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Tuesday, January 27, 2015, 09:00

Funding remains a headache for pensions

By Kahon Chan in Hong Kong

The debate on Hong Kong’s future pension scheme is likely to continue despite the fact that the government has made a commitment to offer HK$50 billion to help the city’s growing number of old-age pensioners.

The Legislative Council panel today (Tuesday) is expected to discuss how Hong Kong can use the HK$50 billion earmarked by the government to help fund the future cost of retirement.

Agreeing that “protection for needy citizens after retirement should be improved”, Chief Executive Leung Chun-ying allocated the amount in the recent Policy Address to show his government’s commitment to a retirement protection scheme. The government has been contemplating different options to meet the future retirement needs of the city’s growing elderly population.

On Monday, Secretary for Labour and Welfare Matthew Cheung Kin-chung told lawmakers the Commission on Poverty would also run a public consultation on the future funding of retirement incomes from late summer. Cheung expects the commission to offer some concrete suggestions.

These discussions will be based on a study led by Nelson Chow Wing-sun, a welfare expert at the University of Hong Kong. After comparing different proposals, Chow’s team advised the city to opt for a universal pension scheme. This would require monthly contributions from employees and employers.

But to Chow’s disappointment, Leung said his government was not prepared to adopt the universal plan - although the idea has not been completely abandoned.

Chow’s plan had much in common with a scheme advocated by the Alliance for Universal Pensions. Its organizer, Au Yeung Kwun-tung, said he was puzzled by the CE’s suggestion that the funding pool for their scheme would dry up before 2050 — as Chow’s study had not covered the period after 2041.

Hong Kong senior citizens currently receive financial support from the government through the non-means-tested Old Age Allowance, also known as “fruit money” and from disability allowances. The Old Age Living Allowance and Comprehensive Social Security Assistance require a certain level of means testing of claimants’ assets.

The alliance had hoped the universal pension scheme could replace most of these current schemes. Au Yeung said that before abandoning the idea of a universal scheme, the government must address how it would fund the present system in the future.

Should existing measures stay in place until 2041, their cost would soar from under HK$20 billion in 2013 to nearly HK$45 billion. Tax contributions will also fall – meaning that every seven workers will support five citizens aged over 65 by 2041. (In 2011, every 10 workers supported less than three older people).

The workforce is expected to begin to decline in size in 2018.

Marcellus Wong Yui-keung, a council member of the Taxation Institute of Hong Kong, said tax revenues would probably be unable to support the aging population in future. Therefore, it was vital to find the best ways to close the funding gap.

Chou Kee-lee, a welfare expert at the Hong Kong Institute of Education, said he also supported the alliance’s goals. But he is not an enthusiastic supporter of a “universal” scheme. His current study shows that existing schemes, following some changes, would still prove to be cost-effective. They could still ensure older people lived above the poverty line, added Chou.

Advocates of universal pensions often argue such schemes deliver extra benefits — such as improving social harmony.

Chou, who agrees with the government that any future pension strategy should focus on those retirees most in need, believes other suggestions are illogical.

Chou said a universal scheme would be highly likely to fuel conflict between struggling younger workers and soon-to-be retired baby boomers. It was unwise to force young workers to underwrite other people’s pensions by creating an illusion that they will also be rewarded — as this could not be guaranteed.
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