Research | Social mobility and wellbeing | 2016-01-26

Retirement: Your Will, Your Way

The Bauhinia Foundation Research Centre (the Centre) released a study on ‘Retirement: Your Will, Your Way’ today, aiming to build up robust retirement protection in two ways: by setting up a ‘Public Pension’ and by refining the Mandatory Provident Fund (MPF) system. The Centre concurs with the saying ‘Different people, different needs’. Therefore, with a view to addressing these various needs effectively, the Centre has offered extensive recommendations on enhancing the current retirement protection system.

The ageing population and elderly poverty are major challenges facing Hong Kong. The latest figures from the Census and Statistics Department show that in 2014, the number of people aged 65 or above reached 1.07 million and 30% of them lived below the poverty line. At present, the elderly dependency ratio is 4.5:1. However, it has been estimated that in twenty years this ratio will drop significantly, to 2:1.

The Centre’s Vice-chairman and Convenor of the study Mr Lau Ming-wai said, “The shrinking workforce in Hong Kong, induced by demographic changes, cannot be resolved over a short period of time. Unfortunately, instruments such as tax-financed social protection from the Government and the MPF system contributed by both employers and employees are insufficient to enable our future generations to enjoy a worry-free retirement life.”

“We encourage shared responsibilities amongst the Government, employers and employees. We also emphasise the importance of allocating limited public resources reasonably, and we encourage people to start their retirement planning early. In the long run, we perceive that sustainable retirement protection system should not pose a risk to public finances, as this will marginalise the competitiveness of Hong Kong,” Mr Lau continued.

After conducting in-depth research on the benefits and drawbacks of the existing retirement protection measures in Hong Kong and making references to overseas experiences, the Centre has explored directions that can better accommodate the different needs of different individuals. A comprehensive revision of the retirement protection system is proposed based on four major recommendations:  

1. Review and relax the approval threshold of elderly CSSA applications

Presently, elderly persons who have financial needs can apply for the Comprehensive Social Security Assistance (CSSA) Scheme, and will receive an average amount of $5,500 per month. If their children are unwilling to sign a statement affirming non-provision of financial support (the statement), elderly persons who apply for CSSA on an individual basis will be declined.

The Centre suggests the Government to consider exempting the requirement under CSSA for the children of elderly persons to sign a non-provision statement. This will allow the elderly to apply for CSSA on an individual basis. When assessing the amount of CSSA payable to the elderly, the Administration should also consider disregarding part of the cash assistance from their children, which would encourage these children to support their parents and improve the quality of life of the elderly.

2. Set up a ‘Public Pension’ and provide financial aid according to economic criteria

At present, seniors who are non-CSSA recipients with financial difficulties may apply for Old Age Living Allowance (OALA) and receive $2,390 per month. Those aged 70 or above will receive a non-means-tested Old Age Allowance (OAA, commonly known as ‘fruit money’) of $1,235 monthly.

The Centre recommends the Government to set up a ‘Public Pension’ to replace the existing OALA and OAA. This will better support elders with financial needs. A public pension payment of $3,200 per month will be paid to those aged 65 or above, with monthly income not more than $5,000 and net assets not more than $50,000. The amount of ‘Public Pension’ will be adjusted according to the income and asset levels of the elderly, which will be deducted by $0.333 and $0.005 for every $1 exceeding the income and asset limits. The lower amount generated will be considered as the eligible payment. A floor amount will be set at $1,235, i.e. the amount of the existing fruit money.

Citing an elderly person with a monthly income of $6,200 and net assets of $90,000 as an example, this applicant will receive $2,800 and $3,000 respectively after the income and assets tests. As the lower amount generated will become the eligible payment, the applicant in this case will receive $2,800.

Under the Centre’s newly proposed scheme, an elderly person who originally receives $2,390 from OALA may receive a maximum of $3,200, which will vary depending on income and assets. Some of the elderly receiving fruit money can also enjoy better financial support. The study reveals that ‘Public Pension’ would significantly enhance support to the elderly. It is estimated that over 60% of the elderly would benefit from the said pension.

Mr Lau Ming-wai added, “If the Government is willing to inject $10 billion as one-off seed money on top of the current welfare expenditure on the elderly, along with an additional 1% contribution by both employer and employee based on employee’s income, the balance of ‘Public Pension’ will remain positive in the next 50 years. The fund would reach $200 billion in 2064, making the scheme sustainable and affordable.”

3. Abolish MPF offsetting mechanism and set up a matching grant

MPF plays a crucial role in retirement protection. However, the accrued benefits for an employee might be reduced by one-half under the current offsetting mechanism. The Centre recommends the Government to abolish the MPF offsetting mechanism and strengthen the retirement protection function of MPF.

The Government could specify an effective date on the abolition of the offsetting mechanism, allowing employers to use the accrued benefits derived from mandatory contributions to offset the provision. After the new policy is enforced, employers’ contributions cannot be used for the offsetting provision in the MPF. This arrangement could lessen the financial pressure brought to bear on employers and enable employees to enjoy better protection.

The study explicates that the scale of voluntary contribution is very limited. Between 2010 and 2015, voluntary contribution only accounted for around 13% of total contribution. “The Government should set up a matching grant to encourage individual voluntary contribution and educate people to accumulate sufficient retirement savings. This can lessen the burden of public finances. In order to assist lower income earners, the matching ratios could be set differently based on their income levels,” the Centre’s Director Lawrence Lee suggested.

Presuming a 25-year-old employee who earns $10,000 per month is willing to contribute $4,000 voluntarily per year, together with a 50% matching grant from the Government ($2,000), the employee’s monthly retirement income after 40 years would be increased by 50%, from $2,900 to $4,300.

The Centre also recommends the Mandatory Provident Fund Schemes Authority (MPFA) to proactively improve the efficiency of the administration processes. This can be accomplished by setting up a centralised electronic platform and database to reduce administrative expenses. MPFA should also implement a MPF full portability arrangement to allow employees to manage their own funds, thereby pushing trustees to lower their fund management fees and enhancing the quality of services and products.

4. Promote annuity market and enhance Reverse Mortgage Programme

While retirement savings are important, financial planning is equally important. The Government should improve public education so that more people understand the merits of various annuity plans and means of managing longevity risk. The Government can consider offering financial incentives to motivate seniors to purchase life annuity plans entrusted to private companies or the Government, ensuring the elderly can receive a stable monthly annuity payment.

In the interest of engaging more of the elderly to convert their assets into regular income, the Centre believes that relaxing the collateral requirements of the Reverse Mortgage Programme could help promote the scheme. For instance, the Authority could accept subsidised housing with unpaid premium as collateral. The Authority should also introduce more diversified plans to meet different needs of individual borrowers.

Director Lawrence Lee concluded, “Improving the lives of the elderly and the disadvantaged is a common goal of our society. Standing shoulder to shoulder, we can create a better retirement protection system. Our ability to achieve this goal hinges on our willingness to share responsibilities.”

For more information, please visit the thematic site on retirement protection.


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