Introduction
Nowadays, the world is facing the old age crisis. "Due to the combined fluctuations in fertility, life expectancy at birth, and mortality, the average age of the world's population is expected to increase dramatically within the next forty years." (Shuman, 1984) Hong Kong, which is tiny city with about 7 million citizens, is also facing this worldwide problem. In 2006, Census and Statistics Department conducted the population by-census and made population projections for the next 30 years. The population is predicted to keep giving older and older. In 2006, the percentage of those who were 65 years old or above was 12%. The percentage is projected to increase by 14%. At the same time, the median of age would increase by 6.5 from 39.6 in 2006 to 46.1 in 2036 (Hong Kong Population Projections 2007-2036, 2007). The continuous aging trend makes the government concern and review the pension system. In the Chinese society, parents treat their children as the "pension". Even though Hong Kong was the colony of UK before 1st July, 1997, most of the families still live in a traditional Chinese style. In the older generation, families were keen on having more children. For instance, my grandparents have five children and totally rely on them after retirement. In 70s, the Family Planning Association of Hong Kong encouraged people to have two children only in each family in order to control the birth rate. As a result, there were only 4 members in most of the families in 80s & 90s. The mean of the number of children in each family was 2.6 in 1982. The mean keeps falling to 1.9 in 1997 and 1.6 in 2002 (Knowledge, Attitude & Practice Survey Report 1997, 1997; Knowledge, Attitude & Practice Survey Report 2002, 2002). Supporting parents' living becomes a burden of children, since there were five or more children sharing the parents' living cost in the past, but there are only two or less children sharing the expenses now. As a result, the voice of requiring a secure pension system is larger.
In 1st December, 2000, the Mandatory Provident Fund Schemes (MPF) System was carried out (MPFA, 2006). In 1994, the World Bank suggests that there should be three pillars to support the aged. The first one is creating a social security net from the tax. The second one is a mandatory private saving scheme. And the last one is the personal saving and the retirement planning from the insurance companies. Definitely, MPF system is the second type. It is impossible to implement a tax-financed pension system in Hong Kong as the tax rates are low (17%). In 2008, Hong Kong was even listed as a tax haven in the report published by United States Government Accountability Office. Before the implementation of MPF system, the elderly can only depend on Comprehensive Social Security Assistance (CSSA) Scheme and Social Security Allowance (SSA) Scheme, which are not designed as a pension system, when they do not have enough money to support their daily life. This essay will describe CSSA, SSA, MPF and the pension system in the future.
CSSA & SSA Scheme
"The objective of the SSA Scheme is to provide a monthly allowance to Hong Kong residents who are severely disabled or who are 65 years of age or above to meet special needs arising from disability or old age." (Social Welfare Department, 2005) Normal Old Age Allowance and Higher Old Age Allowance are designed for the elderly under the SSA Scheme, and were implemented in 1973. The elderly aged between 65-69 and possessing an income and properties below the limits are qualified to receive this allowance. For Higher Old Age Allowance, the only requirement is equal to or older than 70 years old. Both the allowances are HK$1,000 per month. However, before 2009, they were only HK$625 and HK$705 per month. All these amounts are insufficient for a reasonable standard of living. Different from CSSA and MPF, actually the Old Age Allowance is only a "policy of apology", since the government did not set up a social security for the old people at that time (Ming Pao, 2008).
Unlike the Old Age Allowance, the CSSA Scheme is a better safety net for the elderly. The target of the CSSA Scheme is Hong Kong residents who cannot financially support themselves to meet the basic needs. There are the income and assets tests. The applicant must fulfill these requirements before they get the payment. In general, there are three types of payments, standard rates, supplements and special grants. For supplements, there are long-term supplement, single parent supplement, community living supplement and transport supplement. For a qualified able-bodied or 50% disabled old person aged 60 or above, he/she can receive HK$2,590 per month. If he/she is totally disabled, the payment is HK$3,140. HK$4,420 is paid to those who need constant medical care (Social Welfare Department, 2005). Consider both the Old Age Allowance and the CSSA Scheme; the maximum monthly payment for a healthy elderly person is HK$3,590 which should be able to meet their basic needs.
MPF
The Mandatory Provident Fund (MPF) is the "real" pension system. The MPF System started in 2000 and is supervised by the Mandatory Provident Fund Schemes Authority (MPFA). Both all employees and self-employed persons aged between 18 and 65 are legally required to join the MPF scheme. Employees are classified into two types, regular employees and casual employees, under the system. For a full-time or part-time employee who is employed continuously 60 days or more, he/she is a regular employee. If you are employed less than 60 days in the catering or the construction industries, you are a casual employee. And also, the employers in these two sectors are casual employees, the length of the employment period is not concerned. However, some people are exempted from joining the MPF scheme, such as self-employed hawkers, domestic helpers and people covered by mandatory pension. For the regular employee whose relevant income is lower than HK$5,000 per month, an amount which is equal to 5% of your relevant income is contributed to your MPF scheme by your employer. If the relevant income is between HK$5,000 and HK$20,000 per month, both employers and employees are required to contribute the amount equivalent to 5% of employees' relevant income to the MPF scheme of employees. Since HK$20,000 per month is the highest income level, for those with relevant income higher this amount, only HK$1,000, 5% of HK$20,000, is contributed to the MPF scheme by both employers and employees. Relevant income does not only include wages and salary, it refers to all monetary payment employees receive. For instance, bonus and commission in the insurance companies are also included in the relevant income. If you are self-employed with income less than HK$5,000 per month or HK$60,000 per year, contribution is not needed. For those whose income level are between HK$5,000 and HK$20,000 per month or HK$60,000 and HK$240,000 per year, 5% of the income is required to contributed to the MPF scheme. If your salary is higher than HK$20,000 per month or HK$240,000 per year, your contribution will be HK$1,000 per month, 5% of HK$20,000, or HK$12,000 per year, 5% of HK$240,000 (MPFA, 2006).
Under the MPF system, there are three types of schemes, Master Trust Schemes, employer-sponsored Schemes and Industry Schemes. Most people participate in Master Trust Schemes which are open to self-employed persons, employees of participating employers and persons with accumulated benefits transferred from other schemes. The concept is to gather the contributions from people just mentioned, so that trustees can manage and invest efficiently (MPFA, 2006). A demonstration will be given using HSBC Provident Fund Trustee (Hong Kong) Limited that provides more than 10 funds to choose. Firstly, the employee needs to choose one or more funds to contribute and decides the proportion. For example, you can contribute 10% to Asia Pacific Equity Fund, 35% to Balanced Fund and 55% to North American Equity Fund. Then, in each month, your employee and you will contribute 5% of your relevant income into these funds proportionally. Your return depends on the fluctuation of the unit prices. Some of the funds are riskier than others. People should consider their risk tolerance level before making the decision. It is obvious that you can choose some risky funds such as Hong Kong and Chinese Equity Fund, if you still have 40 to 50 years to work until retirement. For those aged 50, in general, it is better to choose funds with lower risk, like Guaranteed Fund, rather than risky funds (HSBC, 2009). If the number of employees in a company is large number, Employer-sponsored Schemes can be applied since only employees of a single employer and its linked companies can join the scheme. Otherwise, it is not cost-effective with just a small number of employees. Considering the high mobility of the job market and the typical practice of daily wages within the catering and construction industries, the MPF Industry Schemes (IS) are set up. This can provide better convenience for the casual employees since they do need to change schemes if they change employment in these two sectors, provided that their previous and new employers also registered for the same Industry Scheme. For instance, it is normal that a construction worker works at different building sites for different employers during a period of time, maybe one or two months, they do not need to change the schemes for several times within this short period if their employers registered for the same Industry Scheme. The employers in these two sectors can also choose Master Trust Schemes; however, usually they will choose the MPF Industry Scheme which is more suitable for their employees. The following two tables provided by MPFA show the scales of contribution of daily paid casual employees and non-daily casual employees.
Most of the employees concern when they can get back their contribution. As the contribution is saved for your future after retirement, people will only get the lump sums when they are 65 years old which it has already stated in the Mandatory Provident Fund Schemes Ordinance. Nevertheless, there are still several exceptional cases that cause early withdrawal. Total incapacity or disability, death, early retirement between 60 and 64 years old, permanent departure from Hong Kong are those circumstances. Besides these, if people without contribution in the past 12 months declare that they do not have any incentive to be self-employed people or employees within the foreseeable future and there is less than HK$5,000 in their accounts, they can also make requests for early withdrawal (MPFA, 2006).
Owing to the duty of providing a reliable retirement system for Hong Kong's workforce, the MPFA has to supervise and regulate privately managed provident fund schemes. Supervision of trustees is one of the primary responsibilities of the MPFA. The MPFA visits approved trustees' offices regularly to make sure that they obey the regulatory requirements. During these visits, different parts of trustees' operators and the schemes provided are viewed based on risk. Besides periodic on-site visits, there are also off-site monitors to ensure that the trustees follow the legal requirements. In order to achieve this aim, returns, audited financial statements and reports are required to submit on a monthly, quarterly and annual basis. Through monitors, any problems can be noticed earlier to protect the scheme members' benefits and minimize the loss. And also, to protect employees' right, some measures are enforced on those employers who exploit their employees, such as deductions of employees' incomes for employers' contributions and even no arrangement for their employees to join any MPF schemes. In these cases, the MPFA talks employees into putting the situation right directly. Employees may need to pay monetary penalties or may be even charged with default contributions (MPFA, 2006).
Pros and Cons
In the past three to four years, many people criticized the MPF system for the unstable return since the contributions are invested in the funds, their benefits and the unit prices of funds are linked. In 2008, performances of funds were horrible due to the finance tsunami. In the third quarter of 2008, the MPF scheme totally lost 11.62%, 28.997 billion Hong Kong dollars which meant that each one in the schemes lost about HK$11,947. As the average monthly salary in Hong Kong was around HK$10,000, they lost one year's contributions (Wen Wei Po, 2008). As a result, some people deferred their retirement plans because they hoped that the economy would become better after one or two years, and their contributions may not earn a lot at that time, but they already satisfy the result if there is no loss.
The party who can get the most benefit is not the workforce or the government, but is the trustee since you need to pay for the fees, such as administration fee and investment management fee. The annual fees can be as low as about 0.5% of fund assets or as high as more than 3% of fund assets. Assume that the annual return rate is 5% and the fee is 1% p.a., the benefit after 40 years will be 23% less than that without any fee. If the fee is 2% p.a., the difference will increase from 23% to more than 50%. And the average fee in 2007 was 2.06% (Choice, 2007). Unlike Chile and Australia, employees in Hong Kong lack right to choose the trustees. Therefore, the market is not competitive and does not need to cut the fee to attract employees.
However, the MPF system is not useless. As the CSSA and SSA Scheme are non-contributory schemes, it is a government's burden and this problem will become more serious in the future. The MPF system can definitely help to solve this problem. The number of people who need to apply for either both schemes or only one of them must decrease since they can get a lump sum after retirement. Even if the lump sum is not enough to support his whole life after retirement, he may only need to rely on the non-contributory schemes for a few years.
Conclusion and Prospect
As the population must be older in the future, the CSSA Scheme and SSA Scheme are not enough to meet the demand since they are not designed as a pension system. As a result, the Mandatory Provident Fund was implemented in 2000. It is a contributory system, so that, it can share the pressure of increasing expenditure on the CSSA Scheme and SSA Scheme in the recent years. Although there are quite a lot of criticisms of the MPF system in the society, several measures can be probably done to strengthen the system in the future. Letting employees have the right to choose trustees can make the market become more competitive. Consequently, the fee will be lower in order to attract employees. Increasing the highest income level and providing tax allowance can let employees contribute more into their MPF schemes. This can provide them with a more secure future after retirement. Since the method of making profit is investing contributions in funds, some financial knowledge and the importance of personal financial planning can be taught in secondary schools, in order that they can minimize their loss during another financial crisis. I think this system is still young, only 9 years old, and it still needs to keep improving and reviewing in the future to become a well-developed and secure pension system for the workforce in Hong Kong.
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