Voluntary scheme needed to replace lackluster MPF
Noting poor performance by mandatory funds, Peter Liang suggests new pension plans to ensure comfortable retirement for city residents
New York is set to join the list of American states offering a voluntary pension scheme to people who either don’t have access to the government plan or want greater protection for old age. Numerous studies show most people in the United States don’t have a habit of saving unless they join a scheme that requires employers to deduct set amounts of contributions from employees’ payrolls.
Hong Kong, of course, has a salary-deduction pension scheme, the Mandatory Provident Fund, to which employers are also required to contribute. But even the government concedes that too many compromises to soften resistance from employers have rendered the scheme ineffectual in many ways to meet even the basic needs of an average retired worker and his family.
In view of the rapidly aging population, the government is working to reform the scheme, promising to produce a proposal later this year for public discussion. The proposed reform is widely expected to address the highly controversial provision that lets employers offset severance payments against an employee’s pension balance. Another change is a proposal to raise monthly contributions by employers and employees.
Even before the details are out, employers — represented by several powerful trade organizations — are already raising objections, claiming, as they have done numerous times in the past, that any additional cost would force many smallto medium-sized enterprises out of business, resulting in massive layoffs, which would hurt workers most.
Such an argument should not be dismissed as nothing more than an empty threat. Many smallto medium-sized businesses, mostly in the highly labor-intensive service industries, operate at very thin profit margins after paying high rents on their business premises. Together, these businesses employ a large portion of the workforce.
Like their counterparts in many other serviceoriented economies, Hong Kong workers’ wages have remained static in the past decade despite persistently low unemployment. This means raising workers’ contributions to the pension fund will not make much of a difference to the lump sum they have on retirement.
Many insurance companies have been selling pension insurance schemes. But the return from these schemes is seldom attractive enough to entice consumers who see them as insurance policies rather than pensions.
Other than that, the average Hong Kong worker has little choice. He can, as many others do, put money into a bank savings account. But the interest rate for demand deposits is usually lower than inflation.
The limited choice for someone looking to save for old age has strengthened the notion in many workers’ minds that property is the only viable store of wealth. This notion has gained momentum against the backdrop of abnormally low borrowing costs and escalating property prices in recent years.
To be sure, there are compelling reasons to reform the woefully inadequate pension scheme Hong Kong has now. But in doing so the government, together with employers and workers, can look at other options that would give employees more choices other than putting money in the bank to be eroded by inflation or take on huge debts to buy properties at current prices.
The choice provided by a voluntary pension scheme seems to make sense. According to the US model, scheme members have the flexibility to withdraw balances at any time should needs arise.
Exposed to the lure of consumerism, many young people have largely forgotten the lesson of saving for rainy days — people of previous generations have learned this by heart. A wellstructured savings plan that young workers find attractive can do a lot more than any of the advertisements some organizations display to teach restraint to spendthrifts.