Archive for the ‘Universal Transfers’ Category

improving public healthcare in Pakistan

Sunday, October 19th, 2014

BBC News brings us the heartwarming story of one man’s struggle to provide free, world-class care to millions of Pakistan’s kidney patients.

Pakistan’s shambolic public health system suffers from corruption, mismanagement and lack of resources. But one public sector hospital in Karachi provides free specialised healthcare to millions, led by a man whose dream was inspired by the UK’s National Health Service. ….

Adib Rizvi was barely 17 when Hindu-Muslim communal riots forced him to migrate from India to the newly created country of Pakistan.

Without a family, he spent much of his time as a medical student in Karachi in the 1950s living in boarding hostels.

“In those days, I had plenty of time to roam about and observe what goes in our hospitals,” he remembers. …. “I saw people being abused for not being able to pay for treatment. I saw elderly women taking off their earrings and pawning them to pay for medicine.

“People would beg for healthcare, but they would be demeaned. It was like people were required to pawn off their self-respect to get a service which I felt should have been their right as citizens in the first place.”

After completing his medical degree in Karachi, Dr Rizvi went to Britain for a fellowship in surgery. There, he spent a decade working in hospitals.

“I was inspired by the National Health Service (NHS). It showed me that providing free healthcare was doable,” he says.

But when he returned to Pakistan in 1971 and joined Civil Hospital Karachi as assistant professor of urology, most people around him told him he was talking utopia. “They said it can’t be done here.”

At the time, he had a choice.

He could have opted to set up his own private hospital. He could have built up his own lucrative empire while keeping his day job at the poorly run government hospital – a path taken by many highly qualified physicians in Pakistan.

“But the option never really appealed me,” he says. “I always felt that in order to really make a difference, I had to be committed to this public sector hospital. Because when you contribute to public sector institutions, you help the common man. That’s what I wanted to do.”

Shahzeb Jillani, “Pakistan’s ‘miracle’ doctor inspired by NHS“, BBC News, 19 October 2014.

The Sindh Institute of Urology and Transplant (SIUT) is part of Civil Hospital Karachi (a large teaching hospital). It began in 1971 with a shabby eight-bed ward. SIUT hospital today is  a world-class kidney disease centre, with 800 beds in two multi-storey buildings.

Income policies with ageing populations

Wednesday, October 8th, 2014

Michael Littlewood compares the experience of New Zealand with that of Australia, drawing lessons regarding the effects of public policies on incomes of older citizens. He concludes a concise essay with four key questions “to focus policy attention on the things that matter”:

  1. Poverty in old age: How many people of pension age are living in poverty?  First, we must decide how to measure that.  Then we need detailed, impeccable numbers by age, household composition and geographic areas, also covering those in the age groups before the state pension age.  The results should be tracked over time.  If there are ‘too many’ living in poverty, on whatever measure is agreed, current pension policies have failed.
  2. Saving adequacy: Are people saving ‘enough’ for retirement?  If we decide we need to know whether people are behaving appropriately, the only way to find out is through a longitudinal study of household wealth51.  Apart from measuring wealth and its changes, such surveys can also show how households react to government policies.  In this context, total household wealth is what matters, not just pension wealth nor even just financial wealth.  Surveys to find out what people think about retirement saving are pointless.  Surveys to find out what people are doing are more useful.  
  3. Cost of tax incentives: How much do tax incentives for retirement saving currently cost?  Who specifically benefits most from those concessions?  Do they increase retirement savings?  Do they increase overall savings?  Do they increase a country’s national saving (the macro-economic number)?   
  4. Labour market data: When do people ‘retire’ (finish ‘careers’; stop all paid work)?  What does the transition from full-time work to full-time retirement look like?  How long does it take?  What drives the transition?

Michael R. Littlewood, “Ageing Populations, Retirement Incomes and Public Policy: What Really Matters“, University of Auckland Business School, 17 June 2014, p. 17.

Mr Littlewood is the principal editor of and co-director of the Retirement Policy and Research Centre. Both institutions are based at the University of Auckland (New Zealand).

universal vs contributory pensions in Bolivia

Thursday, September 11th, 2014

As promised, here is a blog on the Bolivia chapter of the UNRISD book. It is wonderful, but I limit myself to copying and pasting part of the concluding section.

The Bolivian experience since 1996 clearly illustrates the respective capacity of contributory and non-contributory pension schemes to deliver income security to older people in low income countries. Put simply, it demonstrates that non-contributory social pensions are much better suited to this task. By 2007, the contributory system paid out pensions to around 65,000 older people, of which only 12,000 were paid by the new private scheme. In 2004–5, this contributory system absorbed around 5 per cent GDP in government subsidies, not including substantial indirect subsidies of up to 40 per cent of the annual transition costs through treasury bonds. …. By contrast, the [universal] social pension pays out over 830,000 benefits at a cost of less than 2 per cent of GDP. ….

The most obvious lesson for other developing countries is that non-contributory social pensions are a much more efficient means of meeting the welfare needs of older people than contributory schemes. …. In countries where both exist, government spending on social pensions is usually a fraction of spending on contributory ones. The Bolivian experience also shows that contributory pension funds create powerful vested interests among privileged groups of workers who can resist substantial reforms, even under radical non-elite governments. Only six years after Morales took office was the contributory system meaningfully modified, although many of its essential features remain.

Peter Lloyd-Sherlock and Kepa Artaraz, “Pension Reform in Bolivia: Two Models of Income Security in Old Age”, chapter 9 of Reforming Pensions in Developing and Transition Countries (Palgrave Macmillan, 2014), edited by Katja Hujo, pp. 267, 270.

I came to a similar conclusion in an earlier study of Bolivia:

The cost of the [universal] Bonosol is not low, but benefits go to the entire population of elderly. The annual fiscal cost of reform of the contributory scheme is four times greater, and benefits go to the few, none of whom are poor. Actual costs of reform of the contributory system are more than twice those projected at the beginning of the reform, largely because of fraud, but also because of increased generosity in transferring income from taxpayers in general to the small number of salaried employees (fewer than 12% of the labour force) who participate in the contributory scheme. ….

The Bonosol is a godsend for the poor of Bolivia. …. The World Bank and the Inter-American Development Bank, in a joint report (2004) use strong language to recommend “The Bonosol should be maintained, as it represents a strong redistributive policy with minimum fiscal impact.” For the World Bank, this marks a reversal of earlier views that questioned the worth and the wisdom of the Bonosol, whereas the views of the IMF continue to be quite negative.

Larry Willmore, “Non-contributory Pensions: Bolivia and Antigua in an International Context“, Financiamiento del Desarrollo 167 (United Nations, Santiago, Chile, May 2006), p. 28.

Great minds think alike!

My essay is not as good …. but it is freely accessible.



basic income for all

Tuesday, September 9th, 2014

[M]ost people [do not] know what the phrase “basic income” means. With that in mind, here are the basics (get it?) of the idea, in eleven questions.

1) What is basic income?

“Basic income” is shorthand for a range of proposals that share the idea of giving everyone in a given polity a certain amount of money on a regular basis. A basic income comes with no categorical eligibility requirements; you don’t have to be blind or disabled or unemployed to get it. Everyone gets the same amount by virtue of being a human with material needs that money can help address.

There are a number of different names this idea has gone by over the years. “Universal basic income” and “basic income guarantee” are used frequently. “Guaranteed minimum income” and “negative income tax” are generally used to refer to versions of the plan that also impose a tax that gradually eats up the cash transfer, as a means of reducing the cost of the policy. “Demogrant” was popular in the ’70s, and “citizens’ dividend” and “social wage” get used from time to time.

2) Who supports basic income?

Surprising people! Arguably the biggest popularizer of the idea in the 20th century was libertarian economist Milton Friedman, who specifically favored a negative income tax as a replacement for much of the welfare state. Many left-of-center economists, like James Tobin and John Kenneth Galbraith, were also on board. ….

Martin Luther King Jr. endorsed the idea in his book Where to Go From Here: Chaos or Community?, writing, “I am now convinced that the simplest approach will prove to be the most effective—the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.”  ….

3) Has a basic income been implemented anywhere?

Not exactly, but a lot of countries have generous cash transfer programs of one variety or another. ….

[Well, you get the idea. Here are the remaining eight questions.]

4) Wouldn’t this destroy the economy?

5) Could a basic income ever happen in the United States?

6) I believe it’s customary to provide a music break. (“Money for Nothing” video)

7) Will a basic income save us from the robot uprising?

8) What’s the liberal/leftist case for basic income?

9) What’s the conservative/libertarian case for basic income?

10) What’s the liberal/leftist case against basic income?

11) What’s the conservative/libertarian case against basic income?

Dylan Matthews, “Basic income: the world’s simplest plan to end poverty, explained“, Vox, 9 September 2014.

Click on the link above to continue reading. Keep in mind, though, that should not be confused with is very serious. It was set up by the Centre for Economic Policy Research to promote research-based policy analysis and commentary by leading academics. Its posts, almost always, are summaries of working papers., in contrast, is non-academic. It is run by Vox Media, an online publisher based in Washington DC. The postings are jargon-free, opinionated, easy and fun to read. Its target audience is similar to that of Planet Money.

This article is the first that I have read on the site. Its simple text is illustrated with numerous graphics and embedded videos. My only complaint is that one of the promised 11 questions (#6) is not a question! Highly recommended for those who find economic writing to be boring, with impenetrable jargon.

A universal age pension is basic income restricted to older citizens/residents. Without an age restriction, the pension would be a universal basic income grant.


Reforming Pensions in Developing Countries (new publication)

Monday, September 8th, 2014

UNRISD (the United Nations Research Institute for Social Development) has just released a new publication on pension reform in developing and transitional countries. The 368-page volume contains nine chapters of case studies written by various scholars, plus an introduction and conclusion authored by Katja Hujo. So far I have read only the introduction and conclusion, plus chapter 9 (a superb case study of Bolivia).

The book contains a wealth of information, and I will blog on some of the case studies as I read them. First, though, I would like to complain that the book pays little attention to universal  pensions, concentrating on social assistance (means-tested) pensions and on contributory pensions.

I would like to remind TdJ readers of the definition of “universal pension” – at least the definition that I use!

Age and residence/citizenship are the only tests for this pension. It is not necessary to actually retire from work to receive the pension. Benefits might be taxable as income, but only at normal rates, without surcharges to recover them.

Larry Willmore, “Types of Social Pensions“, 22 April 2012.

The UNRISD publication uses a broad definition of “universal”, which includes pension-tested schemes. (See p. 18 of the introduction.) If a social pension is given only to those without a contributory pension (or too small a pension), by definition it excludes part of the elderly population, so is not universal.

The most comprehensive treatment of universal pensions (without using the term!) is in the first sentence of last paragraph of p. 18:

Most countries have social pensions that target the elderly poor, but some countries have implemented non-contributory pension programmes covering all citizens and residents in the country – as in Bolivia, Nepal, Mauritius, New Zealand and Brazil (rural sector).

A number of examples of universal pensions in developing countries could (and should) have been added to this list: most notably rural Mexico, Mexico City, Namibia and Botswana, but also Guyana, Samoa, Brunei and Kosovo. Regrettably, there is no case study of Mauritius, a country with a long and successful history of universal pensions (from 1958). More regrettably, there is almost no mention of Mauritius in the rest of the book, and the sentence above is the only mention of New Zealand. Neither Mauritius nor New Zealand are listed in the book’s extensive index.

The paragraph at the bottom of p. 18 concludes with arguments for and against universal schemes:

As with other social transfers and services, opinions diverge on the pros and cons of targeted versus universal social provisioning. As Chapters 9 [on Bolivia] and 10 [on Argentina and Chile] explore in more detail, there are strong arguments in favour of universal schemes in countries with widespread poverty, weak administrative systems and where there is a need to strengthen social cohesion, a sense of citizenship and social solidarity. On the other hand, international financial institutions (IFIs) tend to favour the introduction of means-tested targeted transfers because they hold that these schemes are less costly and more effective in terms of poverty reduction.

Support for a universal pension is at best tepid. Strong arguments exist for universal pensions even in countries like New Zealand and Mauritius, which do not have widespread poverty nor weak administrative systems. It is a pity that the case for universal pensions was not articulated better.

Neither Argentina nor Chile have universal pensions, so I am eager to learn in what way these case studies are relevant for policymakers contemplating introduction of universal pensions. Katja Hujo (editor) is co-author, with Mariana Rulli, of chapter 10.

Below is the full reference for this publication, and the link to a site where you can download it. All quotes above are from the introduction, which can be downloaded as a free “sample chapter”. The complete book (hardcover, 368 pages) is available from Palgrave for the high price of 115 US$ plus shipping.

Katja Hujo (editor), Reforming Pensions in Developing and Transition Countries (Palgrave Macmillan, 2014).

Reforming Pensions in Developing and Transition Countries

The study of pensions in Bolivia (Chapter 9) is the best I have seen. It was written by Peter Lloyd-Sherlock (University of East Anglia) and Kepa Artaraz (University of Brighton). I will blog on it shortly.

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