South China Morning Post
Comment›Insight & Opinion
Shirley Yuen says it must be affordable over long term, and target those who need help
Hong Kong faces an ageing society and, by 2018, a shrinking workforce. It is our responsibility to work out a plan for managing both. Getting it right means using our scarce fiscal resources to help those who genuinely need assistance, and doing so in a manner that is sustainable over a very long period.
The population policy consultation paper predicts that our labour-force-to-population ratio will fall from a high of 53.7 per cent last year to as low as 44.1 per cent by 2041. The working group on long-term fiscal planning, in its report, reminds us that revenues are highly sensitive to economic performance; that the tax base is too narrow; and that even without any increase in public services, the cost of government will rise from 19 per cent to 23.9 per cent of gross domestic product by 2041.
In this context, the very cautious tone adopted in the report on the development of retirement protection in Hong Kong, by Professor Nelson Chow Wing-sun, comes as no surprise.
Other countries’ experience shows that designing an appropriate, useful and sustainable universal pension scheme is extremely difficult. It requires very careful thinking and a tight control over our tendency towards political posturing.
The two core principles are targeting those who need assistance and making sure we can afford, over many decades, the support systems we put in place. The first calls into question the notion that a useful, appropriate and sustainable programme must cover everyone in Hong Kong, regardless of need. That is wasteful and should not be part of the solution.
Every year, some 100,000 people in Hong Kong pay salaries tax on incomes of more than HK$1 million. These people do not need public assistance in their old age. To ensure that we target only those who do need our help, we must have a programme that is means tested.
Moreover, we need to encourage people to look after their own needs in their old age, so that society as a whole can focus its efforts on those who truly need help. That means we cannot touch the Mandatory Provident Fund. The MPF is the broadest structure in place today for dealing with our ageing population, and while it may not be perfect, it is one of the most important pieces of a holistic solution.
The MPF covers most of the employed population – but only the employed. Of the entire population over the age of 20, including retired people and homemakers, only 40 per cent are covered by the MPF scheme. The programme is designed to build assets that will help these people later in life, and it should be allowed to function without undue interference.
Our pace of ageing is increasing, and we cannot afford to get it wrong. Hong Kong people are living longer, and so will need incomes for many more years. By 2041, when today’s children will be well into their careers, life expectancy for men is projected to be 84.4 years, and for women 90.8 years.
As we plan for our city’s future, we would do well to note that, in other jurisdictions, most broad-based pension systems are in trouble.
In 2012, a study for the European Union advised members to reduce the generosity of public pension schemes to make them more sustainable.
Among the other suggestions were to raise the statutory retirement age in line with longevity and to restrict access to early retirement options. Bear in mind that this is in a society where 21 out of the then-27 member states already require means testing.
In Singapore, Central Provident Fund contributions range from 6.5 per cent to 16 per cent from employers and 5 per cent to 20 per cent from employees. At that rate, far in excess of our MPF levels, the average savings plan is equal to one year’s GDP per capita. Although employee contributions are tax deductable, those who do not earn enough to fall into the taxman’s hands gain no benefit from this incentive.
How should we pay for these future benefits? Companies and employees are doing their part by building MPF assets. Given the huge resistance to broadening the tax base, and the annual encroachments on our international competitive position, we need to develop a funding mechanism that doesn’t interfere with those in place.
We are committing our future resources for a very long time to come, and we need to make sure we can afford to pay what we promise to pay. The long-term fiscal report recommends that we focus on longer-term affordability and fiscal sustainability. It also notes that the public sector is increasingly reliant on direct tax revenue, land premiums and investment income, and that such sources are “highly sensitive to the performance of the economy”.
We have to be extremely careful before creating additional very long-term spending obligations. We need to put our scarce public funds to work where they will do the most good, not where they will be wasted.
Shirley Yuen is CEO of the Hong Kong General Chamber of Commerce