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Retirement Protection in Hong Kong – Some ideas about Improving the Mandatory Provident Fund scheme and the larger Social Security System PTM meeting, Central Policy Unit, SAR Hong Kong Government 25 th June 2011. Wong Chack Kie ( 王卓祺 ) Professor, Social Work Department
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Retirement Protection in Hong Kong – Some ideas about Improving the Mandatory Provident Fund scheme and the larger Social Security SystemPTM meeting, Central Policy Unit, SAR Hong Kong Government 25th June 2011 Wong Chack Kie (王卓祺) Professor, Social Work Department Associate Director, Hong Kong Institute of Asia-Pacific Studies, The Chinese University of Hong Kong Email: email@example.com
Introduction • The alternative to the proposal of universal retirement protection (全民退休保障) by mending the prevailing social security system • Mandatory Provident Fund (MPF) scheme • Comprehensive Social Security Assistance scheme (CSSA) • Old Age Allowance (OAA) • It is also by default in relation to tax increase (the social insurance part of the universal retirement protection is in fact a payroll tax)
The question to ask in this presentation is “Whether Mandatory Provident Fund (MPF) can provide adequate basic retirement protection?” • We confine our study on income(in-cash), in-kind transfers or benefits are another set of issues • MPF or even universal state pension is always about the basic level of income protection for retirement or old age • Countries always need multi-pillar retirement income protection • Replacement ratio at low level, e.g., 30-40% of average wage
Estimated Number of Employees Enrolled in MPF Schemes (as at end-March 2011): 2,272,000 Estimated Number of Self-employed Persons Enrolled in MPF Schemes (as at end-March 2011): 241,000 Net Asset Values of MPF Schemes (as at end-March 2011): HK$378,280 million Average beginning balance:HK$151,000 Data Used – from Mandatory Provident Fund Schemes Authority
Hypothetical Examples: Accrued Benefits of Members with Different Investment Return Scenarios
Assumption of the medium investment return • Annual 4% - assuming a high inflation rate of 3%, still beat inflation with 1% real return • So, we choose the balance of $477,000, (1% per annum, i.e., minus 3% inflation against the amount of $740,000) as the basis of calculation. • Assuming CSSA at the value of $3,800 (present value and the real value 20 years later), so the average MPF holder can have 125 months (10 years 5 months minimum protection; even if the value of OAA, $1035, not counted after aged 70)
How reliable is the 4% annual return rate? • Hong Kong’s MPF past ten years since 2000 – 5.5% (minus management fees and 0.7% annual inflation rate in the same period). • Between 1994 and January 2011, the average annual return of HK Monetary Authority’s reserve was 5.9% (75% bond/25% stock) • Chilean provident fund, with free choice of fund managers, an annual return of 10% in the past 25 years, without minus inflation (don’t know about the management cost included or not).
The issue is not all about investment return, but • We talk about average return, not those people who don’t have MPF, and even they have MPF, they do not have adequate balance to cover their retirement • For example, even in MPF, we have exemption of employees’ contribution to those with monthly wage of HK$5,000 and below
The benefit of funded model takes at least 25-30 years to realize, a life cycle investment strategy; and depends how much you invest • A non-guaranteed return funded model, alike our MPF, requires good investment skill and discipline; often lacking amongst those who need most • Reliance of funded model or investment for retirement protection is problematic to those low-income or those without income (house wives and disabled persons)
The need to improve MPF scheme • The need to help those low-income employees (we do not consider the non-working population here) to have adequate retirement protection • Education on investment over life and economic cycles • Constant injection targeting at low-income • For example - 2008 HK$8.5 million injection for 1.4 million employees with monthly wage >$10,000 (see reference) • Other suggestions such as – • Matching of investment, targeting at low-income members • Encourage topping-up by children to those less than the minimum sum balance (need to set it) after a certain age • Liberalize choice of fund managers • Guarantee minimum return, e.g. by HK Monetary Authority • Add an Index fund – minimum management fee
The proposal to merge old age CSSA benefits with Old Age Allowance (OAA, 生果金) • In the long term, even if MPF can reduce the need for social assistance, Hong Kong still needs CSSA as the last resort in income protection • The value of OAA:$1,035, without stigma and it is universal • The value of old age CSSA:$3,800 (including housing benefits), with stigma • see the references for rationale
The beauty of the merge • Income and asset status sensitive to benefits • Those who are turned off from CSSA due to the stigma are likely to apply • The universal OAA will form a protection to those who apply for additional allowance from being stigmatized • Then, we can have a three-tier benefit structure, the two higher benefit tiers for the needy old age depends upon the asset-tests(e.g. now, they are $36,000 for CSSA and $177,000 for normal OAA) • Need to consider the starting age of this new merged scheme – 65 or 70
The challenges of this proposal • Regressive, more elderly than now, will apply for the additional allowances • This is a tax-funded retirement scheme, eventually it will lead to tax increase if our fiscal surplus dries up or our current budget cannot cope with the increase
Conclusion • MPF is a good choice for retirement income protection in view of the worldwide worsening demography trend and the long-return rates in the funded model • But it is bound to be inadequate to those who are at the lower-end of the labour market • So, it needs social assistance to cover the gap
Social assistance (e.g., CSSA in Hong Kong) is always the last resort, another pillar • The need to tackle the stigma of CSSA • The merged proposal helps in this regard • Acknowledgement: Gabriella Yee of the Mandatory Provident Fund Schemes Authority for kindly supplying the projected balances of investment scenarios
References • On one-off injection of MPF, see • 王卓祺、曾澍基, 「以强積金分配經濟紅利」續篇」信報，2008年3月11日 • On the merge of old age CSSA and OAA • 王卓祺 「應否一刀切增加生果金？」信報，2007年11月3日 • 王卓祺「增加生果金的契機-老人綜援併入高齡津貼的建議」信報，2008年10月30日 • The articles and two more lengthy and related articles are available from my personal webpage: http://web.swk.cuhk.edu.hk/~ckwong