[SCMP Column] Saving for Old Age

January 09, 2016

Alarm bells ring the second you pick up the Government’s latest consultation document on Retirement Protection.

First, there is the title itself: “Retirement Protection: Forging Ahead”. Is someone in Government trying to be funny? This is a topic that has been masticated by, and passed between, different parts of government for literally decades. Of one thing we can be sure: government is not going to “forge” anywhere. More likely, it will do what it always does – edge nervously sideways. It is nevertheless promising to seek closure on this issue in 2016. Let’s see.

But a more important alarum comes from the authorship – the Commission on Poverty. Pension schemes and poverty alleviation are distinct issues that cannot be examined together without risk of huge confusion. True, people subsisting on miserly or non-existent pensions are inevitably going to be poor, but policy-making is going to be horribly muddled if those tasked to build effective pension arrangements at the same time tackle poverty alleviation – and vice versa.

Old age brings convergence of three separate challenges or questions: first, have you saved enough in your working life to be confident you have sufficient funds to support you through the twilight decades? Second, are you protected if you get sick when you get older. And third, what arrangements are in place for the elderly poor. The three are bundled but separate challenges, and from a policy point of view they have to be tackled separately.

Putting in place a good pension regime should be all about forced saving, and is based on simple arithmetic: if you begin work at 20 and retire aged 65, and live until you are 85, then a good pension regime will ensure that you are able to save enough during your 45 working years to support yourself (and your family) through 20 years of retirement.

The crude arithmetic is simple, but almost always terrifying. If you earn the average Hong Kong household income of HK$24,000 a month, and want to maintain that level of income after you retire, then your savings at retirement will need to be HK$24,000 times 12 months times 20 years – which comes to almost $5.8 million. That is a number that makes most families turn white: it means that you have to save HK$128,000 a year, or just under over HK$10,000 a month for the whole of your working life. What family do you know that earns HK$24,000 a month and can afford to save almost half of it?

Of course, compound interest on savings over 45 years can ease the pain. So can retiring later than 65. But the arithmetic is still daunting.
One of my main complaints about our Mandatory Provident Fund Scheme introduced in 2000 is that it created a false sense of comfort about the savings challenge. As people joined up to the scheme, so they were given a false sense of confidence that retirement needs were now taken care of. For the more naïve among us, the challenge of taking personal responsibility for saving for old age was lifted from our shoulders. They forgot the basic arithmetic: under present MPF arrangements (5% of salary from yourself, matched by the employer, up to HK$1,500 apiece) that family earning HK$24,000 a month would have MPF savings of just HK$28,800 a year – less than a quarter of the amount needed to maintain the family’s income level in retirement.

So, problem number one as we review our pension arrangements is the hopeless inadequacy of our MPF scheme. In Singapore, where a more realistic forced saving regime has been put in place, monthly contributions amount to 20% of a worker’s salary, with an additional 17% from the employer – a total of 37% of a person’s salary every month. The arithmetic may be ugly, but there is no escaping it.
Poverty alleviation in Hong Kong – for sure the responsibility of the Poverty Commission – is obviously a critical matter, but is separate from retirement protection. For people focused on old age, it only becomes relevant when savings fail – either because your income is too low, or you have frittered it on wine and women and horses, or because you have spent time unemployed, or because sickness has burdened you with unplanned costs.

My own undoubtedly contrarian view is that the public demand for a universal government pension to replace the skeletal MPF is well meaning but sentimental, misconceived and unlikely to solve the problem it is being designed to tackle. The HK$5,000 being considered might stop people starving, but it will deliver neither comfort nor dignity for our elderly. For this, we need better wages, a better forced saving regime, and a poverty alleviation plan to bring means-tested help to the truly poor. That means tackling our pathetically inadequate MPF.

From this conclusion, sensible policy recommendations cascade naturally, and have been well summarized by the Business Professionals Federation in an excellent paper published last August (full disclosure: I was involved in the work of the BPF Task Force on retirement protection).  First and foremost, upgrade the MPF. Why not 10% apiece for employees and employers? That falls short of the Singapore contribution level, but would be a more credible savings regime. If an employee’s pay falls short of a minimum level, then a government top-up arrangement for his or her share should kick in.

Second, remove the scandalous offset arrangement being exploited by employers to claw back severance and long service plans.
Third, encourage delayed retirement, and delayed access to the MPF savings pool.

And set up a “Long Term Care Commission” to review our approach to elderly lifestyle support, focused on mitigating the infirmities that inevitably set in – ranging from wellness support, services for people with disabilities, and arrangements that enable people to live at home and among their loved ones for as long as possible.

Above all else, let’s make a decision. Please don’t let the government do what it likes to do best - kick the can down the road.
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