'Universal pension system' not practicable
Updated: 2011-04-05 07:25
By Francis Lui(HK Edition)
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A group of elderly asking for better retirement benefits in the future, demonstrate as Financial Secretary John Tsang delivered his budget speech on February 24, 2010. Mike Clarke / AFP |
Some interest groups in Hong Kong appear determined to pressure the SAR government into establishing a "universal pension system" to which subscribers may "contribute and from which they may withdraw anytime they choose". I don't want to speculate on political motives of those demanding such a scheme, but I must say it is a system that will hurt rather than benefit the interest of Hong Kong people and especially the future pension system of today's young people.
The colonial government of Hong Kong spent a lot of effort promoting a universal pension system in 1993-94. However, after heated debates among members of the public, popular support largely favored those opposed to the idea, resulting in the government's withdrawing the plan in September 1994. Media records of this episode shouldn't be too hard to find in our public libraries and veterans of the media still remember it.
Why did those who originally supported a universal pension system , popularly called "old-age money", undergo a change of heart? It had something to do with the all-out criticism of the system by the city's economists at that time, but the real reason, I'm afraid, is that people realized after both sides showed all their cards, the plan was actually so bad it should not be adopted in Hong Kong.
Have conditions in the city changed enough since then to relaunch the universal pension scheme? Not at all!
As a matter of fact, Hong Kong's maintenance rate today is even worse than the estimate made during the publicity campaign 17 years ago, which means the conditions will make it harder for such a pension system to exist. Besides, we already have the Mandatory Provident Fund (MPF) pension scheme and do not need another one to put more financial pressure on wage earners.
The "withdraw as you contribute" system is a cross-generation pension scheme characterized by collecting tax from the young or working population to pay for the welfare of retirees. When the current working population retires, their old-age welfare will be paid for with taxpayers' money then. To a young working person who needs to figure out how much pension he will have in retirement two factors will decide his future livelihood: one is the maintenance rate and the other the economic growth. If the working population decreases while the number of retirees possibly increases, the financial burden on taxpayers will be too much to bear simply because there are not enough of them to pay tax.
It is a well-known fact that Hong Kong's population is aging, with its life expectancy ranked only behind Japan while its birth rate is the lowest in the world. This reality has led to a plummeting maintenance rate that not even the arrival of more migrants from the mainland and elsewhere can remedy.
As for economic growth, obviously we cannot predict how it will be in a decade's time or further. If the economy is doing well the working population's wages will also grow, allowing the government to collect more tax. However, we must not forget the MPF will also benefit from fast growth, but it is not a cross-generation pension scheme and therefore not affected by the maintenance rate.
With the inverted-pyramid population structure an undeniable reality in Hong Kong, it is now quite clear the performance of the "withdraw as you contribute" pension scheme will never be better than the MPF's because the latter is not affected by the population structure.
In terms of actual pension for each retiree at 65 or older, according to the proponents of the so-called "withdraw as you contribute" pension system in their brief introduction, the monthly amount one can get will be about HK$3,000, provided the government can inject some HK$1.1 trillion in present discounted value into this pension scheme over the next 45 years, including drawing from the existing MPF, welfare allowances and "fresh fruit money". One doesn't have to be a scientist to see what kind of a life future retirees can expect on a monthly pension of less than HK$3,000 if this "withdraw as you contribute" universal pension plan is adopted.
The pressure groups are right to demand improvement of Hong Kong's pension system, but the substitute plan they are promoting is wrong. In my opinion the best way to do it is by upgrading the existing MPF system. The government agency in charge of managing the MPF needs to do three things: Change the rules to allow collection of MPF outside Hong Kong; make transparency in all pension funds' management part of the relevant laws, and step up public education about the MPF and all its operational details.
The author is professor of economics and head of the Department of Economics, Hong Kong University of Science and Technology.
(HK Edition 04/05/2011 page2)