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: chackkiewong@cuhk.edu.hk

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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)

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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

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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

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Acc

rued

Ben

efits

Years from Now

High Investment Return Scenario (7% per annum)

Medium Investment Return Scenario (4% per annum)

Low Investment Return Scenario (1% per annum) $2,575,000

$1,266,000

$666,000

Beginning balance: $151,000

$1,186,000

$740,000

$477,000

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20 years from now

Accrued benefits

derived from beginning balance

Accrued benefits

derived from new

contributions

Total accrued benefits

High investment return

$610,000 $576,000 $1,186,000

Medium investment return

$336,000 $405,000 $740,000

Low investment return

$184,000 $292,000 $477,000

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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)

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1. Hong Kong’s MPF past ten years since 2000 – 5.5% (minus management fees and 0.7% annual inflation rate in the same period).

2. Between 1994 and January 2011, the average annual return of HK Monetary Authority’s reserve was 5.9% (75% bond/25% stock)

3. 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).

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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

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◦ 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)

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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

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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

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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

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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

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• 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

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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

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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

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