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Op-Ed

2014/08/12

Paying the bill is key to any pension plan

The universal pension scheme is a complicated issue that needs comprehensive discussion among employees, employers and government.

Paying for such schemes has caused great fiscal problems in most of the developed world, which makes it all the more imperative that we fully understand the commitment we are putting on future generations, and the sacrifices we are asking current stakeholders to make.

In the Organization for Economic Cooperation and Development, the assets of pension funds of all kinds are equal to an average of 77 percent of GDP, and spending on pensions runs at 10 percent of GDP per annum.

Governments from Britain to Japan have found that their commitment to provide financial security for their retired population places an enormous burden on annual budgets.

Here in Hong Kong, our Mandatory Provident Fund already provides a retirement safety net for employees.

At the end of last year, the MPF covered 2.38 million people, or 39.7 percent of the people over 20. It held HK$514.1 billion in assets, equal to 24.3 percent of GDP.

It's the only broad-based retirement scheme we have, so it makes sense to use it as a reference point here.

Expanding the pension net to include everyone over 20 will have profound implications.

An additional 3.6 million people  those over the age of 20, but not part of the MPF  would be eligible for benefits when they retire. If we don't want to get into financial trouble decades down the road, funding such a commitment would have to begin promptly.

The increase in coverage from almost 40 percent of over-20s (ie, those in the MPF scheme) to everyone in that age group is of the same magnitude as an increase in assets required from under 25 percent of GDP to more than 60 percent.

If such a scheme were in place today, the one million people over 65 would have an immediate claim. In six to 10 years, their number would rise to nearly 1.6 million, of whom only 200,000 are now working and (by a generous estimate) eligible for MPF.

As our society ages, the numbers expand quickly. At the same time, our labor force will start to shrink after 2018, and the resultant labor shortage will hamper economic growth.

More people will be claiming money, yet fewer people will be contributing amid a slowing economy.

Any consideration of a universal pension is going to require a re-evaluation of the services government provides and the means by which we pay the bills.

It's time to look at extending the retirement age, which the Hong Kong General Chamber of Commerce has long been advocating. This will enable more people to remain financially independent and contribute to government income.

Universal or state pensions in many countries require citizens and residents to contribute a portion of their income during their working years.

Other systems pay for pensions out of a broad tax. Some provide benefits based on the amount contributed, from a basic rate to all to a cap for those contributing the maximum.

Most are means-tested to ensure fiscal viability. And most are inflation- indexed, which compounds the cost of payments over many decades.

A serious concern among OECD economies is the viability of the pension system. Extending the retirement age is a common approach to stretch payments so as to avoid having to raise contributions or cut pensions.

Across the European Union, spending on pensions, health care for the elderly and long-term care is projected to increase from 18.2 percent of GDP in 2008 to 23.4 percent by 2060.

The key question is this: How do we propose to pay for these future benefits? Given the enormous resistance to broadening the tax base, and the annual encroachments made on our international competitiveness, we need to ensure that promises made today are both fiscally feasible and broadly accepted.

The report of the Working Group on Long-Term Fiscal Planning recommends that we pay greater regard to longer-term affordability and fiscal sustainability in our planning. It also notes the public sector is increasingly reliant on direct tax revenue, land premiums and investment income, and that such sources are highly sensitive to the performance of the economy.

In other words, we need to be extremely careful before we create permanent and long-term spending obligations. We think that is sound advice.

Shirley Yuen

CEO of the The Hong Kong General Chamber of Commerce

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