Missing the Point

When Otto von Bismarck introduced the first old age pension scheme in 1889 in Prussia (modern day Germany) the qualifying age was 70. The average life expectancy in Prussia at the time was 45. In other words, it was understood from the outset that the vast majority of citizens would never get to receive it. It was more like an end of life bonus for those who beat the odds on longevity.

The underlying assumption was that most people would continue to work and support themselves for as long as they were physically and mentally able to do so. Thereafter they would be supported by their family. Perhaps I am a misfit from another era but I find nothing wrong with such an approach in principle. Yet somehow in recent times the idea has grown up that once a person has reached a certain age or completed a set number of years of gainful employment, he has earned the right to put his feet up and do nothing for the next few decades except play golf or mah-jong all day.

Perhaps it was expecting a bit much to look for our government to begin the latest consultation exercise on retirement issues by going back to first principles. But by confining the scope to fine-tuning what we already have I think our community risks missing a major opportunity to debate more fundamental issues.

At a time when life expectancy here is around 85 (slightly more for women, less for men), why do we adopt uncritically the assumption that retirement should begin at 65? Most people continue in reasonable health well into their seventies. Yet the consultation document – Retirement Protection Forging Ahead – takes 65 as a given. It then offers us two different approaches, either “regardless of rich or poor” or “those with financial need” and talks about the implications for public finances. Under one approach, Profits Tax would have to rise by 4.2% to 22.7% while under the limited option it would only have to rise by 0.4% to 16.9%. Since the vast majority of the population do not pay profits tax, I doubt they care very much about the difference. Similarly with Salaries Tax, since more than half of the working population do not pay any, why should they care about the difference between increases in standard rate of 8.3% or 0.9%? It sounds like (and indeed is) a major redistribution between rich and poor which some would find attractive in principle.

Let me posit an entirely different approach. We should start by completely scrapping the idea of any fixed retirement age (as indeed the USA and some other countries already have done). You have the right to work either full or part time as long as you wish to do so and are physically capable of making a meaningful contribution.

You retain the right to retire at any time you can afford to do so. Thereafter, rather than offering a stark choice between two radically different approaches, why not combine the two. From a certain age – let us be more generous than the Teutonic chancellor and say 75 – there is a universal government scheme paying a decent sum, say $6,000 per month rather than the beggarly $3,000 offered in the consultation, to show respect to the elderly. Prior to that age, you depend on your own savings (including employer paid pension), or support from your family, or – subject to a means test – public coffers to alleviate poverty. Essentially this last is the same as our present CSSA.

How do we finance this largesse? As other commentators have pointed out, a significant chunk of Hong Kong’s public revenue – the proceeds of various land transactions – is diverted directly into the Capital Works Reserve Fund rather than coming into General Revenue. This arrangement has served us well over the years as it means we do not have to scrape around for resources to finance essential infrastructure. Rather than scrap the system as some have suggested, I think we can fine tune it instead. Bearing in mind that we already have most of the physical infrastructure we need for a developed city, the emphasis in future should be switching to maintenance to ensure that we keep what we have in good condition. Let us take responsibility for maintenance costs – for highways, drains, waterworks, hospitals etc – out of the recurrent side of the accounts and move them over to the CWRF, thereby freeing up resources there to meet the ongoing consequences of our aging population.

I think my essential argument is this: there is a strong sentiment in the community that we should have a universal retirement pension of some sort, but there is concern about the long term implications. If we exercise just a little imagination and creativity, we can introduce such a scheme without breaking the bank. Where there is a will, a caring administration could find a way.

Mike Rowse
email: mike@rowse.com.hk