Help the old now, fix pensions long-term
SCMP August 24, 2014
The report on pension scheme options is very welcome, if only because it may result in debate and even action on a topic which the bureaucracy would rather not have to address. Whichever way one looks at it, it involves spending public money on items other than costly infrastructure projects with scant economic return.
There are two issues to be addressed. They are linked but have very different time scales. One is elderly poverty. The other is a scheme to provide for the future that meshes with the MPF.
The most urgent is to address the very real poverty endured by a large percentage of old people, the poverty which sees 80-year-old women bent double pushing carts of rubbish in an effort to make a living. This problem will probably become worse as the numbers of those over 65 continue to increase while welfare remains minimal and family support systems are undermined by issues ranging from migration to housing costs.
The first principle must be to recognise the processes by which Hong Kong has become such an unequal society and one where the old are the worst hit. The past 40 years have seen capital values - in effect real estate and shares in public companies - rise much faster than either salaries or gross domestic product. The beneficiaries have been threefold.
Firstly the government, through its control of land supply which feeds through to capital revenue, rents and profits tax.
Secondly, the developers. One must recall that, prior to 1998, Hong Kong GDP figures had a separate item - "real estate developers' margin". This was so high as to be embarrassing, so it disappeared. But the margin is still there. The next beneficiaries were those fortunate enough to acquire more than one property. Owning your own home, as the majority now do, is of scant relevance to disposable income, as people need somewhere to live. But those with two or more properties have mostly enjoyed a free ride to relative riches.
Finally, there are those who have invested in the stock market over a sustained period. Contrary to media imagination, individual stock ownership is not especially high in Hong Kong - though there have been speculative spikes which usually led to small investors being ripped off. Indirect share ownership through the Mandatory Provident Fund and life insurance has been growing but is mostly too recent to have much impact on the net worth or income of the majority, and almost none on those now over 60.
So, while owners of real estate and shares have mostly been gaining, and civil servants treated to featherbed welfare, the mass of small savers with savings accounts have seen their money eroded by interest rates, which for much of the time have lagged behind the rate of inflation.
All classes of Hong Kong society have records of high personal savings rates. But the thrift of middle- to lower-income workers has been ill-rewarded while the rich (including the government) have, by the same process, got richer.
It appears that the Scrooge in charge of finances, John Tsang Chun-wah, is incapable of recognising these obvious facts of Hong Kong's history since 1970. That explains why he bemoans "welfarism" while wasting billions on dubious projects ill-managed by a civil service that is at the trough itself. (The financial sector faces much tougher insider dealing legislation than the rules applying to civil servants involved in land deals).
So, a starting figure for the transfer of government assets to a new pension fund should be more like HK$150 billion than the HK$50 billion proposed. That would only be 10 per cent of the government surpluses accumulated through years of asset-price escalation at the expense of those not owning disposable assets.
The payments from the fund, plus those out of recurrent revenue, should also be weighted towards those now in or near retirement, because they are the ones who built most of the surpluses. For the future, there should be a gradually increasing reliance on the MPF - except that its still-high costs make it a poor vehicle for mass savings. At present contribution levels, the MPF can never provide adequate retirement income on its own but, over time, will reduce the burden on government.
Means testing of benefits, opposed by the report, is a good idea in theory but can be difficult to implement fairly and cheaply. But it is hard to say why 65 should be the starting age for untested payments. Given that life expectancy is now over 80 years, this would be a good opportunity to start edging up the pension age, at least to 67, as is now happening in some Western countries.
Nor is it clear why additional costs to the government of a pension scheme should be funded by a levy on personal incomes ranging from 1 to 2.5 per cent. It would be much simpler to use the existing tax system to raise money from expenditure rather than income - which has long supposedly been a goal of government. Better use of rates and a hefty tax on energy use would be a simpler and fairer system than levies either on profits or salaries.
But these are relatively minor issues compared with the urgency of addressing old age poverty now, and the future of an economy with a workforce participation rate that is destined to decline rapidly.