Archive for the ‘Universal Transfers’ Category

free schools (friskola) in Sweden

Thursday, August 28th, 2014

Six years ago, while updating an essay on education published in Economic Affairs (December 2004), I reviewed a radical reform begun by Sweden in 1992. Sweden’s embrace of free choice and competition impressed me. Here are highlights from pp. 14 and 15 of the 2008 update.

Prior to 1992, Sweden’s school system allowed for little choice. Government assigned pupils to their closest school, and parents had little to say in the matter, short of moving to a different neighbourhood. Very few private schools existed; most were faith-based and accounted for less than one percent of students in compulsory schooling, which in Sweden is nine years starting at age 7.

In 1992 everything changed. Anyone can now open a school, and municipalities are required to finance it on the same per-pupil terms as a government school. ….

There are no restrictions on ownership of private schools. Schools can be and are run by religious groups (Christian, Jewish, Muslim), teachers’ co-operatives, parents’ co-operatives or for-profit corporations. If a registered school attracts and retains students, it receives funding from the students’ respective municipalities. Sweden has created a market for schooling, but it is a very egalitarian market because there is no price competition and each consumer has the same access to schools. Precisely because Sweden does not allow private schools to charge fees or select students, its system has attracted criticism from libertarian groups …..

By no means all Swedish parents have deserted government schools, but the private share of enrolment has increased, and came to exceed 10 percent in 2008. Surprisingly few of the new private schools are faith-based, but many are run for profit, some as chains of schools. ….

Three econometric studies [2003, 2005, 2007] have examined the effect of introduction of school choice on the quality of education in Sweden …. All three studies exploit the fact that private schooling varies by municipality, and all find that everyone gains from competition—pupils who remain in government schools as well as those who choose a private option. The reason this happens is that government schools, faced with competition from private schools, must improve their performance or lose pupils and funding.

Larry Willmore, “Basic education as a human right redux“, MPRA Paper 40478, 28 July 2008.

The private share of enrolment has reached 20% – double the proportion of students enrolled in 2008. Nonetheless, writes FT journalist Helen Warrell, many Swedes are questioning the merits of their schooling reform.

Two decades on from the audacious experiment in opening up state education to the market, a fifth of pupils, or about 312,000 children, attend [independently run free schools, known as] friskola. Of these, two-thirds go to institutions run by companies rather than co-operatives or charities ….

No other European country has entrusted so much of its children’s education to private companies. ….
Swedish schools
But as friskola have proliferated, Sweden’s confidence in for-profit schools has been shaken. Traditionally top of the class in education, Sweden has tumbled in international test rankings, with the OECD’s most recent Pisa results showing scores falling dramatically in reading, maths and science to a position well below the average for developed nations. …. [Pisa is the Programme for International Student Assessment that the OECD administers to fifteen-year old students every three years.]

One of … [the for-profit schools], Rytmus, specialises in music and has a cult following among Swedish teenagers. Lars Ljungman, its headmaster, spent 20 years teaching in the public sector before taking over the free school two years ago.

“I was curious to find out what it would be like because within the public schools it was always said that [the education companies] were so greedy, that they didn’t give to the students,” says Mr Ljungman. “I was thinking about whether I would have less money to spend on my students but on the whole, I have more to distribute for my pupils and teachers.” ….

However,… one Rytmus teacher is less complimentary. “These companies are like parasites, nothing more nothing less,” the teacher says. The expansion of the highly popular Rytmus model … is financially driven …. “Rytmus is like KFC, it is a brand. Expansion is just a way of making more profit. It is about ‘reaching future customers’.” ….

Mr [Jonas] Sjöstedt [leader of the Left party] says there is no question that profitmaking businesses are at fault for the national crisis now known as the “Pisa shock”.

“They’re not [running schools] because they like kids or because they’re interested in education,” he says. “They are doing this because they’re interested in fast money.”

Mr Sjöstedt … admits [though] that drawing a definite link between the poor Pisa results and the increase in private provision is “more complicated”.

“It’s not always the fact that the private schools get worse results … but they do harm [to the system] because traditional municipality schools have to adapt to a market system and they often lose their best pupils,” says Mr Sjöstedt.

This is the most common complaint about free choice in schooling ….. Critics contend that middle-class parents are likely to be drawn to the newer free schools, leaving poorer children stuck in poorly performing older institutions.

Helen Warrell, “Free schools: Lessons in store“, Financial Times, 28 August 2014.

Ms Warrell’s report, though interesting, omits important information and leaves many questions unanswered. A major omission is the fact that privately-run schools receive the same funding per-pupil as municipal schools, and are not allowed to charge top-up fees. Nor are schools, with rare exceptions, allowed to discriminate among applicants for admission.

There is no economic reason, then, for wealthier parents “to be drawn to the newer free schools, leaving poorer children stuck in poorly performing older institutions.” If the attraction of private schools results from advertising and branding (“like KFC”) why, then, should advertising attract a disproportionate number of children from wealthier households? Why do government schools lose their best students to private schools? Do the best students tend also to have wealthy parents?

The stark division of rich from poor, bright from dull, if true, is an anomaly of the reformed Swedish system.

reflections on contributory and non-contributory pensions

Wednesday, August 27th, 2014

I have prepared, for the record, an annotated version of my June 2000 paper “Three Pillars of Pensions? A Proposal to End Mandatory Contributions”. The prologue that follows explains in some detail what I did, and why. This will not be of general interest, but the writing of this paper marked an important moment in my own life, the beginning of my obsession with reform of old age pensions. (That is not a politically correct statement. I should have written ‘pensions for older persons’. But I have never been known for political correctness!)

Without more ado, here is the prologue that I wrote today. The newly annotated paper can be downloaded at the link above.


This is an old, but important paper, one that defined my future work on pension reform. In April of the year 2000, I was at an OECD conference in Prague, listening to presentations of two World Bank economists (Estelle James and Dimitri Vittas). At that moment, it suddenly dawned on me that an ideal pension system should provide basic pensions for everyone, funded pay-as-you-go from general government revenue, allowing citizens who desire more than basic income in retirement to save in any way they please, without subsidies, tax breaks or coercion from government. This was my ‘Eureka’ moment.

When it was my turn to speak, the very next day, I spoke with excitement and enthusiasm. The conference was on private pensions, so the audience did not react warmly to my talk. Nonetheless, I presented my core ideas orally, and drafted a paper immediately after the conference. I circulated it as a UNDESA discussion paper in June 2000. While writing the paper, I discovered that the ideal system I dreamed of was already in place — in New Zealand. Much later I discovered that Mauritius for decades has operated a similar pension system. The universal pensions of New Zealand and Mauritius began long ago, are very successful, but nonetheless have been ignored by the OECD, the World Bank and other development agencies.

The OECD published a version of my paper “edited for length” in 2001 on pp. 385-397 of its “Private Pensions Conference 2000” proceedings. The editors changed the subtitle from “A proposal to end mandatory contributions” to a blander “Is there a need for mandatory contributions?” In my opinion, the OECD editors removed important points from the paper. For the record, I have highlighted all deletions in yellow, so readers can judge for themselves whether anything of importance was omitted.

What most upsets me is the deletion of all reference to Estelle James. Ms James had an enormous influence on my thinking. More than anyone, she is responsible for my obsession with pensions, which began at a conference in Prague, on April 4th of the year 2000. The obsession continues now, at the end of August, 2014.

Regarding length, numerous papers in the conference proceedings are longer than the 13 pages allotted to me. A paper on Romania’s pension system is longest, with 54 pages. The paper co-authored by World Bank economists Estelle James and Dimitri Vittas is much shorter, but still 32 pages long.

funding universal pensions in Hong Kong

Monday, August 25th, 2014

A member of the government’s Commission on Poverty has suggested a goods and services tax could be used to fund a new public pension scheme, instead of a further tax on payrolls.

The controversial idea was floated by University of Hong Kong academic Dr Law Chi-kwong after a government-commissioned study last week suggested granting every Hongkonger aged over 65 a pension of HK$3,000 per month, with no means test. But Law suggested the plan would be more palatable if only those in greater need were entitled to the subsidy.

The study, by Professor Nelson Chow Wing-sun, a colleague of Law’s …, suggested funding the pension by imposing new taxes of between 1 and 2.5 per cent of workers’ salaries on both employees and employers. ….

But Law said linking a goods and services tax to universal pensions would make the latter more palatable to the public, after former financial secretary Henry Tang Ying-yen was forced to withdraw a plan to introduce the indirect tax amid a public outcry in 2006. ….

“The government would run into a budget deficit even if it did not introduce a universal pension.” he said. “The government would have to raise taxes somehow.”

Law said that if Hong Kong did eventually introduce a universal pension, the government could consider excluding high-income earners from receiving it “so that public resources could be more focused to help the needy”.

Timmy Sung, “Sales tax mooted to fund pension for all“, South China Morning Post (Hong Kong), 25 August 2014.

Introducing a goods and service tax (GST) or – even better – a value-added tax (VAT) in Hong Kong is an idea whose time has come. I fully support Dr Law’s proposal. But I disagree with his idea of  excluding high-income residents from the social pension. An income test is equivalent to a tax on the wealthy, but only on those who are 65 years of age or older. Why not collect more taxes from all the wealthy, young or old, with a higher GST or VAT rate for luxuries, for example? Why burden only the elderly with higher taxes?

I have explained numerous times, on this blog and elsewhere (for example here and here), that means tests are taxes. This is not a controversial statement. Economists on the political Left, Centre and Right agree with it. Non-economists, unfortunately, are often attracted to the idea of reducing government expenditure by limiting benefits to those certified as poor.

Means-tests improve the government’s budget, it is true, but in precisely the same way as increased taxes do. Citizens inevitably finance all government services and transfers of income. There is no free lunch. Some pay indirectly when they are denied benefits. Others pay directly through the tax system.

Hong Kong Report calls for universal pension

Sunday, August 24th, 2014

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.

towards universal pensions in Hong Kong

Wednesday, August 20th, 2014

[W]hether a universal pensions scheme will finally come to pass, proponents say, all depends on … political will ….

As a social sciences scholar prepares to present his findings on the feasibility of such a scheme tomorrow, advocates worry that the government will continue a trend of “chickening out” of launching much-needed social policies – despite rising poverty among the elderly.

At the centre of the government-commissioned report are six proposed retirement protection schemes, whose costs, sustainability and funding options have been examined in actuarial studies. Nelson Chow Wing-sun, chair professor at the University of Hong Kong’s department of social work and social administration, wrote the report. ….

The city’s struggle for a comprehensive retirement protection policy dates back to the 1970s, when discussions first arose over the possibility of setting up pensions for retirees.

But no colonial governor dared to tackle it until Chris Patten revived the idea in 1994 – only to shelve it in the face of opposition from business and Beijing. ….

Instead, the Mandatory Provident Fund got past a Legislative Council vote that year and started operating in 2000, as a compromise solution to retirement protection for workers.

Employees contribute 5 per cent of their monthly income and the government matches that with 5 per cent. The money goes into the employee’s personal account and can be withdrawn as a lump sum upon retirement.

The fund is highly criticised as flawed ….

The … bottom line [of the Alliance for Universal Pension, which represents more than 80 grass-roots groups] was to have no means test, to avoid creating a labelling effect or polarisation in society ….

Chinese University economics professor Chong Tai-leung said universal pensions with no means test were “not possible” without major changes in taxes or more employee-employer contributions.

Chong said it would not be fair to the young working class, who would be feeding not only their families but also more of society’s elderly. “It’s not worked anywhere in the world,” he said.

Jennifer Ngo, “Universal pension? It’s all up to the chief executive now“, South China Morning Post, 19 August 2014.

Professor Chong’s assertion that universal pensions have “not worked anywhere in the world” has no foundation. The truth is that universal pension schemes function smoothly in countries around the world. The Netherlands, New Zealand and Mauritius, to cite three examples, have had universal pension schemes for decades. The schemes, funded from general government revenue, provide a basic income to all older persons who satisfy residency and age requirements. Universal pensions are age pensions, not retirement pensions, so pensioners are allowed to continue working while receiving full benefits.

Universal pension schemes are very popular with the electorate. Governments who reinstate income or asset tests do so at their peril. In August 2004, for example, the government of Mauritius introduced an income test for its previously universal basic pension. In July 2005, it faced defeat in national elections. A new government moved quickly to “end the humiliation previously imposed on pensioners by abolishing the targeted approach and reinstating [the] universal pension”. (Larry Willmore, “Universal Age Pensions in Developing Countries: The Example of Mauritius“, International Social Security Review, October 2006, p. 79.)


Professor Nelson Chow

the struggle for universal pensions in Hong Kong

Monday, August 4th, 2014

Members of the Elderly Commission are still split over a pension scheme and how much should be doled out to different levels of senior citizens each month, says chairman Alfred Chan Cheung-ming. ….

Speaking in a radio program, Chan said there are various views on how to deal with the rich and the poor elderly.

“Some say since it is named universal pension, every senior citizen should be given HK$2,000 [US$258] or HK$3,000 [US$387] each month, no matter how much they have contributed to the fund,” he said.

“Some others suggest this violates the principle of work more, get more.” ….

He said he personally supports a suggestion that rich or poor elderly should be … receiving HK$3,000 to HK$4,000 a month. ….

He stressed that the universal pension should not be treated as a poverty-alleviation measure and should instead be considered a policy to help the elderly live with dignity. ….

Au Yeung Kwun-tung, Alliance for Universal Pension committee member, said some elderly people used up their saving because of illness, causing them to become anxious about their future.

He hoped society would contribute to the fund and that every elderly person would receive an equal pension no matter what assets they had.

Kenneth Lau., “Group struggles over pension plan“, The Standard (Hong Kong), 4 August 2014.

Chan’s reference to “fund” no doubt refers to the Mandatory Provident Fund (individual savings accounts). Contributions to the MPF should not affect receipt of a non-contributory pension. Otherwise, mandated savings become a payroll tax, and support for a non-contributory pension will fall.

call for universal pensions in Hong Kong

Sunday, July 27th, 2014

Hong Kong’s promised march for transparency on age pensions took place last week, on Sunday, July 20th. An estimated 2,000 protestors took part. They called for release of a full report on pensions that government commissioned some time ago.

Hundreds of protesters, many of them in wheelchairs, yesterday urged the government to release a consultant’s report on a universal pension.

Nelson Chow Wing-sun, chair professor in social work and social administration at the University of Hong Kong, and his team spent a year on six proposals including a universal pension scheme.

The report, submitted to the Poverty Commission on June 30, is yet to be made public. ….

Organizers estimated 2,000 joined the more than hour-long rally from Chater Garden in Central to the Chief Executive’s Office in Tamar. Police put the crowd at 700. ….

If the government does not release the report and address calls for universal pension, the alliance [for universal pension] may organize another demonstration on November 16 – Senior Citizens Day – said Au Yeung Kwun-tung, the group’s general secretary.

One of the participants, Lo Siu-lan, 78, said she is fighting for future generations.

The oldest protester was a 98-year- old woman, surnamed Tsang.

Katherine Kwok, “Elderly in push over pension for all“, The Standard (Hong Kong), 21 July 2014.

The Alliance for Universal Pension wants all Hong Kong residents to receive a HK$3,000 (US$390) monthly pension from age 65. The pension could be financed by a 5% tax on payrolls, This would allow government to eliminate – or at least reduce – contributions to the Mandatory Provident Fund (MPF). The MPF consists of savings accounts that provide no pension, thus inadequate financial security even for those who contribute.

Hong Kong march for universal pension

Saturday, July 5th, 2014

The Alliance for Universal Pension says it will hold a march later this month to call on the government to release the full report done by an academic on retirement protection methods.

Professor Nelson Chow, who was appointed by the government, has finished studying various pension scheme proposals and it will be made public soon.

But the Alliance said it was worried that the government will cover up controversial details in the report.

March for universal pension“, The Standard, 4 July 2014.

decision time in Hong Kong

Tuesday, July 1st, 2014

[G]overnment-appointed consultant Nelson Chow Wing-sun said he will bat for a universal pension to give retirees a more stable income in his report to be submitted to the government today.

“If the community misses this chance [for a universal pension], it will be hard to raise it again in future,” said Chow, chair professor of the University of Hong Kong’s social work and social administration department.

He said income taxes could be increased or higher regular contributions than the Mandatory Provident Fund could be made, which could lead to strong opposition from some sectors. ….

He reiterated that the pension is not to “subsidize the poor, but to ensure the retired can have stable income regardless of whether they are wealthy or poor.”

Earlier, Chow said the pension should not be less than the existing old age living allowance of HK$2,285 a month and that if it is accepted, it would replace both the “old age allowance” – that is HK$1,180 a month and non-means tested, [thus universal] and covers those aged 70 and over – and the [higher] “old age living allowance” that is means-tested and open to those over the age of 65.

In an interview with Sing Tao Daily, Secretary for Labour and Welfare Matthew Cheung Kin-chung said he hoped to release the report to the public.

But he admitted that it is “too early to decide” on the injection of funds by the government and implementation of the pension because “the community’s consensus over the contribution to the pension matters the most.” ….

Lawmaker Fernando Cheung Chiu- hung said he supported Chow’s proposal of having an old age pension because it can relieve the poverty problem among elderly, while the fruit money alone does not help maintain their livelihood.

He said not many apply for Comprehensive Social Security Assistance as “some elderly are afraid of the labeling effect if they rely on CSSA.”

Alliance for Universal Pension organizer Au Yeung Kwun-tung said the alliance agreed largely with Chow’s proposal but would like to know if the government will conduct a public consultation, or will just give a summary of the report.

Hilary Wong, “Now or never for pension scheme“, The Standard, 30 June 2014.

reforming universal pensions in Hong Kong

Tuesday, May 27th, 2014

It is still possible that Hong Kong’s older population might obtain access to reasonable universal pensions. A government-commissioned proposal will be submitted next month to the Legislative Council’s Commission on Poverty.

Everyone would be entitled to a flat-rate monthly pension from the age of 65 under an option being considered by an expert [University of Hong Kong Professor Nelson Chow Wing-sun] commissioned to lead a year-long government study of retirement proposals.

The proposed scheme … would replace the existing old-age allowance and old-age living allowance schemes.

Chow was commissioned … amid mounting public calls for a universal pension system. He is expected to finish his report next month and submit it to the Commission on Poverty.

The initial plan is for the non-means-tested scheme to provide a monthly amount adequate for a retiree to live “a reasonably acceptable life”. It is likely to be more than the [means-tested] HK$2,300 a month old-age living allowance. ….

Dr Billy Mak Sui-choi, of the Baptist University finance department, said the idea was politically feasible. “Basically, it is to scrap the old-age allowance and old-age living allowance schemes and pay the money under a new scheme. Financially, it does not mean a huge extra burden for the government.”

Ng Wai-tung, community organiser of the Society for Community Organisation, also hailed Chow’s proposal and suggested the monthly pension should be over HK$4,000.

Ng Kang-chung and Johnny Tam, “Plan for flat-rate monthly pension for all over-65s is proposed“, South China Morning Post, 27 May 2014.

The existing universal pension – known as ‘fruit money’ – is extremely low: HK$1,090 (US$140) a month). It is paid from age 70 to those who receive no other government assistance. For reference, the official poverty line is HK$3,600 (US$465) a month, the minimum wage is about HK$8,000 (US$1,032) a month, and per capita income is HK$295,701 (US$38,155) a year.

Those willing and able to pass a stringent means test are entitled, from age 65, to an Old Age Living Allowance (OALA) of HK$2300 (US$295) a month that is larger, but still far below the official poverty line.

Professor Nelson Chow last year proposed a universal pension of HK$4,000 (US$515) a month, which is above the poverty line, so would eliminate elder poverty in Hong Kong.