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On The Record

HK faces pension challenges

(April 12, 2016)


Chief Secretary Carrie Lam

There could be no better time for this gathering of experts and practitioners in the pension industry to take place in Hong Kong. For the first time since the establishment of the Hong Kong Special Administrative Region on July 1, 1997, that is almost 19 years ago, the HKSAR Government has embarked upon a major public discussion on this very important topic.
The fact that we are doing this is a clear recognition of the challenges to be brought about by a rapidly ageing population and a strong reflection of the Government's commitment to tackle the issue head-on with a view to providing better support for our old people.
At the moment, we are halfway through a six-month public consultation on retirement protection launched last December by the high-level Commission on Poverty which I chair. And forums like this are invaluable as we consider various options to enhance retirement protection for the elderly.
Universal benefits
The first question is affordability. As I have acknowledged in engaging advocates for a universal scheme, I said I can understand their well intentions to provide a grant to all elderly above the age of 65 irrespective of means. I have listened to their justifying this universal scheme on the basis of recognising the elderly's contributions to society when they were young and the psychological comfort of "right and entitlement".
The fact is the HKSAR Government does provide universal benefits to the elderly, such as the heavily subsidised hospital care, the non-means-tested Old Age Allowance, the $2 transport concession scheme and the $2,000 medical voucher per year for the elderly to receive care from the private sector.
But a universal pension at a monthly grant of $3,230 would require an immediate outlay of $22.6 billion and incur an additional aggregate cost of $2,395 billion over the next 50 years. To finance this outlay, the Government inevitably has to raise taxes and the quantum of such increases must pay due attention to their impact on Hong Kong's economic competitiveness and hence growth. Also, raising taxes does not necessarily guarantee increase in revenue if the resultant tax rates have become prohibitively high. Worse still, Hong Kong would lose her appeal and attraction as a place for investment.
Financial sustainability
The second question is sustainability. Policymakers could not be short-sighted. Officials have a duty to ensure that new measures introduced to improve livelihood are sustainable in fiscal terms. In early 2014, the results of a study commissioned by the Financial Secretary on Hong Kong's long-term fiscal planning were released.
Given the ageing of our population, the study concluded that even without any service enhancement, a structural deficit will occur in 2029-30, and by 2041-42 our fiscal reserve will be completely depleted. By then, increases in taxes may be inevitable. If we were to introduce a universal pension scheme with a total cost of $2,395 billion over a 50-year period, the dire fiscal situation would be aggravated.
As a former Treasury official and the former Director of Social Welfare in Hong Kong, I have first-hand experience or trauma of the pain in cutting back welfare benefits in the aftermath of the Asian financial crisis in the first few years after the establishment of the Hong Kong Special Administrative Region. In those days, unemployment was as high as over 8% and fiscal deficits occurred in successive years, wiping out a significant proportion of our fiscal reserves. As responsible officials, we have to devise policies and measures in retirement protection which have a better chance of sustainability in the longer run.
Encouraging self-reliance
The third question is equity. Our 2014 poverty situation analysis produced by our economist and statistician colleagues clearly indicate that despite the existing social security schemes, notably the new Old Age Living Allowance introduced by this term of the HKSAR Government in 2013, some old people were still confronted with financial difficulties.
In line with the Chief Executive's philosophy, we should help those able-bodied people to be self-reliant while public resources should be spent on assisting those in need. If one cared to promote equity and uphold justice in Hong Kong, and tried to narrow the wealth gap, the obvious question to ask is whether providing each elderly person a standard monthly payment regardless of means is more just and fair than targeting public resources towards those in need.
Multi-pillar approach
The fourth question is comprehensive protection. The four-pillar retirement protection system we practise in Hong Kong comprises social security cash grants, the Mandatory Provident Fund, heavily subsidised housing, medical and nursing care as well as financial products that may overcome the elderly's longevity risks and investment risks. At the moment, some 57% of the Government's recurrent expenditure is spent on education, welfare and health.
Even if we were able to raise sufficient revenue to support a costly universal pension scheme, the consequences of inadequate funding for enhancing medical and welfare services to meet the needs of the elderly could not be overlooked.
It is important for me to stress that our multi-pillar approach is built upon a key principle that echoes the theme of today's forum - shared responsibility, that the responsibility for caring for our elderly should be one to be shouldered jointly by individuals, families and the community. The overall design upholds our long-held beliefs on self-reliance and targeted assistance for the needy. As our friends from Australia will notice, our model is akin to that in your home country-income protection system integrating a mandatory employment-based saving system with an essentially means-tested social security pillar, which is similar to your Superannuation and Age Pension.
Pension challenges
Hong Kong holds many of the pension system challenges for the 21st century. With low fertility rates coupled with increasing life expectancy, our old age dependency ratio is expected to triple in the next 50 years. In addition, a number of issues in the design of our retirement protection system are far from settled.
The Mandatory Provident Fund system has to be improved - fees must be lowered and "leakage" as a result of early withdrawals by employers to offset severance and long-service payments must be tackled. Risk sharing is one of the most controversial aspects. For example, how the risk of increased longevity can be better apportioned between individuals and the community without creating moral hazard.
Alongside population ageing, other changes such as changing household composition and family structures are taking place such that reliance on children and other family members will become increasingly difficult. With a growing population of asset-rich income-poor elderly, should we also consider how to help the elderly to make better use of their assets to supplement their retirement income?
In a society as diversified as Hong Kong, it is not surprising that there are widely divergent views as to what we should do to improve retirement protection for the elderly.
While Hong Kong is charting its way forward, the experiences of other economies are highly relevant in many ways. We may avoid repeating the mistakes elsewhere; we may also incorporate into our own system successful features in other places.
Chief Secretary Carrie Lam gave these remarks at the Hong Kong Retirement Schemes Association and Association of Superannuation Funds of Australia 5th Asia-Pacific Pensions Forum.

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Chief Secretary Carrie Lam

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