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Speech by SLW at 5th Asia-Pacific Pensions Forum (English only) (with photo)
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     Following is the speech by the Secretary for Labour and Welfare, Mr Matthew Cheung Kin-chung, for his presentation on "Both sides of the story: examining some of the current challenges and debates around providing retirement protection in Hong Kong", at the 5th Asia-Pacific Pensions Forum today (April 12):

Ms Yvonne Sin (Chairman of the Hong Kong Retirement Schemes Association), Ms Pauline Vamos (Chief Executive Officer of Association of Superannuation Funds of Australia), distinguished speakers, ladies and gentlemen,

     Good afternoon. I feel honoured and privileged to have the chance of addressing this high-powered pensions forum and meeting so many leading experts, leaders and stakeholders in the field of retirement protection in the Asia-Pacific region.  

     This morning, our distinguished speakers have given us inspiring and insightful presentations on the challenges and solutions for population ageing in the Asia-Pacific region, the global trends in retirement incomes and the best practices in economies with established systems for retirement protection. At the beginning of this afternoon session, let me focus on the challenges and debates surrounding retirement protection in the Hong Kong context.

Population Challenge

     First of all, our population challenge.

     Like many developed economies, Hong Kong has a low fertility rate. The last time Hong Kong's total fertility rate (TFR) reached the replacement level of 2.1 dated back to 1979. Since then, Hong Kong's TFR dropped from 2.1 to a record-low level of 0.9 in 2003. While there has been an upward trend in recent years, the TFR still stood within the range of 1.1 to 1.3 in the past four years, way below the replacement ratio of 2.1. In other words, our TFR has been lower than the replacement ratio for more than three decades.

     A low fertility rate is not unique to Hong Kong. Other developed economies in Asia, such as Japan, Singapore and South Korea are also facing the same problem. The reasons behind the low fertility rate in Hong Kong are largely similar to those in these places - a decreasing marriage rate as well as delayed marriage and childbearing.

     On the other hand, we have a fast growing ageing population. Hong Kong people are living longer. Among the elderly people now aged 65, 60 per cent are expected to live to the age of 85 and 40 per cent to over 90. Given the longer life expectancy and low birth rate, and that the "baby-boomers" are approaching retirement age, the elderly population will continue to grow over the coming 50 years. According to our latest population projections, the elderly population aged 65 or above will more than double from 1.12 million (or 16 per cent) in 2015 to 2.49 million (or 33 per cent) in 2041, i.e. one in three will be senior citizens in 26 years' time.

     The elderly population aged 75 or above will increase from 0.55 million to 1.51 million over the same period. In contrast to the rapid growth in elderly population, the number of younger people (aged 15 to 64) is anticipated to drop significantly from 5.03 million (or 72 per cent) 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, we will have a shrinking workforce. Our labour force, after a slight increase from 3.6 million (excluding the 340 000-plus foreign domestic workers) in 2014 to 3.65 million in 2018, will taper off continuously and dip to a low of 3.11 million in 2064, i.e. a reduction of 0.5 million in 50 years. The 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. With a declining younger population and growing elderly population, as well as longer life expectancy of the elderly, it is open to question whether a retirement protection system which relies heavily on future generations to support the elderly can be financially sustainable.

Public Finance Challenge

     Let me now turn to the challenges to our public finance. An ageing population, coupled with a shrinking labour force, will obviously pose a serious challenge to our public finance.  

     With a continuously shrinking labour force, our long-term economic growth potential will inevitably come under pressure even if our labour force productivity continues to rise. Our long-term economic trend growth is expected to decelerate gradually. Such a trend will adversely affect our tax revenue and other incomes, adding pressure to public finance and increasing the risk of fiscal deficits.

     Looking at the global experience, one common phenomenon is that the trend of economic growth will generally go lower as an economy becomes increasingly mature. Hong Kong, as a mature economy, is no exception.

     Based solely on the growth of the elderly population, discounting the inflation factor and assuming that there is no service improvement, the estimated elderly expenditure in 2064 will be two to four times the current expenditure.

     According to a fiscal sustainability assessment on public finances in the report of a Working Group on Long-Term Fiscal Planning appointed by the Financial Secretary released in March 2014, the Hong Kong SAR (Special Administrative Region) Government may start facing a structural deficit problem around 2029-30 (i.e. 13 years from now) and deplete the fiscal reserves in 2041-42. It is highly likely that the Hong Kong SAR Government will have to raise taxes or introduce new taxes to tackle the deficit problem even before the introduction of any proposal to improve our retirement protection system.

Hong Kong's Current Retirement Protection System

     Currently, Hong Kong adopts a multi-pillar retirement protection system, which is in line with the model advocated by the World Bank.

     Hong Kong has four pillars serving the needs of different groups of elderly through multiple channels and under the principle of shared responsibility. Individuals save for their families' retirement through the second and third pillars, while the zero pillar provides a safety net for those who cannot support themselves financially and the fourth pillar provides heavily subsidised public services.

     The zero pillar, a multi-tiered social security system with an objective to alleviate poverty, is funded by tax revenue and benefitting 73 per cent of the elderly population.

     The second pillar mainly includes the Mandatory Provident Fund Schemes (MPF) - a privately-managed, employment-based mandatory contribution scheme covering around 2.8 million employed persons with net asset values of around HK$600 billion as at end-October last year.

     The third pillar covers voluntary savings, including MPF voluntary contributions, investments in retirement-related insurance or other financial products. It is noteworthy that 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.  

     While there are criticisms about the return and fees of MPF constituent funds, there has been a substantial rise in MPF voluntary contribution in recent years from HK$4.1 billion in 2007 (13 per cent of the total contribution) to HK$15.4 billion (23 per cent of the total contribution) in 2015.

     The fourth pillar includes highly subsidised public services, such as public housing, residential and community care, health care, transport fare concessions, family support and personal assets.

     Our retirement system advocates that those who have the ability to work should be self-reliant, and the Government's role is to provide assistance for the elderly who cannot financially support themselves.

     In other words, the working population save and plan for their and their families' retirement life through mandatory contributions to MPF schemes, voluntary savings, retirement investments and so on (i.e. the second, third and fourth pillars).

     The Government, on the other hand, makes use of tax receipts to redistribute wealth by providing a social safety net for or a supplement to the needy elderly through social security schemes (i.e. the zero pillar), and heavily subsidising services like public housing, healthcare and residential and community care to meet the daily needs of the elderly (i.e. the fourth pillar). This arrangement can better ensure the long-term sustainability of the system in the light of the ageing population and the need to maintain a simple tax regime and low tax rates currently adopted in Hong Kong.
 
     I should stress that poverty alleviation, elderly care and support for the disadvantaged are key priorities of the current-term Government and this is clearly illustrated by the notable increase in the welfare budget in recent years. As compared with 2012-13 which marked the commencement of the current five-year term of Government, the welfare budget has risen by a substantial 55 per cent to 2016-17, significantly surpassing the overall increase of 25 per cent in the Government's total recurrent expenditure. Welfare spending for the current financial year accounts for 19 per cent of the Government recurrent expenditure, just after education which takes up the lion's share of 21 per cent.

     Notwithstanding this, we recognise that there is room for further enhancing the current four retirement protection pillars, and that the community should put in more public resources to provide more comprehensive retirement protection for our elderly. On the other hand, any enhancement proposal has to be financially affordable and sustainable in terms of public finance, taking into account our future demographic changes, in particular population ageing and a shrinking labour force.

Retirement Protection-Forging Ahead

     Against this backdrop, we have prepared a weighty document, "Retirement Protection-Forging Ahead", and allowed for a public consultation period of six months to stimulate and cultivate an informed public debate on an issue which has a far-reaching impact on our future generations.

     It is approaching four months since we issued the public consultation document. Most of the discussion so far has focused on the heated debates of the two principles of "regardless of rich or poor" and "those with financial needs" and whether we should introduce a universal pension.

Debate : "Regardless of Rich or Poor" Vs "Those with Financial Needs"

     Advocates of a universal pension or adoption of the "regardless of rich or poor" principle generally consider that retirement protection is a basic right, not a welfare benefit, thus no means tests should be imposed.   

     Under this principle, elderly people can live with more dignity in their old age. They do not have to run down their assets to a very low level in order to pass the means test before receiving social welfare assistance. It provides basic income protection, thus offering a stronger sense of security and better assistance in managing longevity risk.

     On the other hand, those supporting the "those with financial needs" principle object to offering uniform assistance to all elderly people without a means test. They consider that precious public resources should be targeted towards the needy elderly in order to maintain a reasonable and sustainable system to help those who cannot provide for themselves, while upholding Hong Kong's cherished core values of self-reliance and hard work on the one hand, and minimising adverse impact on the future economic development as well as the sustainability of both public finances and retirement protection on the other.

     On coverage, the "regardless of rich or poor" principle can bring immediate benefits to all elderly people and take care of those low-income and non-working elderly, e.g. housewives, who are not adequately protected by other pillars. This also has the beauty of simplicity in management, thus saving administrative costs; and equity, thereby promoting social harmony. The stable income can also provide the elderly with a sense of comfort and security as well as peace of mind.

     On the other hand, the "regardless of rich or poor" principle will lead to a resources mismatch. It will require a substantial rise in overall expenditure and significantly limit the financial capacity to enhance the assistance to those elderly in need.   

The Government's Position

     The Hong Kong SAR Government has reservations on the "regardless of rich or poor" principle and a universal pension scheme. And we have made this clear in the public consultation document. Hong Kong is facing an ageing population with a very low fertility rate, shrinking workforce and rising public expectations for better services and governance. We will naturally face mounting pressure on public finances and service provision and will have to carefully consider how best to care for those who are frail and not self-reliant. We need to strike a right balance between responsiveness to popular demand and responsibility for properly managing our public finances. As responsible policymakers, we believe that we should adopt a prudent and targeted approach by identifying the specific groups that we help whilst being responsive to public concerns and needs.

     We appreciate the good intention and the positive social impact of government schemes implemented on a universal basis. Indeed, some of our existing schemes are already on a universal basis and, to a certain extent, provide basic protection and support for the elderly, e.g. the Old Age Allowance (OAA), Public Transport Concession Scheme, Health Care Voucher for the Elderly and others. On the other hand, we need to take heed of their financial sustainability and affordability, particularly in the face of the population and public finance challenges that I have outlined in previous slides. In this regard, it is noteworthy that the annual expenditure of the OAA is around HK$3.2 billion while the latter two are about HK$1 billion each as compared with HK$47.9 billion for a "demo-grant", a universal option.

     It is questionable whether we should channel all community resources to provide a demo-grant. This will inevitably reduce the financial capacity of the Government in enhancing other essential elderly services, e.g. healthcare services for the elderly and long-term care for the elderly for which the total annual expenditures in 2015-16 are around HK$25.8 billion and HK$6.8 billion respectively, way below that of the demo-grant.

     Instead of arguing about the concept in a vacuum, we need to focus on developing feasible options covering various pillars which are complementary to each other. This is conducive to cultivating consensus and facilitating constructive discussion.

     I am glad to note that public discussion has gradually been moving in a healthier and more constructive direction. More and more discussions have been focused on developing options with analysis on their financial sustainability.

Points to Consider on the Way Forward

Our Mission

     Our mission has always been to find a pragmatic balance amongst competing interests that will serve the greatest common good. On retirement protection, that common good is to ensure that our growing number of elderly could live with adequate financial means, receive quality housing, medical and care services and enjoy family support through a comprehensive, adequate, sustainable, affordable and robust retirement protection system. In short, we need to tackle our demographic and fiscal challenges while maintaining Hong Kong's economic competiveness.

     With this mission in mind, I would like to raise a few points that we may deliberate further and build on in mapping out our way forward.  

Zero Pillar

     Firstly, are the two principles, i.e. "regardless of rich and poor" and "those with financial needs", mutually exclusive in practice?

     At present, under our social security system, i.e. zero pillar, we already have three tiers of financial assistance, including a non-means-tested OAA, HK$1 290 per month at present, to which all elderly aged 70 or above are entitled irrespective of their financial position. Hence, this is de facto universal in nature.

     For those elderly aged 65 or above with some financial needs, an Old Age Living Allowance (OALA), at HK$2 495 per month at present, which requires a means-test of a lower threshold, was introduced in 2013 and covered some 430 000 senior citizens or about 40 per cent of the elderly population.

     For those who are unable to support themselves, the Comprehensive Social Security Assistance Scheme (CSSA) which requires a more stringent means-test, is in place to provide a safety net so as to meet their basic needs.

     Our established social security system under the zero pillar has already allowed for the adoption of a hybrid mode, i.e. OAA regardless of rich and poor and OALA and CSSA for those with varying financial needs, to provide some sort of income protection to the elderly. These three allowances, together with a non-means-tested Disability Allowance for those elderly with severe disabilities, are benefitting 73 per cent of the elderly population.   

     To strengthen the poverty alleviation function of this pillar and provide suitable income protection for the elderly, there is a school of thought that the three-tier system could be enhanced, taking into account financial sustainability and affordability and the complementary elements of different pillars. To develop concrete options under the established system, it has been suggested that consideration may be given to various parameters, such as the eligibility criteria in terms of age, life expectancy, asset limits, etc, and the subsidy amount by asking questions such as:

- At what level should the asset limit be set?
- What subsidy level will be regarded as adequate?
- How should life expectancy, age and the varying needs of elderly be taken into account in the eligibility criteria of different allowances?
  
     Special attention should also be paid to those below the poverty line who still claim to have financial needs after policy intervention. According to a survey by our Census and Statistics Department, excluding those who had already been covered by the CSSA and those who claimed they did not have financial needs, there remain about
100 000 elderly who were below the poverty line (simply measured on the basis of income without taking into account asset).

Other Pillars

     As I have said earlier, Hong Kong adopts a multi-pillar approach to provide a comprehensive retirement protection for elderly of different social strata, needs and financial means.

     Retirement protection covers different aspects and cannot be taken care of by one single pillar. Focusing discussion on whether or not to have a universal pension is not comprehensive and fails to take account of the complementary elements of different pillars. If other pillars, e.g. the MPF and voluntary savings, can assume stronger retirement functions, this can, in the long run, help reduce the retirees' reliance on social security or a demo-grant or a universal pension, thus effectively alleviating the pressure imposed by an ageing population on public finances and maintaining sustainability of the whole system.

     Apart from income protection, the discussion should also cover protection in other aspects. To many elderly people, having access to appropriate medical or long-term care services when they are frail or ill is their prime concern.   

     Elderly people are not a homogenous group. At present, we have 1.12 million people aged 65 or above. Their individual needs vary. As education attainment level improves, elderly people in future generations should be generally financially better off. In addition, as the retirement protection pillars such as MPF and voluntary savings mature, the number of elderly people with no employment income but holding certain assets will be on the rise. Should the community consider assisting these elderly in converting their assets into a regular stream of income so that they may have more resources at their disposal after retirement?

     We appreciate that various pillars have room for improvement to provide better retirement protection, especially those not well covered by the existing system, e.g. elderly who still have financial needs after policy intervention, non-working housewives, low income groups with retirement benefits affected by offsetting, and elderly who are asset rich and income poor to face longevity risk.

     Hence, there is a need for the consultation to cover all pillars and we encourage the public to put forward proposals in other aspects. The consultation paper has given a few examples under each pillar to stimulate fruitful and pragmatic discussion. For example, how to enhance the retirement protection function of the MPF, exploring whether tax incentives should be provided to encourage working people to make voluntary MPF contributions for themselves and their spouses, considering the development of other financial instruments, such as a public annuity scheme, and a longer-term bond (silver bond) to assist elderly people in transforming their assets into a regular income, and exploring how to encourage more family support for the elderly through public policies.

     The Hong Kong SAR Government has already set aside HK$50 billion initially, demonstrating the Government's firm commitment to improving our retirement system. For this very important consultation exercise, we encourage all members of the public to have a rational, informed and evidence-based discussion and adopt a collaborative and pragmatic approach in developing options that are comprehensive, financially sustainable, affordable, adequate and robust, as advocated by the World Bank.

     Before I close, I should congratulate the Association of Superannuation Funds of Australia and the Hong Kong Retirement Schemes Association for bringing together such a distinguished group of speakers from the Asia-Pacific Region. At a time when Hong Kong is seeking to draw on the best practices and successful experience elsewhere in charting our way forward on enhancing our retirement protection system, I am sure that they will provide us with enlightening and inspiring advice as well as good food for thought.

     On this note, I wish you all a fruitful seminar and an enjoyable stay in Hong Kong. Thank you!

Ends/Tuesday, April 12, 2016
Issued at HKT 16:50

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