Hong Kong currently offers elderly residents an old age allowance (OAA) of HK$1,090 (US$140) a month. The benefit is so small that locals refer to it as ‘fruit money’, useful only for purchasing fruit. How small is it relative to the economy? One useful metric is the minimum wage, which in Hong Kong is 28 HK dollars (US$3.61) per hour, or HK$224 for an eight-hour day. The OAA, then, is slightly less than five full days pay at the minimum wage. Mexico City, with a much smaller per capita income, manages to provide its elderly with benefits three times as generous by this measure: 15 days of minimum wages each month or, as Mexicans prefer to say, half a minimum wage each day of the month. Hong Kong provides the elderly with only one-sixth of a minimum wage for each day of the month.
Hong Kong’s OAA is nearly universal for residents 70 years of age and older. Only those receiving other social assistance, such as a disability allowance, are barred from receiving this gratuity. Those between the ages of 65 and 69 must pass a means test in addition to the usual test of residency (seven years in Hong Kong, with at least one year of continuous residency just prior to applying for a benefit). For a single person, the limit on assets is HK$186,000 (US$24,000) and the income limit is HK$6,660 {US$859) a month. For a married couple, the limits are HK$281,000 for assets and HK$10,520 for income. Owner-occupied housing, automobiles and appliances for personal use are not counted in assets, and gifts from friends and family are not counted in income, so the effective constraint is income.
There have been many complaints of the inadequacy of government assistance for the elderly of Hong Kong. The Alliance for Universal Pensions, a political action group, has been very active in lobbying for a pension of HK$3,000 a month, without means test, for everyone from age 65. Chief Executive Leung Chun-ying recently fulfilled a campaign pledge to introduce a new Old Age Living Allowance (OALA). His proposal will be tabled for a vote in Hong Kong’s Legislative Council next Friday, 26 October. The proposed HK$2200 (US$284) OALA will be subject to means tests at all ages, with age 65 being the minimum qualifying age. Those aged 70 years and older who cannot pass the means test, or do not want to go through the humiliation of a means test, will be allowed to remain with the old HK$1,090 allowance.
If the proposal receives enough votes in legislature to pass, which does not now seem probable, the government expects at least 400,000 of the 980,000 residents who are 65 years and older to qualify for the new Old Age Living Allowance (OALA). All 75,000 recipients of the current OAA who are aged 65 to 69 will be automatically transferred to the new OALA, along with 215,000 OAA beneficiaries who are now older than 70 years, but received means-tested OAA when they were younger. These transferees will have to supply information on their assets and income over the course of the next two years. It is not clear why the government expects an additional 110,000 applications from persons who have never before participated in the means-tested Old Age Allowance.
The government of Hong Kong is proud of its low rates of taxation and established record of fiscal discipline. The territory taxes personal incomes at marginal rates, after exempt amounts, that range from 2% to 17%. A taxpayer has the option of paying 15% tax on his or her taxable income, instead of the specified marginal rates for each segment of income, so a 15% flat rate is the maximum rate of tax on personal income. Moreover, there is no retail sales tax, nor is there a value-added tax (VAT). The preference for means tests over universal benefits reflects a desire to retain low taxes and low public expenditures. I hope to demonstrate that this attempt is fruitless and misguided.
We have all along been encouraging self-reliance. Through savings, investment and insurance policies, the individual prepares himself for retirement, and is backed up by his family when necessary. The Government seeks not to replace, but to reinforce, their roles. ….
We estimate that more than 400 000 persons will receive OALA in the first year. Taking 1 October 2012 as the “effective date”, SWD [Social Welfare Department] estimates that in 2012-13 the additional expenditure on OALA payment will be around $3.1 billion (the amount will be around $6.2 billion if calculated in full-year terms). Making reference to the 2012-13 Budget, an additional $6.2 billion will result in a 14% increase in the estimated recurrent Government expenditure on welfare or a 2.3% increase in the total estimated recurrent Government expenditure in 2012-13, and represents 0.3% of Gross Domestic Product. ….
Should no limits be set for the financial means of people aged 70 or above, the additional expenditure in the first year (in full-year terms) is estimated to immediately soar from around $6.2 billion by $3.7 billion to almost $10 billion. Should there be no such limits for all aged 65 or above, the extra cost will rise to a staggering $13.6 billion. With a fast growing elderly population, the extra financial cost will balloon in the future.
Hong Kong Legislative Council, Panel on Welfare Services, “Old Age Living Allowance“, LC Paper No. CB(2)4/12-13(01), 9 October 2012, paragraphs 2, 20 and 21.
In fiscal accounting, framing is everything. The costs of some are income or benefits for others. More specifically, the “staggering $13.6 billion” in fiscal savings is the sum of benefits denied to elderly residents.
The means test for an Old Age Living Allowance (OALA) is a tax on the elderly. To illustrate this, I have prepared a table with implicit taxes, as a percentage of ‘taxable’ income, for varied amounts of monthly income. There is also an assets test for the OALA, but this is easily avoided, so less important. Only the honest citizens will be deterred by such a test. The application form requests, for example, a listing of all holdings of gold coins and bars. How is government to know if an applicant reports honestly? One effect this test might have is to encourage some elderly to move any ‘excess’ savings from bank accounts to stores of value, like gold coins, that are easy to hide. The income test, in contrast, is difficult to avoid, so I concentrate on it.
In the first column of the taxation table (pdf) is a list of various monthly incomes, from 0 to 60,060 HK dollars. A person can receive the HK$2,200 OALA only so long as his monthly income does not exceed HK$6660. So, with no personal income, his total income is only the HK$2,200 from OALA, and no taxes are payable. He is free to work for wages, so long as his income is not too high, without losing the OALA. The maximum income he can enjoy as a beneficiary of OALA is HK$8,860: personal earnings of HK$6,600 plus an OALA of HK$2,200. (See the third column of the taxation table.)
Beyond this point, our hypothetical resident is subjected to what, in effect, is a lump sum tax of HK$2,200 each month. Why? Because, if he earns even one dollar more in income, he loses the OALA and his income does not rise, but actually falls with increased earnings. With just one dollar of earnings, his disposable income falls to HK$6,661. This is equivalent to an enormous tax – 220,000 percent! – on this dollar of earnings. As his earnings rise, the tax becomes smaller as a proportion of ‘taxable income’ (any personal income greater than HK$6,660). With a personal income of HK$8,860 he has restored the disposable income that he enjoyed when his earnings were HK$6,600, and he was eligible for the OALA. The income tax, at this point, is 100%. The additional earnings are equal precisely to the lost benefit. Earning another HK$2,200 places his monthly income at HK$11,060, and his rate of implicit tax – resulting from the means test – falls to ‘only’ 50%.
The important point to note from this table (pdf) is that means tests have real effects, just like normal taxes. The implicit taxes are high, so discourage the elderly from saving and investing for retirement, and from continuing to work for wages beyond the age of ‘normal retirement’. At some point, our hypothetical resident becomes subject also to normal taxes, to the ‘Salaries Tax’ of Hong Kong’s Inland Revenue. In this example, I assume that the taxpayer has only a personal deduction – amounting to HK$120,000 a year, equivalent to HK$10,000 each month. There are many possible deductions in addition to this basic one, such as expenditures on dependants, charitable donations, elderly residential care, mortgage interest, etc. For implicit taxes from means tests, the only deduction is the basic one, and this (HK$6,600) is much lower than that for normal income tax (HK$10,000). Even exaggerating the normal tax on personal income, it is obvious that the implicit tax of the means test is much larger than that the normal rate of income tax, even for incomes as high as HK$25,000 (US$3,225) a month. Means tests, in short, are a burden not only for the poor, but also for the middle class.
In conclusion, my point is a simple one. Means tests are taxes, just another way to finance social expenditure. The fiscal savings are an illusion. Wouldn’t it be more equitable, and more efficient, to finance basic pensions by taxing everyone – young and old alike – rather than just the elderly?
[...] “Reforming Social Pensions in Hong Kong”. Retrieved from [...]