The Universal Old Age Pension Scheme (OAP) is regarded as a social welfare of retirement protection in Hong Kong.Therefore,many people in the society ask for the implementation of the Universal Old Age Pension Scheme.According to a programme by RTHK and Legislative Council,there are three main proposals of the OAP in the society.It is arguable which proposals are the best or whether the OAP should be implemented in HK.Therefore,whether the OAP should be implemented in HK or not is a controversial issue and there are divided views in the community.
The OAP first proposed in the policy address in 1993 to provide immediate benefits upon implementation and inflation-proof income at a guaranteed basic level,and widen coverage to those outside the workforce.Hong Kong society now is suffering from increasing burden of ageing population which is predicted that the dependency ratio will be 1.8 working population to 1 elderly in 2041.In other words,the income of 1.8 working populaton needs to support the expenditure of 1 elderly after 35 years.On the other hand,the recent retirement protection in HK is inadequate.The Old Age Allowance just $1,290 each month but the average monthly expenses of poor elderly people are $3,904.Therefore,the importance of OAP in Hong Kong has been greatly increased.
However,according to 2015 Policy Address,it is estimated that the retirement fund will be exhausted between 2030 and 2050. Overseas experience shows that universal retirement protection schemes are bound to result in financial problems, entailing a long and painful financial adjustment process that usually involves extension of retirement age, reduction of retirement payment or upward adjustment to contribution rate.Therefore,there is a debate on the implementation of the OAP in Hong Kong.
The aim of this report is to evaluate whether the Universal Old Age Pension Scheme(OAP) should be implemeented in Hong Kong by analyzing the pros and cons of implementing the OAP.
B.Relevant Concepts and Knowledge/Facts/Data
The proposed OAP by Professor Nelson Chow
Currently,according to a progrmme of RTHK,it shows the updating details of the proposed OAP by Professor Nelson Chow:
Age eligibility:70 (change with life expectancy)
Monthly pension (adjust according to the inflation rate): $3,230 (only 13
years)
Contribution: i)Government
-Injects $50 billion
-Contributes 100% pension every year
-Put the Old Age Allowance into the OAP
The proposed OAP by scholars
Currently,according to Legislative Council,it shows the details of the proposed OAP by scholars from the universities in HK:
Age eligibility:65
Monthly pension (adjust according to the inflation rate): $3,500
Contribution: i)Employers and Employees
-Put 2.5% MPF into the OAP
ii)Enterprises with profit more than $10 million
-Increase 1.9% profits tax and put the increased profits
tax into the OAP
Implementation cost: $47.2 billion in 2041
The proposed OAP by government
Currently,according to a progrmme of RTHK,it shows the details of the proposed OAP by the government:
Age eligibility:65
Monthly assets limit: i)Single elderly
-$80,000
ii) Two elderly households
-$125,000
Monthly pension (adjust according to the inflation rate): $3,230
Contribution: i)Employers and Employees
-2.5% of employees’ salaries
ii)Enterprises with profit more than $10 million
-0.4% profits tax
Assets
Assets include land and non-owner occupied properties;cash in hand; bank savings;investments in stocks and shares (including bonds, trust fund and accrued retirement benefits;vehicle for investment (e.g. taxi and public light bus) and its business Iicence;and gold bars and gold coins, etc. Owner occupied property,columbarium niche for self-use in future, and the cash value of insurance schemes are excluded.
Mandatory Provident Fund (MPF)
Contribution:
a)Employer and Employee
Monthly relevant income
Employer
Employee
<$7,100
5% of employees’ income
/
$7,100-$30,000
5% of employees’ income
5%
>$30,000
$1,500
$1,500
b)Self-employed person
Relevant income
Mandatory Contributions
<$7,100/mth or <$85,200/yr
/
$7,100-$30,000/mth or $85,200-360,000/yr
5%
>$30,000/mth or >360,000/yr
$1500/mth or $18,000/yr
Financial sustainability
–Moderate pension rate
–Cross-generation support
–Accrued benefits from investment returns
–Early injection of government funding to generate more investment
return
–Surplus budget
Government revenue and expenditure
Screenshot_2016-06-25-16-05-08-1-1.png
Difficulties of countries implementing the OAP
a)UK
-The total liabilities of the UK Defined Benefit pension schemes, now
tops £1 trillion, with the deficit hitting £200 billion.
-In the past the government has been forced to admit that official
estimates of the level of pension contributions had been inflated by a
statistical error
-Medical advances over the last few decades have greatly prolonged
our life span, forcing the pensions industry to support a greater
number of pensioners for longer periods.
b)US
-The Social Security trust funds for old-age benefits could be depleted
in 2034.Tax collections would then be sufficient to pay about
three-fourths of promised benefits through 2090.
-Nearly seven out of ten (69%) older Americans depend on Social
Security for more than half of their income, and one out of four (26%)
receive all of their income from Social Security
C.In-depth Explanation of the issue
Benefits brought by the OAP
1.Alleviate the poverty of elderly
According to my survey,there are 50.6% respondents support implementing the OAP due to the reason of alleviating the poverty of elderly.One in three old people in Hong Kong are living below the poverty line."The numbers will only grow with our rapidly ageing population," said Chua Hoi-wai, the council's business director. "Poverty has become a continuing trend."This shows that the problem of poverty of elderly is very serious with the increase in ageing population in HK.Hence,a long term retirement is neccessary to deal with the increasing trend of poverty of elderly.
2.Decrease the burden of social welfare
According to my survey, there are 32% respondents support implementing the OAP due to alleviating the burden of social welfare,which is the third highest reason for supporting the OAP.The expenditure on elderly social welfare which needs asset test,including Comprehensive Social Security Assistance (CSSA) Scheme and Old Age Living Allowance,account for about 10% of government expenditure.Hence,with the pension of the OAP,fewer elderly needs the support of social welfare.
Expenditure of Old Age Living Allowance:
$6.2 billion
Expenditure of CSSA:
Screenshot (2016年6月26日 3:06 下午)
Government revenue and expenditure:
Screenshot_2016-06-25-16-05-08-1-1.png
3.Protect the quality of life elderly after retirement
According to my survey, there are 45.9% respondents support implementing the OAP due to protecting the quality of life after retirement.Due to the pension from the OAP,the income of the elderly increases.Hence,elderly have more money to spend.Therefore,their material life improved.
Problems caused by the OAP
1.Unfair contribution
From the proposed OAP by government and scholars, employers and employees need to have extra contribution on the OAP. Moreover, from the case of the US,we can predict that there will be an increase in tax in order to maintain the implementation of the OAP.On the other hand,there are 55.4% respondents unwilling to put the MPF into the OAP.According to the proposed OAP by scholars,employers and employees need to put their MPF into the OAP.These show the unfair contribution which the unemployed such as housewives do not need to contribute to the OAP but employers and employees need to contribute a lot.
2.Amount of pension is too low
The average monthly expenses of poor elderly people are $3,904.However,the amount of monthly pension in the proposals cannot meet the monthly expenditure of most of the elderly.This shows that the pension is too low that makes the OAP become ineffective.
3.Adversed effects caused by low sustainability of the OAP
From the low return rate (5.5% annually) of the MPF,we can predict the OAP may not have a satisfactory returns.On the other hand,from the case of the UK,we can predict that the OAP needs to support a greater number of pensioners for longer periods due to medical expenses.In addition,the birth rate in HK is low,just 8.6 per 1000 population.In other words,the number of workforce may not able to the increasing expenditure of the OAP in the future.From the case of the UK,HK may suffer from liabilities and deficit that have great economic damage.
D.Judgment and Justification
I support to implement the Universal Old Age Pension Scheme in Hong Kong. It is based on the following aspects:
1.Alleviating the burden caused by the ageing population
It is predicted that the dependency ratio will keep increasing and become 1.8:1 in 2041.The numbers of poverty will only grow with our rapidly ageing population," said Chua Hoi-wai, the council's business director. "Poverty has become a continuing trend."Therefore,a long term retirement policy is neccessary to deal with the burden caused by ageing population.If not ,the expenditure of social welfare cases will increase rapidly that HK government may not be able to afford it.
2.All the citizen,regardless the rich and the poor,can have the right
to enjoy basic retirement protection
The OAP let all the citizen get the pension after they retire.This is more fair to HK citizen because they have contributed to the society when they are young.On the other hand,there may be accidents happen after they retire that make them lose a large amounts of money,even the rich.The OAP can give them support so that they can still maintain their material life even they do not have a job.
3.Cover the limitation of the retirement protection in HK
There is a five-pillar model defining the range of design elements to determine the pension system modalities and reform options that should be considered introduced by World Bank.HK retirement protection has inadequate support from the “first pillar” on a pay-as-you-go basis,“third-pillar” on individual savings due to high daily expenditure and “fourth pillar” on family support due to low birth rate(8.6 per 1000 population).Therefore,the OAP can overcome the weakness of the retirement protection in HK by providing a public retirement scheme.
Rebuttal
Although there are adversed effects caused by low sustainability of the OAP mentioned above,this situation can be prevented.According to the Professional Commons, there are five ways to sustain the OAP:moderate pension rate,cross-generation support,accrued benefits from investment returns,early injection of government funding to generate more investment return and surplus budget.In order to obtain an adequate surplus budget,the government can educate the public to do retirement saving plans and set up a group keep watching the implementation and the result of the OAP so that it can maintain a cross-generational support.Moreover,in order to obtain an adequate surplus budget,it is suggested to increase tariff slightly of the business sector in order to maintain the operation of the OAP as the tariff of HK is too low with a simple average applied MFN tariff 0% that would not bring huge adverse effects if HK government just makes a minor change.
Conclusion
From the above discussion, I agree to implement the OAP as soon as possible because a comprehensive retirement protection becoming more and more important and emergency.It requires a serious and fair discussion which can balance the various interests and get the consensus among the society.