Ideally, retirement means a person retire from their regular career; enter a new life span to review what they have contributed to their profession throughout their early and middle adulthood. When a person entering retirement, they must enjoy the rest of their life, the fruitful harvest gain from their previous efforts and pursuing a new goal with their spare leisure time.
The beautiful picture of retirement can only be achieved if you are being protected with a good retirement protection, such as provident funds or personal savings. Without these schemes, I am afraid the retirement will only be a start of a nightmare. In fact, before the implementation of the Mandatory Provident Fund scheme, only about one-third of the workforce of 3.4 million people have some form of retirement protection.
Contribution from the advancement of education level, numerous breakthrough in the medical treatment, modern technology to combat the natural disasters and so on, Hong Kong ‘s population are living much larger than before, but also getting older in a fast tempo. Nowadays, already ten percent of our population is aged 65 and above. By 2016 the proportion will be 13 percent and one senior citizen in every 5 people by 2035.
Unless some way is found of funding the welfare and health needs of the growing population of elderly, a massive burden will fall on the shoulders of the taxable working population. Their wages will be heavily taxed to meet the demands. Without sufficient financial resources, the scarce resources will jeopardize the well medical services and welfare we are enjoying now, something must be done to cope with the predicted situation.
The Pathway to Retirement Protection—Mandatory Provident Fund
The World Bank have outlined a framework of the protection for the elderly, so called ‘three pillars of old age protection’. This recommended that old-age programs should protect the old and also promote economic growth. The three pillars recommended by the World Bank are
Mandatory, privately managed, fully funded contribution scheme.
Publicly managed, tax-financed social safety net for the old.
Voluntary personal savings and insurance.
The SAR government is operating a Comprehensive Social Security Assistance Scheme, which provides basic social security to the needy, and after much debate it was decided in 1995 that the Mandatory Provident Fund (MPF) Scheme should be introduced, there was considerable argument as to the best system for Hong Kong. With the introduction of MPF, complemented by personal savings, Hong Kong will have in place all the three pillars for old age protection.
Mandatory Provident Fund Scheme Ordinance requires all employees (irrespective of their status as a temporary staff or part time worker) and self-employed persons to join a MPF scheme under which contributions will be saved for retirement. The ideology is to ensure people are adequately provided for upon reaching retirement age.
Employer and employee each pay 5 percent of an employee’s monthly salary into a privately run pension plan. The MPF law gives an employee a range of investment choices under an employer’s MPF scheme. Generally speaking, without other circumstances, the member can only collect the lump sum of the MPF benefits when they attain the retirement age of 65.
Mandatory Provident Fund scheme which starts in December 2000, this scheme represents a starting point for forcing individuals to plan for their retirement. Besides helping to provide for the retirement needs of millions of people, the MPF is likely to radically reshape savings habits and investment attitudes and it will extend the pension umbrella to the remaining two million employed by about 250,000 small and medium sized companies.
Different retirement protection systems have their advantages and disadvantages. After careful consideration, it is generally accepted that MPF best suits Hong Kong’ needs, but as we know, no system is prefect, MPF is no exception, this controversial policy have drawn many criticisms.
Libertarians claim the system run contrary to the Hong Kong spirit, as individuals and firms are coerced into savings decisions they are better placed to make alone.
Other claim many workers with high mobility are able to avoid taxation by frequently changing employment and a lack of information about them would make it difficult to capture them in the MPF network.
Many more criticisms and oppositions have also targeted the MPF, in the following paragraphs; I will divide it into different aspects and analyze these criticisms and oppositions, so that we can get more detailed picture about this far-reaching policy.
Protection for all?
MPF is adding a pillar for our retirement protection; if it is true, it will consolidate the foundation of an enjoyable retiring life and the retired people are no longer worrying live under poverty. In fact, will it really protect all future retired people in Hong Kong? It seems to be the most challenging questions and controversial part of the MPF policy. Will the scheme really protect the elderly, unemployed, housewives and so on? I will divide the question into four parts—high income group, low income group, no income group and young, middle and old aged worker to look for the answer for the above questions.
High income people
Before we consider who will benefit the most from the scheme, we should know what you get out of the scheme depends on what you put in. As a result, low-income workers will enjoy less protection than the higher paid worker.
Many high-income people are working large companies and occupying the middle, high or senior position. Since they are specialized in their relevant profession and they possesses some kind of expertise knowledge in their working field, their bargaining power in the labor market are relatively higher, so their companies and organization will provide them many welfare and special allowances in order to lure them staying in the company. Nearly all of them will enjoy a pleasant retirement even without the implementation of the MPF, since many of them have significant amounts of personal saving, high value property or investment and existing pension fund.
Now the MPF has been implemented, both employers and employees will have to pay a minimum contribution of 5% of relevant income, this group of people seems to be much protected and secured from the policy.
As the points illustrated above, low income workers will enjoy less protection than the higher paid because what you get out of the MPF scheme depends on what you put in.
The greatest untruth of the MPF is that a gross 10 percent deduction from salaries, capped at a maximum income of $20,000 a month can make a meaningful dent in funding old age. This mandatory contribution level of the scheme is a good basis to start with, but it is not enough. People will need to pay more to get a better life in retirement. A simple example will illustrate more about the concept, for example, a young man who starts to pay into an MPF plan at 20 years old with an average income of HK$15000 per month. Assuming the investment grows with 5 percent inflation, after 45 years of contributions, he would receive just HK$771429, that would leave him just HK$4300 per month for the 15 years after retirement, if we assuming he die at age 80 (the average life expectancy in Hong Kong).
We should remember most low-income workers are earning only around $10000 or below per month. After many years of contributions, they would receive just around $2000-3000 a month. Also due to their income would merely cover their monthly expenses, they are without personal savings, their retirement may not be funded in a pleasant way, the effectiveness of the MPF scheme may not create a beautiful picture for this group of people.
The MPF scheme not only can’t provide an effective retirement protection for them, but also create some difficulties and hardships for them. Some unscrupulous employers are avoiding pay extra for the Mandatory Provident Fund scheme by slashing wages and making their staff become self-employed. Many of these problems came from the catering and construction industries.
Since Hong Kong are still recovering from the 1997 Asia financial turmoil, the most hard hit industries (transports, catering, restaurants, construction, manufacturing) are still struggling, most low income workers are working in these sectors (an estimated 500,000 people are working in the construction and catering industries, which account for about 17 percent of the total workforce in the SAR). Some employers were ‘playing tricks’ to avoid their financial responsibility because the MPF is an additional cost for these employers. They only cut staff salaries to save costs rather than taking risks to breach the law.
Some restaurant owners treated part of their staff wages as special allowances instead of basic salaries in an attempt to lower the employers’ contribution. Others effectively cut salaries by imposing an unpaid holiday arrangement on staff. Some construction firms had changed staff into self-employed contractors to avoid responsibility. The affected construction workers would no longer enjoy the benefits of MPF or other staff welfare scheme.
Transport employees are also affected by the scheme. A survey conducted by the Container Transportation Employees General Union members found 86 percent had experienced some reduction in pay and benefits by employers using the MPF as the reason. The cutbacks include reducing pay and benefits such as bonuses, travel allowances and telephone payments, signing new contracts that waive past years of services without compensations. They were forced to register as a business so they have self employed status. Since it is very difficult to find a job in the current climate, so they have to accept the new arrangement reluctantly in order to survive.
All those unscrupulous employers are not only exploiting these low-income workers they are also undermining the effects of the SAR government to build a provident fund system for Hong Kong.
We can see clearly the long-term benefits are far from the low-income workers, but the immediate negative consequences they should face now, so there is no doubt why the most opposite voice are coming from this sector.
Protection for Young, Middle and Old aged People
The benefits from MPF not only depend on the salary input, but also depend on the choice of funds. The choice of fund may be greatly influenced by the age of employee and what you can collect after retirement. For example, a young worker can afford to invest more in high risk, higher reward funds because if markets tank, they have a long time to recover. By contrast, an employee close to retirement cannot afford to risk short-term volatility taking a chunk out of his capital. Young workers seem to be the most benefit from the MPF scheme, compare with the middle or near retiring aged people. The majority of low income earners in their 40s and 50s have no chance of achieving what pension planners call a minimum replacement rate sufficient to fund a pleasant retirement, for example, a man who works for the next 25 years on the median wage of $10000 a month might get only $1700 a month upon retirement, based on commonly quoted return rate of two percent, less than social security assistance for a single person.
Finally, as workers cannot take any money back before reaching 65, and there are investment risks involved. The private sector rather than the government will manage the funds. The MPF in no way safeguards every citizen’s right to the security of basic provisions in life.
No income group
Many people have criticized the MPF scheme which starts in December 2000, neglects the elderly, unemployed and women particularly housewives, since the MPF requires ’employer’ and ’employee’ contribute to the scheme, so the well being of the no income people will not be guaranteed.
MPF scheme as a compromise package that does not serve the well-being of the most vulnerable. There are now 600,000 people over 65 and in 1996, one quarter of people over 60 were living below the poverty line, with a monthly income of under $2500.
Women will also remain stuck in a dependent role under the MPF scheme, less than half of the labor forces coerced by the scheme are women because many are either causal workers or housewives. When they get old, they can only expect to rely on their husband, if they have one or obtain comprehensive social security assistance.
At present, Hong Kong is operating a Comprehensive Social Security Assistance Scheme, which offers basic social security to the needy. With the introduction of MPF, complemented by personal savings and CSSA, Hong Kong will indeed have in place all the three pillars for old age protection. In fact, it is far from saying that the scheme provides an effective retirement protection for all and easily believes the problem of elderly poverty will be eradicated.
Burden for investors in Hong Kong?
Hong Kong acts as a financial center in the world and playing a significant role in the Asia. The implementation of MPF will definitely affect the investors, no matter the multi-national investors, big business entrepreneur, small and medium sized enterprises.
Investors of big business
Big companies in order to recruit the talents from the labor markets, many of them have been offering various welfares for their employees, these including a well-sound pension system. Before the implementation of the MPF systems, many big companies have start selecting their company’s MPF provider. For example, Swire Pacific said the process of selecting the company’s provider began two years old. As one of the Hong Kong’s biggest companies, Swire are operating companies, such as Cathay Pacific Airways, hotel, trading, marine and properly-development and employing 25000 employees, for this kind of big companies, it is important to have a provider with a sound administration system to deliver pension services to all their employees, since employees are the biggest assets for these big business operators.
Large companies appeared to be concerned about their employees’ opinions when choosing a provider, it can reflect large companies seem to support MPF scheme and it come along with their existing pension policy, it seems not to create financial burdens for this kind of companies compare with small and medium sized companies.
Investors of small and medium sized enterprises (SMEs)
Coming at a time when small and medium firms are struggling back into the black after the financial crisis, it is not surprising that the MPF is off to a shaky start. There is no doubt that the MPF presents an extra financial burden for companies that work on narrow profit margins when these kinds of companies were badly hit by the Asia financial turmoil. Small and medium sized businesses (SMEs) have protested vociferously over the MPF’s introduction, insisting they cannot afford it with the economy still recovering from recession.
Although MPF will extend the pension umbrella to the two million, employed by about 250,000 small and medium sized companies, the financial burden seems to be unbearable for the investors.
For small business investors, they are reluctance to join the scheme is not just about the financial burden. They also resent the time consumed by MPF decision-making and paper work because many of them were far too busy with the day-to-day business of running the firm to take on extra paper work.
How MPF scheme affects the Hong Kong’ economy?
MPF not only will have far reaching effects on the fund-management industry, service providers, but also the general economy. Since MPF is an investment programs, it will increase the pool of institutional funds invested in the SAR, broadening and deepening the financial markets, promoting their efficiency and thereby economic growth, it will bring positive charges for financial market.
On the other hand, some people criticize the MPF scheme will eventually upset the flexibility of Hong Kong because workers cannot take any money back before reaching 65 and there are investment risks involved. This compulsory saving scheme, unable an employee who leaves a company can get cash in a lump sum or use it to buy property or whatever and invest in other areas.
Although it is far from saying that MPF provides an effective retirement protection for all and elderly poverty will be eradicated, it really encourages people to save for their old age. No schemes are perfect, the MPF is no exception, but it is the scheme most suitable for Hong Kong’ needs. Since Hong Kong has a well-established and sound financial services sector. A privately managed retirement system under prudential regulation and supervision is the most effective and secure way offer retirement protection to the workforce. Also under a free competition environment, it tends to increase efficiency and reduce costs of operating the MPF scheme, which will benefit scheme members ultimately.
Nowadays, a large part of the social welfare expenses are spending on the Comprehensive Social Security Assistance (CSSA), in the long run, MPF scheme may reduce the financial burden of CSSA, spare welfare expenses can be spent on other social welfare areas, every citizens will benefit at large.
The scheme may be viewed with some skepticism at the moment, but after people have a chance to see the plan in action, attitudes towards long term saving and retirement should change. Then retirement could be something to look forward to with pleasure, rather than worry. But one things should be bear in mind, our government should also take care of the most vulnerable people in our society as the paragraphs mentioned above, provide them with appropriate assistance, especially the low income people. Only with that, Hong Kong will be a better, fairer society for everyone to live in.