Speech by SLW at OECD/IOPS Global Forum on Private Pensions (English only)
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Dr Edward Odundo (President of IOPS and Chief Executive Officer of the Retirement Benefits Authority of Kenya), Mr André Laboul (Senior Counsellor to the Directorate for Financial and Enterprise Affairs, Special Financial Advisor to the G20 Sherpa of OECD and Secretary General of IOPS), David (Chairman of the Mandatory Provident Fund Schemes Authority (MPFA), Dr David Wong), Darren (Chief Regulation and Policy Officer and Executive Director of the MPFA, Mr Darren McShane), Yvonne (Immediate Past Chairman of the Hong Kong Retirement Schemes Association, Ms Yvonne Sin), distinguished guests, ladies and gentlemen,
I feel deeply honoured to be invited to address this high-powered Global Forum on Private Pensions and to kick off the Roundtable discussion on the theme "Hong Kong focus on pensions".
At the heart of many pension system reforms is the issue of a rapidly ageing population, making it imperative for societies to protect people against longevity risks. Across the world, the pervasive demographic shift of ageing affects a wide spectrum of policy areas, from pensions, healthcare, housing provision, labour productivity to economic growth and intergenerational harmony. To best prepare people for a fast greying society therefore requires holistic policy planning that includes but goes far beyond the issue of building a sustainable and adequate retirement protection system.
This is why, besides touching on the Hong Kong Special Administrative Region (HKSAR) Government's latest thinking on our ongoing review on retirement protection, I will also discuss our overall strategies in tackling fairly and squarely the multi-faceted challenges that our society will have to face as the population ages. We are not shying away from this hugely complex and important issue. We will take the bull by the horns.
As we all know, the world is fast greying and Hong Kong is no exception to the trend. Indeed, Hong Kong people are living longer. The average life expectancy for Hong Kong's male is 81.2 whilst that for female is 87.3. These figures are projected to rise to 87 and 92.5 respectively by 2064. Among the elderly now aged 65, 60 per cent are expected to live to the age of 85 and 40 per cent to over 90. Given our longer life expectancy and low birth rate plus the fact that the "baby boomers" are approaching retirement age, Hong Kong's elderly population will continue to grow over the next 50 years. Our elderly population (senior citizen here is defined as one aged 65 or above) will more than double from 1.12 million (or 16 per cent of the total population) in 2015 to 2.49 million (or 33 per cent) in 2041. In other words, one in three will be senior citizens in 25 years' time. Moreover, the elderly population aged 75 or above will increase from 0.55 million to 1.51 million over the same period. On the contrary, the size of the population aged between 15 and 64 is projected to drop significantly from 5.03 million (or 72 per cent of the total population) in 2015 to 4.44 million (or 58 per cent) in 2041 and further down to 3.92 million (or 55 per cent) in 2064.
Along with the drastic reduction in the younger age group, Hong Kong's workforce will also shrink. Our labour force will rise slightly from 3.6 million (excluding the 340 000-plus foreign domestic workers) in 2014 to 3.65 million in 2018 but then taper off continuously to a low of 3.11 million in 2064. In other words, our labour force will dwindle by half a million in 50 years' time. Our labour force participation rate (excluding foreign domestic helpers) will decrease from 59.3 per cent in 2014 to 48.6 per cent in 2064. As a result, the dependency ratio will worsen quickly. The number of children and elderly people to be supported per 1 000 people of working age will increase from 371 in 2014 to 831 in 2064.
These rather stark demographic figures tell us that Hong Kong is confronted with many of the pension system challenges of the 21st century. With an ageing population, an anticipated shrinking workforce, an increasing dependency ratio and rising public expectations for better services and governance, the HKSAR Government will naturally face mounting pressure in terms of public finances and service provision.
To prepare for an ageing society and build an elderly friendly culture, the HKSAR Government is fully committed to improving the well-being of our elderly. Recurrent government expenditure on social welfare, social security payment and medical services for our senior citizens is estimated to reach a hefty $67.3 billion (US$8.63 billion) in 2016-17, or close to 20 per cent of total government recurrent expenditure.
I would like to elaborate on our multi-pillar retirement protection model. Under Pillar Zero or the non-contributory social security pillar, a significant 73 per cent of our 1.12 million elderly population are covered by the social security system. This comprises the non-means-tested Old Age Allowance and Disability Allowance as well as the means-tested Old Age Living Allowance and Comprehensive Social Security Assistance. Social security payment to the elderly accounts for 8 per cent of total government recurrent expenditure. As for Pillar Four (which covers, among other things, the provision of public services), it is noteworthy that over half of Hong Kong's elderly live in heavily subsidised public housing. What is more, our healthcare service is fully accessible to the public at the subsidised rate of 97 per cent. The Government's heavy involvement in these two pillars speaks volumes about the paramount importance that we attach to assisting different groups of elderly people in need.
The Mandatory Provident Fund (MPF) Scheme forms the core of Pillar Two of our retirement protection system. It is a privately managed, employment-based mandatory defined contribution scheme and currently covers around 2.8 million employed persons with net asset value including contributions and investment returns reaching $646.6 billion (US$82.9 billion) as at August 2016. By design, the MPF is perfectly in line with the global development trend which has been shifting from a defined benefit system to a defined contribution one to maintain its financial sustainability in face of an ageing population.
Whilst the MPF has been playing an important role in Hong Kong's retirement protection system, we are mindful that members of the public are concerned about the adequacy of MPF in providing sufficient retirement protection, its investment performance and fee levels, as well as the "offsetting" arrangement. Let me stress that both the HKSAR Government and the Mandatory Provident Fund Schemes Authority are committed to refining the MPF system. Apart from streamlining the administrative and operational procedures of MPF to reduce costs, the MPF Default Investment Strategy (DIS) will come into operation with effect from April 1, 2017. This fee-controlled instrument directly addresses the concerns of high fees and the difficulty in making investment choices' under MPF, and will promote competition amongst service providers and bring about further fee reduction across the board.
Pillar Three covers voluntary savings, including MPF voluntary contributions, investments in retirement-related insurance or other financial products. Currently, only 46 per cent of Hong Kong's working population needs to pay salaries tax and the average tax rate is only 8 per cent. Our low tax regime provides a favourable environment for voluntary savings and investments. In this context, it is important to note that MPF voluntary contributions have been rising substantially from $4.1 billion (US$ 526 million) (or 13 per cent of total contributions) in 2007 to $15.4 billion (US$1.97 billion) (or 23 per cent of total contributions) in 2015.
Against this backdrop, the Government has just completed a major public consultation on the crucially important but highly controversial issue of retirement protection. Views are sharply divided between whether Hong Kong should go for a universal scheme which provides a uniform amount of retirement allowance for all senior citizens, regardless of rich or poor, or whether we should go for a targeted approach in order to focus limited public resources on those in need.
Whilst we are still analysing the feedback from the public consultation and pondering the best way forward, our ultimate goal must be to build a comprehensive, adequate, sustainable, affordable and robust retirement protection system. Consistent with the Government's philosophy, we hope that our senior citizens in need can be more adequately protected in their twilight years, the able bodied are given room for self-reliance through continuous employment and savings, and the traditional Chinese values of mutual help and family support can be encouraged.
It follows that we should seek to strengthen and consolidate the existing pillars of the current multi-pronged system and enhance their retirement protection functions. To address elderly poverty, we may need to strengthen the poverty alleviation function of Pillar Zero through enhancing the current social security system. To fortify the retirement protection function of the MPF, we may need to explore whether tax incentives should be provided to encourage working people to make voluntary MPF contributions for themselves and their spouses. To assist the elderly in transforming their assets into a regular income, we need to consider the development of different financial instruments, such as a public annuity scheme and a longer-term bond. To encourage the traditional Chinese values of mutual help, we need to explore the best government measures which are conducive to promoting family support.
On the question of assisting our senior citizens to generate steady income, the HKSAR Government issued Hong Kong's first batch of "silver bonds" targeted at elderly clients in August this year. Moreover, since July 2011, the Hong Kong Mortgage Corporation launched the Reverse Mortgage Programme which provides those aged 60 or above with an additional financial planning option to enhance their quality of life and generate income.
To underline our commitment and determination in providing better retirement protection for those in need, the HKSAR Government has set aside $50 billion (US$6.4 billion) to meet future needs arising from the public consultation exercise on the way ahead on retirement protection. We are consciously and proactively tackling the thorny and contentious issue of the MPF "offsetting" arrangement which allows employers to use their MPF accrued benefits to offset severance payment or long service payment stipulated under the Employment Ordinance. Between July 2001 and June 2016, MPF benefits withdrawn for "offsetting" amounted to $30 billion (US$3.85 billion), representing 28 per cent of the total benefits withdrawn during that period. From the perspective of retirement protection function, the "offsetting" arrangement inevitably gives rise to benefits leakage from the MPF system, thus undermining its retirement protection function. This is an issue that we need to address. We fully understand the unique historical background that the "offsetting" arrangement is very much a quid pro quo for introducing the MPF and that "offsetting" of the employer's provident fund payment against severance or long service payment was allowed well before the birth of MPF. We are in the process of developing possible options and will do our best in striking a proper and reasonable balance between the interests of employees and the affordability of employers, especially the many small and medium enterprises which form the bulk of our corporations. I must admit that this is a hard nut to crack as well as a delicate and difficult balancing act. But we will strive to identify a viable formula.
The HKSAR Government's overarching strategies of population ageing go beyond a comprehensive review of our retirement protection system. To encourage active, positive and healthy ageing, we have launched the Government Public Transport Fare Concession Scheme for the Elderly and Eligible Persons with Disabilities since June 2012. Under the scheme, senior citizens can travel on the network of public transport at a concessionary fare of $2 (US$0.26) per trip anytime. This scheme has proved highly popular and effective in promoting active ageing. We are also encouraging all Hong Kong's 18 districts to become accredited members of the World Health Organization's Global Network of Age-friendly Cities and Communities. Several districts have already attained this status. This marks an important step in making Hong Kong an elderly-friendly city. To enable our senior citizens to pursue life-long learning in a school setting and lead a more fulfilled life, we have launched the Elder Academy Scheme since 2007. There are now 130 Elder Academies in Hong Kong.
One of the most effective ways to assist people to maintain a corresponding pre-retirement living standard through savings is by offering options of continuous employment. In this respect, we are promoting elderly-friendly employment practices and have put in place training programmes and employment services for our "young olds" or early retirees to re-enter the workforce. As Hong Kong's largest employer with more than 160 000 employees, the HKSAR Government has recently extended the retirement age of all newly joined civil servants from 60 to 65. This serves as a shining example for other employers to follow.
In finding and charting our way forward in preparing Hong Kong for a fast ageing community, we will leave no stone unturned in building community consensus and devising pragmatic, sustainable and viable solutions. This is a mammoth task but we believe that we shall overcome.
On this note, I wish the Forum every success and all of you a fruitful and stimulating discussion. Thank you.
Ends/Wednesday, November 9, 2016
Issued at HKT 17:22
Issued at HKT 17:22
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