakage which weakens MPF's retirement protection function.


We appeal to all to make use of this opportunity to address the offsetting issue and suggest, quite explicitly, that the role of the Government in helping to find a solution should be examined. In the long run, the feasibility of raising the contribution rates and achieving full portability should be explored.


On voluntary savings, while voluntary contributions to MPF schemes are increasing, we see the need to further encourage voluntary savings including the use of tax incentives and suggest that more financial products for retirement investment such as annuity plans and retail bonds of longer maturity periods should be developed.


On public services for the elderly, we demonstrate that expenditure on public medical services and community and residential care is bound to surge with the ageing of the population and financial sustainability will be a major challenge. We ask that measures be devised to promote family support of elders and to help the asset-rich income-poor elderly increase their retirement income.


Financial sustainability

The title of today's forum sums up succinctly one of the core issues to be dealt with in this consultation: whether we should adopt universal pensions or targeted pensions in enhancing financial security of our elderly.


To facilitate an informed and rational discussion, we have put forward two approaches, termed "regardless of rich or poor" and "those with financial needs" respectively, in our consultation document. We have developed two simulated options to illustrate how much each approach will likely cost the community in the next 50 years as well as the tax increases or new taxes needed to pay for the expenses.


If we provide all elderly aged 65 or over a monthly pension of $3,230 this will cost an additional $22.6 billion in the first year. That will rise sharply over time and reach $56.3 billion by 2064 as the number of elderly persons increases rapidly in particular over the next 20 years. The total additional expenditure in the 50-year projection period would amount to $2,395 billion, almost 10 times that of the "those with financial needs" option.


Just to give you a feel of the magnitude of an additional $22.6 billion in annually recurrent expenditure, it will eat up all the "new" money available for allocation to new or improved public services across the entire Government under a 2% growth scenario for three years. It is equivalent to 90% of the annual expenditure of about $25.8 billion now spent on healthcare services for Hong Kong's elderly. It is three times more than the current annual expenditure of about $6.8 billion on welfare services for the elderly.


So our main concern is one of financial sustainability. The key challenge is that in a rapidly ageing society, fewer people at work will have to support a growing number of retirees. We have a small tax-paying population - only 46% of our working population and 9% of registered corporations are paying taxes. The hefty expenditure is going to push up taxes too much - that will overturn Hong Kong's simple and low tax regime which is the cornerstone of our economic development. This will hurt our competitiveness. It will also hasten our plunge into structural deficit, predicted to occur around 2029-30 in a report released by a working group under the Financial Secretary in 2014.


Some advocates of the "regardless of rich or poor" approach stress that a universal pension is every elderly's right: it will enable them to live with dignity in retirement. But philosophically, we have to ask ourselves whether giving all elderly including those with no financial needs a pension is going to make our society more equitable or the rich-poor gap less glaring? With limited resources, isn't it not more compassionate to help those most in need both in terms of financial support and medical and nursing care services?


Universal issue

Hong Kong is not the only place trying to find a better solution to address our elderly's retirement needs. In making an important choice for Hong Kong, we must be wary of those pension policies which have proven to be problematic in other places. Experience in other developed economies shows that a pay-as-you-go universal pension system can become a bigger burden than anyone expects. Rising life expectancy has increased the number of recipients and duration of payment, while political pressure would force up the handout faster than economic growth or inflation. Many overseas places have introduced reform measures to restore the solvency of their pension schemes.


But pension reforms can be highly controversial. The extension of retirement age from 60 to 62 was one of the reasons leading to the series of general strikes and demonstrations in France in 2010. In 2014, Japan made an unusual move by increasing for the first time in 17 years the sales tax rate to fund its pension scheme. Its ruling government decided last year to put off the second-stage increase owing to adverse local reactions, amongst others.


The Government's reservations on the "regardless or rich or poor" principle and a universal pension scheme are clearly stated in the public consultation document. I do not wish to repeat them here, except to reiterate our sincerity to provide further help to those elderly in need, and the $80,000 asset limit included in our simulated option for the "those with financial needs" principle is no more than a reference. Specific views on eligibility and payment levels are welcomed.


Chief Secretary Carrie Lam gave these remarks at the Business & Professionals Federation of Hong Kong "Universal Pensions or Targeted Pensions - An Important Choice for Hong Kong" forum.