Sustainable pensions andretirement schemes inHong KongReceived' 1st November, 2004

Nelson Chowis the Chair Professor at the Department of Social Work and Social Administration, the University of Hong Kong Hespecialises in the comparative study of social security systems in the East and South East Asian region.

Kee-Lee Chouis Research Assistant Professor at Sau Po Centre on Ageing, the University of Hong Kong. He has conducted research onthe mental health of older adults, physical exercise among elderly people and social security, as well as long-term care policy

Abstract Over the next 20 years, Hong Kong will face a rapidly ageing population asthe number of older adults aged 65 or above increases to approximately 2.26m by 2033(26.8 per cent of the total population). Hong Kong has three pillars of old age incomesecurity: the Mandatory Provident Fund, personal savings and the financial support thatis given to the elderly by adult children. This paper examines how these three pillarswould serve their individual purposes and, as a whole, what can be done to sustainretirement protection for the older adults in Hong Kong in coming decades.

Keywords: retirement protection; sustainable pensions; older adults; Hong Kong

Nelson Chow

The University of Hong

Kong, Department of Social

Work and Social

Administration,

Pokfulam Road,

Hong Kong, P. R. China

Tel- +852 2859 2084,

Fax +852 2858 7604,

e-mail

hmwcws@hkucc hku hk

IntroductionA longer life expectancy coupled with adramatic decline in the birth rate hasresulted in a rapidly aging population inmost parts of the world.1 Hong Kong isno exception to this global populationtransformation. The number of people of65 or above has increased from 150,000in 1961 to 739,739 in 2001 (4.8 percent and 11 per cent of totalpopulation), and they are expected toincrease by over 300 per cent in thenext thirty years to reach 2.26m by2033, or 26.8 per cent of the totalpopulation.2'3 This rapid increase in thenumber of older adults presents a seriouschallenge to policy-makers, especially inregard to financial security in old age.This paper examines the concept of the

'three pillars of retirement protection'proposed by the World Bank for HongKong, how it would serve its purposesand what can be done to sustainretirement protection in the comingthree decades.

Hong Kong, a British colony for morethan 150 years, was returned to thePeople's Republic of China to become aSpecial Administrative Region (SAR) on1st July, 1997. Although Westernpractices have been prevalent in HongKong, especially among the youngpeople and the better-educated, Chineseculture is still dominant among the olderadults. After all, over 98 per cent of thepopulation in Hong Kong is ethnicChinese and most of them come from anagrarian social and economic background

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and are now the first generation to growold in a highly industrialised city.4 It isnot surprising to find that the majority ofthe older adults in Hong Kong areunprepared for their retirement,especially with regard to financialarrangements, because, according totraditional Chinese customs, relying onone's children is the most commonlyaccepted way of meeting economicneeds in later life. Moreover, retirementis not a familiar concept to today's olderadults because there was no official ormandatory retirement age for HongKong residents, except for a smallproportion of workers who were civilservants or employees of largecorporations.

Because of insufficient retirementprotection, the majority of older workersstrive to stay in the labour market for aslong as possible, earning a living untilthey are forced to retire. In a recentlarge-scale survey of 2003 older adults inHong Kong, it was found that, although56.6 per cent of them had retired, only3.4 per cent retired because they hadreached the age of retirement.5 Foralmost all of them their retirement is of aforced nature, eg due to poor healthstatus, a long period of unemployment,or no job opportunities.

Three pillars of retirementprotectionAccording to World Bank'sconceptualisation, Hong Kong has threepillars of old age income security: themandatory publicly managed pillar, themandatory privately managed pillar, andthe voluntary private savings pillar. InHong Kong, the social security schemes,including both the Comprehensive SocialSecurity Assistance (CSSA) scheme andthe Old Age Allowance (OAA) scheme,form the first pillar of retirementprotection and they are provided by the

government, being tax-financed,flat-rated, and with redistributionalelements.

The CSSA scheme isnon-contributory, but means-tested, basedon an individual's or a family's incomeand assets. Only residents who haveresided in Hong Kong for at least sevenyears are eligible for assistance. It aims tobring the income of needy individualsand families up to a minimal level sothat basic needs or special needs can bemet. In 2001, the CSSA scheme forolder adults (aged 60 and above, calledthe old age category of CSSA) includeda standard rate for an able-bodied personof US$3,931 (HK$30,662) per year, along-term supplement of US$206(HK$ 1,607) for those who havereceived CSSA for more than one yearand special grants such as rent and waterallowance. As a result, in a typical case,an elderly recipient receives aboutUS$6,154 (HK$48,001) annually fromthe CSSA scheme. This is equivalent toabout 40 per cent of the median annualincome, ie US$15,384 (HK$120,000) forthe working population.6 In early 2004,there were about 180,000 older adults(aged 60 or above) under the CSSAscheme. Since the monetary assistanceunder the CSSA scheme is minimal,adequate only to meet the basic needs ofthe recipients, older adults under theCSSA scheme are among the poorest inHong Kong.

Older adults in Hong Kong are alsoeligible to receive an old-age allowance(OAA), but not together with CSSA,from the government. When individualsare between 65 and 69 years of age, theyare eligible to apply for one form ofOAA, called Normal OAA (NOAA), butthey must subject themselves to asset andincome tests. When adults reach the ageof 70 or above, they are eligible foranother type of OAA, namely HigherOAA (HOAA), for which income and

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asset tests are waived. The amount ofOAA is nominal, fixed at about US$960(HK$7,488) and US$1080 (HK$8,424)annually for the NOAA and HOAArespectively. Both forms of OAA arenon-contributory. Total governmentexpenditure for financial assistance forolder adults was US$1.51bn (HK$11.8bn)in 2002—03, accounting for 5.4 per centof the recurrent public expenditure, orabout 1 per cent of Hong Kong's GNP.

The Mandatory Provident Fund(MPF) scheme is a system of mandatorypersonal savings accounts; 5 per cent ofworkers' salaries and an equalcontribution from employers aredeposited in individualised savingsaccounts to accumulate benefits forretirement. It is described asemployment-based, contribution-defined,privately managed, and compulsorysavings. Employees who join such ascheme will not normally have sufficientbenefits to cover the needs of old ageuntil they have contributed for at leastthirty years. As a specific example,consider a worker who was 35 years oldin 2001. If she, with her employer,contributes 10 per cent of her salary eachmonth, then the replacement ratio willbe 45 per cent (assuming a 5 per centreturn on investment, a 5 per centinterest rate, 2 per cent real wagegrowth, a retirement age of 65, and lifeexpectancy of 80 years).7 However, theMPF scheme could not provide adequatefinancial protection for older workers(aged 45 and above) and low incomeearners.7X In 2002, the scheme collectedUS$2.56bn and this will increase ordecrease with the salary trend.9

Before the implementation of theMPF scheme in late 2000, approximately30 per cent of the 3.4 million workers atthat time participated in retirementprotection programmes provided byindividual employers.7 These schemes areeither Occupational Retirement Scheme

Ordinance (ORSO) schemes or thepension scheme for civil servants. TheMPF scheme, the ORSO schemes andthe pension scheme form the secondpillar of the retirement protection systemand they share a common feature in thatthey are all fully funded (funding ofpensions for civil servants lies with thegovernment). It was estimated that theamount of money accumulated each yearby the ORSO schemes ranged betweenUS$1.92 to 2.56bn (HK$15-20bn).

Other than the above two, personalsavings and family financial support,especially from adult children, form thethird pillar of retirement protection. Ina 1995 survey, a sample of 1,106 olderadults aged 60 and above was asked toreport their major source of income.Three major sources of cash incomewere identified: contributions fromfamily members, especially from adultchildren or adult children-in-law(62.3 per cent); government welfare(16.5 per cent); and employment,retirement funds or investments (21.2per cent). Another survey conducted in2000 found that 56.1 per cent of2,180 older adults aged 60 and abovereceived financial support from theirchildren; the median monthly incomewas about US$205." Thus, almosttwo-thirds of older adults are supportedfinancially by their adult children orchildren-in-law, indicating the strengthof traditional values, such as filialpiety.12 Based on a survey of 7,200households conducted in 2001, it wasestimated that 30.1 per cent (1.68m) ofpeople aged 15 and above hadfinancially supported their parents inthe past year.13 For these people whohad supported their parents, the medianannual amount was US$3,205(HK$25,000) and US$3,846(HK$ 30,000) respectively, inaccordance with the pattern of livingor not living with their parents. The

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total amount of their financial supportwas US$2.56bn (HK$20bn) per year.

Resources for retirementprotectionAlthough wealth stored in Hong Kong isknown to be enormous, one has to takenote of the fact that income distributionhere is also highly unequal.14 Themajority of Hong Kong people have littlesavings other than the self-occupied realestate and their MPF or ORSOcontributions. The margin for savings ishigher among those with steadyemployment. Therefore, private savingsfor most people would not be a significantcontributor to retirement protection. In asurvey conducted by the government, asample of 1,876 middle-aged adults(between 45 and 59) were asked whetherthey had done anything to prepare fortheir future financial needs after age 60 orafter retirement." About one fifth of thesemiddle-aged adults reported that theywould rely primarily on governmentwelfare (most likely they were referring tothe CSSA scheme) when they became oldor retired. Reasons given included thefact that some of them were childless; insome cases their current annual income(median = US$5,988) was too low toenable them, even through the MPFscheme, to save enough for theirretirement; and most did not have anyretirement protection before theimplementation of the MPF scheme.11 Asa result, the authors predict that theproportion of older adults who wouldhave to be supported by the socialsecurity schemes in the next two decadeswill remain at more or less the currentlevel, ie around 20 per cent of olderadults.

As mentioned above, before theimplementation of the MPF in 2000,30 per cent of the working populationwere members of the ORSO or other

pension schemes and they wereexempted from MPF contributions. Inmost cases, they should be able tomaintain a living equivalent to about 40per cent of their last salaries or evenhigher when they retire. Therefore, it isestimated that in the next twenty tothirty years, there will be about 30 percent of retirees -who would havesufficient benefits from their ORSO orpension schemes, plus in some cases theirown savings, for their retirement. Whenthe MPF schemes begin to mature, sayin about 2025 there should be moreretirees who will have saved enough tosupport themselves.

In a survey conducted by thegovernment, 60 per cent of middle-agedadults expected their children tofinancially support them when theyretired.11 It is reasonable to predict that,in comparison with the present cohort, asimilar proportion of the future cohort ofolder adults might also find it necessaryto financially rely on their adult children.It should be noted, however, that HongKong's middle-aged adults have fewerchildren than their parents." Slightlymore than two thirds (67.3 per cent) ofmiddle-aged adults have two children orless, whereas only slightly less than halfof today's older adults (49.5 per cent) do.This means that the adult children ofpresent middle-aged adults, as they arefewer in number, might find it moredifficult to financially support theirparents when they retire. As a result, wedo expect children's financial support forolder adults to decline in future, thoughthe need might still be there.

Future strategies for sustainableretirement protectionDue to the recent economic downturn,the Hong Kong SAR government isnow facing persistent and structural fiscaldeficits; its intention is to restore the

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balance as soon as feasible. Because ofthe fiscal deficits, it is very unlikely thatthe government would allocate moreresources to support the needy olderadults. Therefore, the immediate questionis how to utilise the current annualwelfare expenditure (US$1.51bn orHK$11.8bn) now spent on older adultsin a more effective manner. One feasiblesolution is to combine the financialresources put in the CSSA and OAAschemes, with only the needy as thetarget for assistance. To ensure that olderadults who are in need have enough tosupport them, the authors propose thatthe new scheme be means tested, butnon-contributory. The authors furthersuggest that the income and asset limitsallowed by this new scheme be raised —ie they must at least be higher than theexisting levels of the current CSSAscheme. It is estimated that a further 30per cent of the current number ofelderly CSSA recipients would benefit, asabout 25 per cent of the totalexpenditure for financial assistance (CSSAand OAA schemes) was accounted for bythe OAA scheme.22

This proposal may be controversial,but it is one practical way to make theexisting public assistance system moreeffective in resource allocation and keepit financially sustainable. The strongestresistance will come from those whoview receiving the OAA as a right — avalue widely held by the public.16

Another survey, however, revealed thatboth older and middle-aged adults agreethat needy older adults should have apriority in receiving OAA, especiallywhen new resources are notforthcoming.17 By using a new name anda more generous means test, oppositionmight not be as great as some expect.

As mentioned above, until 2000,Hong Kong was one of the fewindustrialised societies without aretirement protection scheme for its

senior citizens. Even with theintroduction of MPF, the majority of thefuture older adults will still be unable toadequately support themselves, due tothe low MPF contribution rates. Sincethe MPF scheme in Hong Kong is stillin its infancy, there is room forimprovement and the authors suggestslowly adjusting the contribution ratesupward in future. Furthermore, productslike annuities developed by financialinstitutions should be provided to retireeswith MPF benefits in order to ensurethat they will have stable and sufficientfinancial support in old age.'

Finally, the Hong Kong SARgovernment must encourage people tosave for their own retirement protectionand maintain the filial support for elders.One way to do this is to facilitate thedevelopment of insurance schemes forhealth care and long-term care servicesin later life. To date, most of the healthcare and long-term care services providedfor older adults in Hong Kong have theirfinance, directly or indirectly, comingfrom public revenue.17 Although thegovernment has pledged to provide olderadults with better and more adequatehealth care and long-term care services,it has also indicated that it has almoststretched its financial resources to thelimit. Further expansion andimprovement of these services for olderadults must rely on a more diversifiedfinancing system. When the WorkingGroup on Care for the Elderly producedits report in 1994, it suggested theintroduction of services on aself-financing basis, with the governmentonly assisting with capital expenses andpart of the initial operating costs. Similarrecommendations have been made forhealth services,18 and the fees for publicmedical and health services are alsoexpected to increase in coming years.1'

Therefore, the authors recommendthat the government should make it clear

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to the current cohort of middle-agedadults that it is not capable of continuingto support all older adults for their healthcare and long-term care services andonly the needy ones will be covered bythose heavily subsidised health care andlong term care services. Therefore, thosewho are able to support themselvesshould prepare for their future needs inhealth care and long term care by payingpremiums to insurance schemes as a formof private saving. Adult children offuture older adults might also fulfill theirfilial obligations by paying premiums totheir parents' health care or long-termcare insurance policies and contributionsshould be tax-exempted as an incentive.These insurance products will notflourish if the government's policy onthese issues is not made known clear andloud.

ConclusionThis paper has discussed the three pillarsfor retirement protection in Hong Kongin the coming three decades. Based ontheir observations and projections, theauthors believe that the presentarrangements for retirement protection inHong Kong can be sustainable. However,modifications have to be made, whichinclude the concentration of public socialsecurity resources on the needy olderadults, the gradual continuedimprovement of the MPF scheme, andthe promotion of preparation for selfsupport in old age, especially with thedemise of the practice of filial piety.

Finally, the authors believe that nosingle system will be able to providesufficient retirement protection to allolder adults in Hong Kong; they willhave to find their own individual mix.20

It is further believed that thesediscussions about the Hong Kongsituation, the concept of 'the three pillarsof retirement protection' as proposed by

the World Bank, will provide usefullessons for countries that have their ownmix of arrangements for retirementprotection but are uncertain of theirsustainability.

References1 OECD (2001) 'Ageing and Income Financial

resources and retirement in 9 OECD countries'.OECD, Pans.

2 Census and Statistics Department (1997) 'HongKong Population Projections 1997-2016', HongKong Government Printer, Hong Kong

3 Census and Statistics Department (2004) 'HongKong Population Projections, 2001—2033', HongKong Government Printer, Hong Kong.

4 Chow, N W. S. 'The Chinese family and support ofthe elderly in Hong Kong', Geroutologut, Vol 23, pp584-8.

5 Deloitte & Touche Consulting Group (1997) 'Studyof the needs of elderly people for the residential careand community support services A consultancyreport', Deloitte & Touche Consulting Group, HongKong

6 Census and Statistics Department (2002) 'PopulationCensus" Thematic Report on Older Persons', HongKong Government Printer, Hong Kong.

7 Siu, A Hong Kong's mandatory provident fundCato, J Vol 22, pp 317-32

8 Chan, C K 'Protecting the aging poor orstrengthening the market economy: the case of theHong Kong Mandatory Provident Fund", InternationalJournal of Social Welfare, Vol 12, pp 123-31

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10 Chou, K L , Chi, I and Chow, N W S (2004)'Sources of income and depression in Hong Kongelderly Chinese. Mediating effect and moderatingeffect of social support and financial strain' AgingMental Health, Vol 8, pp. 212-21

11 Census and Statistics Department (2001) SpecialTopics Report No 27 Hong Kong GovernmentPrinter, Hong Kong

12 Chow, N W. S (2000) 'Ageing in Hong Kong', inPhilips, D R., (ed) 'Ageing in the Asia-PacificRegion Issues, policies and future trends',Routledge, London, pp 158—73

13 Census and Statistics Department (2003) 'ThematicHousehold Survey Report No 11', Hong KongGovernment Printer, Hong Kong

14 Lau, S K (2003) 'Confidence in Hong Kong'scapitalist society in the aftermath of the Asianfinancial turmoil ' . Journal of Contemporar)' China, Vol12, pp 373-86

15 Chou , K L , Chow, N W S and Chi, I'Preventing economic hardship among Hong KongChinese elderlv'. Journal of Aging Society Pokey, Atpress

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16 Chou, K. L., Chow, N W S . and Chi, I. (2003)'Old Age Allowance: a token of appreciation orwelfare to older adults in Hong Kong', Manuscriptsubmitted for publication

17 Chou, K. L , Chow, N. W S. and Chi, I. 'Vouchersystem for long-term care in Hong Kong', Journal ofAgmg Society Policy, at press.

18 The Harvard Team (1999) 'Improving Hong Kong'sHealth Care System- Why and For Whom'' Hong

Kong Special Administrative Region Government,Hong Kong.

19 Health, Welfare, & Food Bureau, (2003) 'The wayforward for the social security system', SocialWelfare Advisory Committee Paper No 03/03,Hong Kong SAR Government, Hong Kong.

20 World Bank (1994) 'Averting the Old Age CrisisPolicies to Protect the Old and Promote Growth',Oxford University Press, Oxford

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