HK’s tax regime can’t support UPS

It is not a good idea for Hong Kong to adopt a pay-as-you-go universal pension scheme.

The main feature of such schemes is that the current working population would be taxed and the proceeds used to pay people who have retired. Few if any of the tax proceeds would be saved. That means the amount of money the retired receive depends critically on the population structure — the support ratio for the elderly, or the ratio of the number of working adults divided by the number of retirees. Hong Kong’s population structure is one of the most extreme in the world. Life expectancy is among the highest globally but the city’s total fertility rate — the number of children an average woman bears in her lifetime — is one of the lowest. That means there will be more and more old people over time, but less and less working adults. The accompanying shows projected support ratios (population aged 15 to 64 divided by population aged 65 or above) over time, based on Census and Statistics Department data.

Hong Kong’s situation is very similar to that of Japan. Both have very high life expectancies and low birth rates. But Japan reached this extreme demographic structure a couple of decades earlier than Hong Kong. So today’s Japan can be regarded as Hong Kong’s future. In the early 1990s, Japan’s government debt was close to 50 or 60 percent of GDP but now it is about 230 percent. Much of the reason is the difficulties of supporting the large number of retirees.

Quite a few European countries have also run up huge budget deficits because of population aging. In fact it is fair to say a significant part of the euro crisis is due to the budget deficits created by the aging population.