Hong Kong Report calls for universal pension

More precisely, the long-awaited Report recommends a “universal, uniform amount, non-means-tested pension”, known also as a “demo-grant”. The Report is somewhat vague on this, but there is no apparent provision for the universal pension to retain its purchasing power by automatically tracking increases in consumer prices or wages.

Professor Nelson Chow of the University of Hong Kong headed the research team that produced the report.

Here are highlights from the “conclusions and recommendations” section of the 43-page executive summary. The full report is available in Chinese.

One out of three elderlies is [sic] now living under the Poverty Line ….

Failure for the government to set up the demo-grant would likely perpetuate disputes over retirement protection. ….

[T]he characteristics of demo-grant is [sic] that it is the right of citizens and so should be enjoyed by all citizens who are Hong Kong permanent residents reaching a specified age [65 years]. ….

[T]he research team considers that the amount may be set at $3,000 [a month, roughly US$387], … about the basic rate of existing elderly CSSA [means-tested pensions] … with the purpose of providing the elderly with a stable source of income but not as their sole income for maintaining livelihood. ….

[The recommended universal pension would be financed on a pay-as-you-go basis, from earmarked payroll taxes:]

  • Employers with [monthly] salary below $10,000, employers and employees each to pay tax at 1% … (employees with income below $6,500 only employers would pay and employees are exempted);
  • Employees with salary at $10,000 to below $20,000, employers and employees each to pay tax at 1.5% of the salary;
  • Employees with salary $20,000 and above (maximum limit at $120,000), employers and employees each to pay tax at 2.5% of the salary.
  • […]
  • As the level of the demo-grant is linked to the source of capital [i.e. tax revenue], should there be any substantial increase in amount, there would not be easy agreement from employers or employees paying the tax. As such there would not be arbitrary increase [sic] in the amount of the demo-grant.
  • The purpose of the different rates in payroll old age tax is to …  indirectly serve the purpose of narrowing existing disparity in income.
  • Levying the payroll old age tax may be done through existing MPF [Mandatory Provident Fund] contribution system thus minimizing administrative fees.

Future Development of Retirement Protection in Hong Kong, Executive Summary, University of Hong Kong, Department of Social Work and Social Administration, 20 August 2014.

To my surprise, the Report does not recommend abolishing the MPF, even partially, despite the fact that almost no-one is happy with the scheme. The Report, on page 7, clearly acknowledges this dissatisfaction:

Most participants [in focus groups] had much reservation about the MPF scheme and severe criticisms were made. They … [suffered] fluctuation in investment market and were dissatisfied with … high management fees.

Mandatory saving in privately managed retirement accounts has been in place since December 2000. With limited exceptions, employers and employees are required to deposit each month at least 5% of salary income. Total mandated savings thus amount to 10% of salaries, up to a maximum mandated saving of HK$2,000 a month from both sides. I haven’t run the numbers, but I am quite confident that current MPF saving would be more than adequate to finance universal pensions of $3,000 a month.

MPF accounts are poor savings instruments, and do not provide old age pensions. Employees withdraw their savings as a lump sum when they reach the age of 65. No tears would be shed (except by MPF managers) if government were to abolish the MPF, replacing forced savings with payroll taxes that are a smaller fraction of salaries, and using the tax revenue to finance a universal pension.

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