pension reform options in hong kong · up the periodic savings during people’s working life,...
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Pension Reform Options in Hong KongChe Cheong Poona and Fuk Kin Joe Wongb
This article argues for the establishment of a defined benefit and partially funded universal pension system. The characteristics of this system represent a publicly managed mandatory contributory pension plan and the coverage of its benefits for all Hong Kong elderly aged above 65. By applying a mathematical model which links up the periodic savings during people’s working life, level of interest rates, average length of time in retirement, and the amount of retirement benefit payments, we calculated the possible scenarios for Hong Kong to reform its pension system. Research results suggest that the proposed system will be financially viable and sustainable provided both the government and its citizens are willing to pay for it.
Keywords: intertemporal consumption theory, partially-funded pension, the World Bank multi-pillar model, universal pension system
The German pension system was the first formal pen-sion system in the world. It has been very successful in providing a high and reliable level of retirement in-
come at reasonable contribution rates in the past 130 years, and became a model for many social security systems around the world (Börsch-Supan & Wilke, 2006). Since then, there has been an explosion of new tax-financed and non-contribu-tory public pensions, marking a shift in priorities for pension policies to include a basic regular income for the poorest older people. In the past two decades, however, facing the challeng-es of the aging population and longer retirement life, many countries have been suffering from rising pension spending and significant pensioner poverty.
To help countries manage the financial risks related to old age, the World Bank (1994) proposed a three-pillar retire-ment protection framework in its report “Averting the Old Age Crisis.” In addition, in 2005, it further refined the frame-work by adding two more pillars in another report entitled “Old Age Income Support in the 21st Century: An Interna-tional Perspective on Pension Systems and Reform” (World Bank, 2005). After realizing that there are neither universal solutions to the complex array of pension issues nor a simple reform model that can be applied in all country settings, it was
recommended that the multi-pillar model be used by countries to evaluate their current retirement protection systems (World Bank, 2008). The function of the “zero pillar” in the multi-pillar model is to provide basic protection for all the elderly in the form of non-contributory social security schemes pro-vided by the government. To manage the risk of individual short-sighted behaviors of those who earn too little and/or spend too much during their working years, both the “first pil-lar” and “second pillar” are mandatory contributory pension plans, which are managed publicly and privately respectively. The “third pillar” is in the form of voluntary contributions or savings and is flexible and discretionary. Finally, the “fourth pillar” refers to the nonfinancial and informal support from family members or formal subsidized public services.
In recent years, developed countries, such as United King-dom, Japan, and Taiwan, have followed one another in the attack against pension rights by extending retirement age, raising contribution rate, and reducing pension benefits to tackle with their pension crises. However, because Hong Kong government needs to respond to the public criticism of Hong Kong’s extraordinary high Gini-coefficient (Cen-sus and Statistics Department, 2017; Poon & Hon, 2015) among developed countries while maintaining huge fiscal
aPresident, Hong Kong St. Vincent Credit Union, No.102, Ching Tack Road, Kowloon. Email: vcuhongkong@ biznetvigator. com; Retired Associate Professor, Department of Economics and Finance, Hong Kong Shue Yan University, 10 Wai Tsui Crescent, Braemar Hill, North Point, Hong Kong. E-mail: ccpoon@ hksyu. edu
bSenior Lecturer, Department of Economics and Finance, Hong Kong Shue Yan University, 10 Wai Tsui Crescent, Braemar Hill, North Point, Hong Kong. E-mail: joewong@ hksyu. edu
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018, 245-258© 2018 Association for Financial Counseling and Planning Education®http:// dx. doi. org/ 10. 1891/ 1052- 3073. 29. 2. 245
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reserves, it has been urged to enhance and strengthen the existing pension system. In the meantime, although there have been many studies focused on pension reform or re-tirement protection in Hong Kong, most of these studies were looking at the issue from the perspective of contribu-tors’ costs and benefits (Chou, 2009; Chu, 2008; Chui & Ko, 2010; Department of Social Work and Social Admin-istration of HKU, 2014; Lee, To, & Yu, 2014; Ng, 2016; Yu, 2008). With the research motivation of looking at the financial affordability of the government, this article aims to argue for establishing a universal pension system for all Hong Kong elderly aged above 65.
We used the term “pension” instead of “retirement protec-tion” because we want to emphasize the fact that people, who are able to, are required to make contribution before his or her retirement age. In the article, we provide a map-ping of the World Bank’s multi-pillar model and Hong Kong’s retirement income provisions followed by a brief description of its existing five main retirement protection schemes. Then we use the theoretical concept of intertem-poral consumption theory to derive a mathematical model linking up periodic savings during people’s working life, level of interest rates, length of time, and the amount of retirement benefit payments. After that, we input data from Hong Kong to this model and analyzed and discussed the empirical results. Finally, we summarize our research find-ings and provide concluding remarks.
The Current Social Security and Retirement Protection System in Hong KongIn addition to personal savings and investment, there are five types of retirement protection schemes in Hong Kong. They can be classified as the zero pillar and the second pillar recommended by the World Bank. As demonstrated by Table 1, the zero pillar consists of several social secu-rity schemes designed with different allowance levels and eligibility statuses to alleviate poverty. These schemes include the Comprehensive Social Security Assistance (CSSA), Old Age Allowance (OAA), and Old Age Liv-ing Allowance (OALA). The second pillar schemes are the Mandatory Provident Fund (MPF) Schemes, MPF-exempted Occupational Retirement Schemes, Civil Ser-vice Pension Schemes, and Civil Service Provident Fund (CSPF). In addition to the first two pillars, the high pen-etration rate of annuity life insurance plans and a vari-ety of subsidized social services provided by public and charitable organizations showing the fact that the last two World Bank pillars have been functioning quite well in Hong Kong. Unfortunately, however, there were no ar-rangements regarding the publicly managed mandatory contributory plans under the first pillar. Before looking at the possibility of introducing some type of public pen-sion, it will be helpful to conduct a brief review of the five types of retirement protection schemes in Hong Kong.
TABLE 1. The Mapping of Hong Kong’s Retirement Protection Schemes to the World Bank’s Multi-Pillar Model
Five Pillars of the World BankMain Retirement Protection Schemes in Hong Kong
Zero pillar Basic protection for all of the elderly; non-contributory social security schemes provided by the government
Comprehensive Social Security Assistance (CSSA), Old Age Living Allowance(OALA), Old Age Allowance (OAA)
First pillar Compulsory savings for the purpose of consumption smoothing; mandatory defined contribution pension plans typically financed on a pay-as-you-go basis and managed publicly
Has not yet provided
Second pillar Compulsory savings for the purpose of consumption smoothing; mandatory defined contribution pension plans managed privately
Mandatory Provident Fund (MPF) Schemes, MPF-exempted Occupational Retirement Schemes, Civil Service Pension Schemes, Civil Service Provident Fund (CSPF)
Third pillar Voluntary contributions or savings Voluntary contributions to MPF schemes, annuity life insurance plans
Fourth pillar Nonfinancial and informal support from family mem-bers or formal subsidized public services
Public housing, health care, and community care pro-vided by public and charitable organizations.
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The Three Retirement Protection Schemes Under the Zero PillarComprehensive Social Security Assistance. The Social Welfare Department (SWD) started to introduce the Public Assistance Scheme to those needy people in 1972.1 Since 1993, the SWD has been formally operating the CSSA Scheme to provide financial assistance to those who cannot support themselves financially so as to “bring the income of needy individuals and families up to a prescribed level to meet their basic needs” (Social Welfare Department, 2016). Elderly people are defined as persons aged 60 or above un-der the CSSA scheme. Currently, about 50% of CSSA re-cipients are elderly people, indicating that CSSA has been providing financial protection for needy elderly people. The CSSA is a means-tested scheme conducted on a household basis, in which the applicant must pass the financial tests in-cluding both the income and asset tests. According to Social Welfare Department (2016), in the fiscal year 2015–16, the payment for CSSA was HK$ 22,313.14 million.
Old Age Living Allowance. Launched in 2013, it is a means-tested scheme designed to alleviate poverty and is conducted on an individual or couple basis for those el-derly people age 65 or above. The income and asset limits for a single person are HK$7,750 and HK$329,000, and for a married couple are HK$16,620 and HK$499,000 in 2017. which are much higher than that of the CSSA (So-cial Welfare Department, 2017). The objective of imple-menting the OALA is to subsidize the older people’s living expenses. Among the three main social security schemes, the OALA can fill in the gap between the needs of the el-derly who are not poor enough to apply for the CSSA and the overly permissive amount of allowance of the OAA which is designed for all the elderly people aged 70 or above. Currently, the living allowance for the single per-sons of the OALA is HK$2,390. According to Social Welfare Department (2016),2 in the fiscal year of 2015-16, the payment for OALA was HK$14,087.29 million.
Old Age Allowance. Launched in 1973, it is also called “fruit money.” The design of the OAA is not intended to address poverty alleviation and is also a non-means-tested scheme conducted on an individual basis for all the elderly people aged 70 or above. The OAA is meaningful because it allows the community to show its appreciation and respect for the elderly in the society. Currently, the OAA provides
an allowance of HK$1,235, which is so small that it is only enough for the elderly to buy some fruit every month. Ac-cording to Social Welfare Department (2016), in the fiscal year 2015–16, the payment for OAA was HK$3,755.53 mil-lion.
The Two Retirement Protection Schemes under the Sec-ond PillarMandatory Provident Fund Schemes. Launched in De-cember 2000, it is a privately managed mandatory defined contribution scheme (Kim, Kwon, & Anderson, 2005; Yuh & DeVaney, 1996) with the objective of enhancing com-pulsory savings for the purpose of consumption smoothing throughout one’s lifetime. It is the responsibility of the em-ployers to arrange for their employees, aged 18 or above but under 65, to join the MPF scheme. Self-employed persons in the same age range are also required to join the scheme. As of March 31, 2016, the number of participation members (enrollment rates) for employers, relevant employees, and self-employed persons were 276,000 (100%), 2,552,000 (99%), and 205,000 (68%), respectively (Mandatory Provi-dent Fund Schemes Authority, 2016a). Both the employer and employee are required to contribute 5% of the relevant employee’s income to the fund; besides, self-employed per-sons are also required to contribute 5% of her or his income. Currently, employees or self-employed persons who earn less than HK$7,100 a month are not required to contribute to the fund, but their employers are required to contribute to the fund for the employees. Employees or self-employed persons, who earn more than HK$30,000 a month, are only required to contribute a maximum of HK$1,500. In 2016, the Mandatory Provident Fund Schemes Authority conducted an analysis about the investment performance of the MPF funds over a 15-year period from December 1, 2000 to November 30, 2015 (Mandatory Provident Fund Schemes Authority, 2016b). The report shows that the total net contributions had accumulated to HK$589.55 billion, indicating an investment return of HK$114.35 billion and an annualized return of 3.1% in the past 15 years.
Civil Service Retirement Protection Schemes. There are three retirement protection schemes for Hong Kong government employees, which include the Old Pension Scheme (OPS), the New Pension Scheme (NPS), and the Civil Service Provident Fund (CSPF). Before July 1, 1987, the Government provided the OPS, a defined benefit retire-ment plan governed by Pension Benefits Ordinance (1997).
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018 247
The NPS is provided for the civil servants who were ap-pointed between July 1, 1987, and May 31, 2000 (Pension Ordinance, 1997). For those government employees who were appointed after June 1, 2000, the Government has ad-opted the Civil CSPF, which is governed by the Manda-tory Provident Fund Schemes Ordinance (2013), is a new defined contribution retirement plan for civil servants with permanent terms. The Government’s contributions follow progressive contribution rates based on the number of com-pleted years of continuous service on civil service terms. The lowest contribution rate is 5%, which is set for less than three years of civic service, and is the same as the minimum contribution rate for the employer under the current MPF Scheme. After three years of civic service, the contribu-tion rates increase progressively until they reach 25% for 30 years of civic service or above. However, after June 1, 2015, the Government has raised the retirement age from 60 to 65 and has also decreased the progressivity by which the contribution rates progressively increase up to 25% until 35 years of service or above instead of 30 years. As indi-cated by the government expenditure statistics released by Census and Statistics Department (2016a), the payment for government employees’ pension was 29,433 million for the fiscal year of 2015–16. The Civil Service Pension Reserve Fund (CSPRF) is intended to meet payment of civil service pensions in the most unlikely event that the Government cannot meet such liabilities from the General Revenue. Ac-cording to Audit Commission Report (2015), investments of the CSPRF with the Exchange Fund was HK$27,029 million, earning an income of HK$973 million in 2015, the rate of return was 3.6%.
We conducted a brief international comparison with re-spect to public pension spending. Table 2 shows some key pension indicators for members of the Organization for Economic Co-operation and Development (OECD) and some major economies. The average pension spending in the OECD in 2015 was 7.9% of Gross Domestic Product (GDP); however, spending in some countries was signifi-cantly higher: 15.8% in Italy, 14.5% in Greece and 13.8% in France. Spending in some countries was significantly lower, 1.8% in Mexico, 2.1% in India and 2.2% in Korea. As mentioned above, the government paid HK$29,433 mil-lion, HK$22,313.14 million, HK$14,087.29 million and HK$3,755.53 million for civil service pensions, CSSA, OALA, and OAA, respectively. The total payment was HK$69,588.96 million, which represents only 2.89% of the
GDP.3 Taking into account that Hong Kong has huge fiscal reserves about HK$860 billion by the end of March 2016, which was equivalent to 24 months of government expen-diture (Hong Kong Government, 2016); we believe that the government has the ability to provide more generous pen-sion benefits to Hong Kong people.
MethodologyA Model Linking Current and Future Consumption ExpenditureWe used the intertemporal consumption theory (Bossert, Chakravarty, & D’Ambrosio, 2012; Feiwel, 1985; Fisher, 1930; Freeman, 1983; Samuelson, 1958; Wang & Hanna, 1997) to derive a model linking current and future consump-tion expenditures to facilitate our analysis. The study assumes that individuals know with certainty that they will only live two periods, the length of time of these two periods, the in-come will be received in the working years of the first period, and that there will be no income during the retirement years of the second period. To ensure a smooth standard of living over the life cycle, people must be net savers during the working years and net dis-savers during the retirement years; thus he or she has to pursue utility maximization during the life cycle by allocating his income earnings between current consumption and future consumption.
In Figure 1, Yt is income in working years Ct and Ct+1 is consumption expenditure in working years and retirement years, respectively; I-I is the indifference curve; Yt is the total income earned in the working years; F is the total con-sumption expenditure in retirement years. That is to say, if individuals consume Ct and save up CtYt during their work-ing years, with an interest rate measured in terms of the slope (1 + r) of the budget line FYt , they will get Ct+1 to facilitate their retirement consumption expenditures. This demonstrates the fact that the opportunity cost of build-ing up a retirement fund is the consumption forgone (i.e., savings) in the working years. According to the theory of positive time preference (Bohm-Bawerk, 1844; Frederick, Loewenstein, & O’Donoghue, 2002), the nominal interest rate on savings must be positive. Since 0Yt must be equal to 0Ct plus the present value of Ct+1, we have
Yt = Ct +
Ct+1
1 + r
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018248
TAB
LE 2
. Key
Pen
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Indi
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ECD
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30.5
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56.2
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(201
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72.
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018 249
after rearranging the variables in the equation, we can ex-press the budget line FYt as follows:
Ct+1 = Yt(1 + r)− (1 + r) Ct (1)
In equilibrium, the budget line (FYt) is tangent to the indif-ference curve (I-I) at point A where the slope of the indiffer-ence curve (Marginal rate of substitution between working years’ consumption expenditure and retirement consump-tion expenditure) equals the slope of the budget line (1+r). Therefore, with the help from this theoretical framework, we are able to determine the bundle chosen from Ct and Ct+1 to make the total utility of this person’s life the great-est. Since the shape and position of the indifference curve varies among individuals, due to differences in the subjec-tive evaluation of the cost and benefit of saving, the optimal allocation of income between current and future consump-tion will also be different. Since it is very seldom that the indifference curve (I-I) would be tangent to the budget line (FYt), when it intersects the horizontal axis, we have reason to conclude that people must save for their future.
From the above analysis, it is quite evident that Yt , Ct , Ct+1, r and the length of time (t) are the major factors for determining the amount of retirement benefits individuals can receive. The study assumed that individuals are being employed during
the working years, wages and prices are changing at the same rate, and saving interest rate is fixed. In conjunction with these assumptions, we expressed the concepts mathematically by using n1 to represent the number of months in their working life, n2 to represent the number of months in their retirement, S to represent the amount of periodic savings which is the difference between current income and current consump-tion expenditure in the respective month (St = Yt Ct), and A to represent the amount of retirement benefits they will receive each month. Using the formula for calculating the future and present values (Budnick, 1988), we can derive a mathematical model to link up the abovementioned variables.
S[(1 + i)nt−1 + (1 + i)nt−2 + (1 + i)nt−3 + ... + (1 + i)nt−nt
]
A[1 +
1(1 + i)
+1
(1 + i)2+
1(1 + i)3
+ ... +1
(1 + i)n2−1
]
Where: S and A represent periodic savings and retirement benefit, respectively.
To simplify the equation, we get
S[(1 + i)n1−1
i
]= A(1 + i)
[(1 + i)n2−1
i(1 + i)n2
]
(2)
Figure 1. Intertemporal income and expenditure distribution.
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018250
We can calculate the amount of retirement benefit from Equation 2:
A =S[(1 + i)n1−1
i
]
[(1 + i)n2−1
i(1 + i)n2−1
]
(3)
Where: i is the monthly interest rate calculated from the an-nual interest rate (r) by
i = 12√(1 + r)− 1
Analysis and DiscussionFrom Equation 3, it is easy to identify that n1, n2, S, and r are the four factors that determine the amount of periodic retirement benefits. That is to say, longer working life time, shorter retire-ment time, greater periodic savings and higher interest rate for the retirement fund will generate a larger amount of monthly
retirement benefits, thus improving the quality of the life of the elderly. The following represents a scenario study demon-strating the relationship among these five variables included in Equation 3. Let us consider a typical young person in Hong Kong who is 24 years old and a fresh university graduate. He started his employment on January 1, 2016, with a monthly salary of HK$15,000, which was the median monthly employ-ment earnings at the first quarter of 2016 (Census and Statistics Department, 2016b, p. 72). He will retire on December 31, 2057, at 65 years old (n1 = 41 × 12 = 492), and his life expec-tancy is 80 years (n2 = 15 × 12 = 180). The calculated results are listed in Table 3.
Considering that retired persons do not require expenses relat-ed to their wage, raising children, salaries tax, home mortgage payments, and also, they do not need to save money for their future, it is reasonable to assume that only one-third of their monthly income would be enough to provide a rather decent retirement life. Given a 2% rate of return (in this case, it refers to real interest rate), 41-year pension contribution period, and
TABLE 3. Projection of the Amount of Retirement Benefit Payments
Pension Fund Expected Rate of Return
Saving Rate (s) and Month-ly Savings(S in HK$)
Size of Pension Fund(HK$)
Monthly Retirement Benefit Payment(A in HK$)
r = 1% s = .05; S = 750 455,451 2,723s = .1; S = 1,500 910,903 5,445s = .15; S = 2,250 1,366,354 8,168s = .2; S = 3,000 1,821,806 10,891
r = 2% s = .05; S = 750 568,637 3,648s = .1; S = 1,500 1,137,274 7,297s = .15; S = 2,250 1,705,911 10,945s = .2; S = 3,000 2,274,548 14,594
r = 3% s = .05; S = 750 717,652 4,930s = .1; S = 1,500 1,435,305 9,860s = .15; S = 2,250 2,152,957 14,790s = .2; S = 3,000 2,870,609 19,719
r = 4% s = .05; S = 750 914,794 6,712s = .1; S = 1,500 1,829,587 13,424s = .15; S = 2,250 2,744,381 20,136s = .2; S = 3,000 3,659,174 26,848
r = 4.35% s = .05; S = 750 998,082 7,490s = .1; S = 1,500 1,996,164 14,979s = .15; S = 2,250 2,994,246 22,469s = .2; S = 3,000 3,992,328 29,958
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018 251
80 years of average life expectancy, we used Equation 3 to calculate the monthly retirement benefits of a typical young person who contributes only 5% of his or her wage during working years. Based on this calculation, he or she will re-ceive a monthly retirement benefit of HK$3,648 which is equal to a quarter of the median monthly wage in 2016 (The monthly retirement benefit is expressed as 2016 purchasing power; if the average annual inflation rate is 3%, the retire-ment monthly benefit in 2057 will be HK$3,648 (1 + .03)41 = HK$12,257.) This amount is slightly higher than the elderly CSSA standard rate of HK$3,105. However, this calculation is subject to several challenges and barriers, such as: What would we do if a person’s monthly pension contribution is less than HK $750 under the 5% contribution rate? What would we do if a person’s working life is less than 41 years (tak-ing the probability of being unemployed into consideration)? What would we do if a person is considered non-working? What would we do if a person’s average rate of return on the pension fund is less than 2%? What would we do if a person’s age is higher than 80 years old? The answers to these ques-tions are essences of a successful universal pension system. If there is no government involvement, no one is willing and able to address these problems.
Barr and Diamond (2008) and the International Labor Of-fice (2014) pointed out that pension systems have mul-tiple objectives: while the major objectives of individuals are consumption smoothing and insurance, governments have additional goals, including poverty relief and redis-tribution. In addition to forcing people who are in the low-income group and lacking foresight to save for their own retirement and to provide a safety net for the poor elderly through legislation, the government can correct market fail-ures that exist in the private pension market caused mainly by information asymmetry. Furthermore, the government can reduce the transaction costs arising from allocating people’s income and consumption expenditure across time, and enforce income redistribution policies to promote eco-nomic prosperity. After considering the social responsibility of protecting the retired elderly against poverty, financial burden of employees and employers, population trend, gov-ernment fiscal ability, and the current pension scheme in Hong Kong, we suggest that the Hong Kong government introduce a defined benefit and partially funded universal pension system (Barr, 2002, 2006; Barr & Diamond, 2006, 2008; Barrientos & Lloyd-Sherlock, 2003; Brunner, 1996; Kim et al., 2005; Kim, 2013; Oksanen, 2010).
The objective of the proposed universal pension system is to establish publicly managed mandatory contributory pen-sion plans. The plans cover all elderly people that are over the age of 65 and are not subject to being means-tested. The government is responsible for building up an initial pension fund that will generate sufficient income to cover all ex-pected shortfalls of pension benefit payments from pension contributions received at least up to 2064. The publicly man-aged mandatory contributory pension plan is added because the management fee will be much lower and more efficient than the privately managed MPF (Barr, 2006; Nickel, Roth-er, & Theophilopoulou, 2008; OECD, 2015). Moreover, the existing Old Age Allowance (OAA) and the Old Age Living Allowance (OALA) will be abolished because the existing beneficiary will be taken care by the suggested universal pension system. Although the government can transfer the money assigned to OAA and OALA to the suggested pen-sion fund, to initiate a sustainable government-led pension system, we must first consider the fiscal affordability.
To implement this pension system, we must estimate the fis-cal affordability of the Government by first getting a grasp on the demographic statistics regarding population projec-tion to facilitate a dynamic analysis. As shown in Table 4, the median age of the Hong Kong population was 43.5 years old in 2016, which was ranked as the 10th highest in the world (CIA World Fact book, 2015; Photius, 2016; World Bank, 2016). While Hong Kong’s elderly dependen-cy ratio increased from 218 in 2016 to 560 per thousand population (increased 2.6 times), the 15–64 labor force has demonstrated a gradually declining trend since 2016. From this, we know that Hong Kong’s aging population problem is very serious. Since this is an irreversible trend, it is time for the Government to take responsible action to assure a minimal decent living standard of the elderly population.
Since the retirement benefit payments of the proposed uni-versal pension system use a defined benefit scheme (Barr & Diamond, 2008), we need to look at the total income inflow to and outflow from the pension fund in the time span from 2016 to 2064 in order to see if it is financially affordable to the society. If we assume that the monthly em-ployment earning is HK$15,000, labor force participation rate is 61.3%, pension contribution rate is 5% of wage in-come, and the rate of return on pension fund investments is 2% in real term, our calculation shows that all Hong Kong residents aged 65 or above will receive a monthly old age
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018252
pension of HK$3,648 (see Table 3). As mentioned earlier, to provide a pretty decent retirement life, individuals must obtain a retirement income in the form of pension benefits, which is equal to one-third of their monthly income (about HK$5,000 in constant 2016 prices). To make the analysis more relevant, we expand the concept of pension benefits to include any form of retirement protections. We used the nominal GDP of HK$2,402,506 million (Census and Sta-tistics Department, 2016c), and the projected number of population (Census and Statistics Department, 2015) to compile the projection. Considering the significant por-tion of persons which includes housewives, handicapped, or occasionally unemployed persons who rarely or never take part in the labor force before reaching their retirement age, and also the low-income people with a monthly income less than HK$15,000. If these people are also eligible to get the guaranteed minimum pension under this universal pen-sion system, government subvention is necessary. To sim-plify the calculation, we further assume that the annual rate of change in GDP, the consumer prices, and wages are all equal. We also assume that the rate of return on the pension remains constant over the projected period.
Table 5 demonstrates the fact that a 5% contribution rate for Hong Kong people in their work life requires the gov-ernment to subsidize 1.563% of GDP in 2016, which will drastically increase to 3.441% in 2064. However, if Hong Kong people, whether they are self-employed or work for employers, are willing to contribute 10% of their income to the pension fund, the situation will turn from impossible
to possible. As we can see from Table 6, the percentage of public pension spending to GDP is only 0.309% in 2016 to 0.679% in 2064. These figures are obviously lower than that of the OECD’s level in 2015.
It is worth noting that the overlapping generations model (Benhabib & Day, 1982; Bonomo, Brito, & dos Santos, 2016; Bucciol, 2011; Docquier, 2002; Docquier, 2002) indicates that self-interested myopic agents might under-evaluate the utility from future consumption, which causes an under-savings problem. We should not deny the fact that many Hong Kong people have poor foresight regarding fu-ture consumption, and thus are not willing to contribute a certain proportion of their income to the pension fund, and don’t care about the burden of public pension spending of the government. We understand that such shortsightedness constitutes a hindrance in implementing the proposed pub-licly mandatory contributory pension plans. And thus, to make people more broadminded and farsighted, we believe the promotion of youth financial literacy activities (McCor-mick, 2009; Robb & Woodyard, 2011) at schools is one of the effective long-term resolutions.
ConclusionIf most people in Hong Kong expect to receive a pension when they get older, this represents a huge social policy success and can also lead to a public sector’s pension reform. Although the evidence is logically derived from the population projections and the current economic environment, the marrow of this article rests on the stance of the government and the people
TABLE 4. Hong Kong Population Structure in Selected Years2016 2024 2034 2044 2057 2064
Total population (Thousands) 7354.5 7755.8 8100.5 8224 7994.1 7813.9Aged 15 and over (Thousands) 6562 6841 7305.3 7505.8 7272.3 7136Aged 15–64 (Thousands) 5389 5157.7 5020.7 4980.1 4662.1 4553.7Aged 65 and over (Thousands) 1173 1683.3 2284.6 2525.7 2610.2 2582.3Age 70 and over (Thousands) 774 1122.4 1759.2 2055.2 2086.1 2124.2Aged 80 and over (Thousands) 345.3 398.2 670 1086.9 1145.8 1144.3Aged 15–64 labor forcea (Thousands) 3303.5 3161.7 3077.7 3052.8 2857.9 2791.4Elderly dependency ratiob 218 326 455 507 560 567Median age 43.5 45.6 48.1 50.1 49.7 51.0aAged 15–64 labor force = Aged 15–64 population × Labor force participation rate. Labor force participation rate refers to the proportion of labor force in the total land-based non-institutional population aged 15 and over. In 12/2015–2/2016, it was 61.3%. Sources: Hong Kong Census and Statistics Department: http://www.censtatd.gov.hk/hkstat/sub/so200.jspbElderly dependency ratio refers to the number of persons aged 65 and over per 1,000 persons aged between 15 and 64.Sources: Calculated from Hong Kong Population Projections 2015–2064, pp. 10–34.
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018 253
TAB
LE 5
. Pub
lic P
ensi
on S
pend
ing
Proj
ectio
n W
ith 5
% C
ontr
ibut
ion
Rat
eYe
ar20
1620
2420
3420
4420
5720
64(A
) GD
P (A
nnua
l figu
re, H
K$m
)2,
489,
109
2,48
9,10
92,
489,
109
2,48
9,10
92,
489,
109
2,48
9,10
9(B
) Pop
ulat
ion
aged
65
or a
bove
(mill
ion)
1.17
31.
6833
2.28
462.
5257
2.61
022.
5823
(C) M
onth
ly p
ensi
on b
enefi
t der
ived
from
con
tribu
tions
=
HK
$3,6
4836
4836
4836
4836
4836
4836
48
(D) P
opul
atio
n ag
ed 6
5 or
abo
ve w
ho h
as m
ade
pens
ion
cont
ri-bu
tion
(mill
ion)
0.71
91.
032
1.4
1.54
81.
61.
583
(E) T
otal
pen
sion
con
tribu
tion
rece
ived
und
er th
e fir
st p
illar
(H
K$m
)31
474.
944
4517
6.83
261
286.
467
765.
248
7004
1.6
6929
7.40
8
(F) G
uara
ntee
d m
onth
ly m
inim
um p
ensi
on =
HK
5000
5000
5000
5000
5000
5000
5000
(G) T
otal
pay
men
ts o
n pe
nsio
n be
nefit
und
er th
e pr
opos
ed
parti
ally
-fun
ded
syst
em (H
K$m
)70
380
1009
9813
7076
1515
4215
6612
1549
38
(H)P
ublic
pen
sion
spen
ding
(HK
$m)
3890
5.05
655
821.
168
7578
9.6
8377
6.75
286
570.
485
640.
592
(I) P
ublic
pen
sion
spen
ding
to G
DP
(%)
1.56
32.
243
3.04
53.
366
3.47
83.
441
Not
es. (
a) A
ssum
ing
that
the
rate
s of c
hang
e in
the
mon
ey v
alue
s are
the
sam
e as
infla
tion
rate
, and
that
they
are
exp
ress
ed in
real
term
s. (b
) In
item
B, t
he
pens
ion
bene
fit o
f HK
$364
8 is
cal
cula
ted
from
Equ
atio
n 3
if th
e co
ntrib
utio
n ra
te is
5%
. (c)
E =
12
× C
× D
; G
= 1
2 ×
B ×
F; p
ublic
pen
sion
spen
ding
refe
rs to
th
e am
ount
gov
ernm
ent s
pent
to fi
nanc
e th
e un
iver
sal p
ensi
on sc
hem
e, th
at is
H =
G E
; I=(
H/A
) × 1
00%
.
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018254
toward the cost and benefit of the universal pension system, and on the rationality of the assumptions. Hence, the research results are strongly dependent on how these assumed param-eters in the model impact different combinations of scenarios. As pointed out by Barr and Diamond (2008) and Ng (1922), poverty relief and redistribution are the goals of the govern-ment to implement a pension reform. If poverty alleviation and income inequality reduction encompass the mission of the Hong Kong government, a change of mindset is required regarding the relative share of public pension spending in the GDP.
The success of a defined benefit and partially funded univer-sal pension system is critically dependent on the size of the pension fund raised at its inception and accumulation there-after. Tables 5 and 6 display that the total pension contribu-tion received under the first pillar of total pension contribution (in Table 6 for example, it is HK$62,958.516m in 2016) is less than the total payments of pension benefit under the pro-posed partially-funded system (in Table 6 for example, it is HK$70,380m in 2016) in any year during the observed pe-riod. Based on this information, it is difficult to say that there is a partially funded element in the system. To establish a fund for the public pension pillar of the system, we suggest that the Hong Kong government transfer some existing funds includ-ing the MPF, Civil Service Pension Reserve Fund, and the Land Fund in whole or in part, to the designated retirement protection fund. Furthermore, to ensure a stable and reason-able pension fund investment return, we suggest that the Hong Kong government transfer its equity holding of HK$124.7 billion (The Treasury, 2016, Schedule 1) to the account of the retirement protection fund, and invest the rest of the fund with the Exchange Fund.
The proposed defined benefit and partially funded universal pension system for Hong Kong people is like a double-edged sword: on the one hand, it is a subtle form of forced life cycle savings, and on the other hand it ensures the quality of life for its elderly. Of course, Hong Kong people need to pay for the benefits. We would like to reiterate here that a good retire-ment protection system should be a simple system with low transactions costs. It should not be combined with social se-curity which is designed to help members of the population in most need, and the implementation of pension system reform should be gradual instead of radical.
TAB
LE 6
. Pub
lic P
ensi
on S
pend
ing
Proj
ectio
n W
ith 1
0% C
ontr
ibut
ion
Rat
eYe
ar20
1620
2420
3420
4420
5720
64(A
) GD
P (A
nnua
l figu
re, H
K$m
)2,
402,
506
2,40
2,50
62,
402,
506
2,40
2,50
62,
402,
506
2,40
2,50
6(B
) Pop
ulat
ion
aged
65
or a
bove
(mill
ion)
1.17
31.
6833
2.28
462.
5257
2.61
022.
5823
(C) M
onth
ly p
ensi
on b
enefi
t der
ived
from
con
tribu
tions
=
HK
$7,2
977,
297
7,29
77,
297
7,29
77,
297
7,29
7
(D) P
opul
atio
n ag
ed 6
5 or
abo
ve w
ho h
as m
ade
pens
ion
cont
ri-bu
tion
(mill
ion)
0.71
91.
032
1.4
1.54
81.
61.
583
(E) T
otal
pen
sion
con
tribu
tion
rece
ived
und
er th
e fir
st p
illar
(H
K$m
)62
958.
516
9036
6.04
812
2589
.613
5549
.072
1401
02.4
1386
13.8
12
(F) G
uara
ntee
d m
inim
um p
ensi
on =
HK
$500
05,
000
5,00
05,
000
5,00
05,
000
5,00
0(G
) Tot
al p
aym
ents
on
pens
ion
bene
fit u
nder
the
prop
osed
pa
rtial
ly-f
unde
d sy
stem
(HK
$m)
7038
010
0998
1370
7615
1542
1566
1215
4938
(H) P
ublic
pen
sion
spen
ding
(HK
$m)
7421
.484
1063
1.95
214
486.
415
992.
928
1650
9.6
1632
4.18
8(I
) Pub
lic p
ensi
on sp
endi
ng to
GD
P (%
)0.
309
0.44
30.
603
0.66
60.
687
0.67
9
Not
es. T
he c
alcu
latio
n is
the
sam
e as
that
men
tione
d in
Tab
le 5
.
Journal of Financial Counseling and Planning, Volume 29, Number 2, 2018 255
Notes1. The Public Assistance Scheme is designed to bring the
income of needy individuals and families up to a level where essential needs can be met without suffering hardship. It is non-contributory and means-tested, and subject to other eligibility criteria (Census and Statistics Department, 1977). As a result of the White Paper published by a Working Party in 1991 set up by Governor David Wilson, the public assistance scheme was renamed the Comprehensive Social Security Assistance Scheme in 1993 and its benefits were increased.
2. In the Policy Address in January 2017, the Government will enhance OALA through the following two measures: (a) adding a higher tier of assistance under OALA by providing a higher monthly allowance of $3,485 per person for elderly persons with more financial needs who are eligible for the allowance, i.e., elderly singletons with assets not exceeding $146,000 or elderly couples with assets not exceeding $221,000; and (b) relaxing the asset limits for the existing monthly allowance of $2,600 per person from $225,000 to $334,000 for elderly singletons and from $341,000 to $506,000 for elderly couples, to benefit more elderly persons with financial needs. For reference, please see https://www. swd. gov. hk/ oala/ index_ e. html# s8
3. However, if we only look at the payment for nongovernment employees’ pension, the total payment was HK$40,155.96 million, which represents only 1.67% of the GDP.
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