Introduction to Social Security and Retirement Protection Schemes

1. Brief History of Social Security

2. Growth of Cases of Public Assistance/Comprehensive Social Security System

3. Expenditure on Social Security

4. The Growth rates of elderly population

5. CSSA as a means for retirement protection

6. The Mandatory Provident Fund (MPF)

7. Central Provident Fund (CPF)

8. The Old Age Pension Scheme (OPS)

9. Summary: Issues in social security and retirement benefits

References

Brief History of Social Security

1965	First white paper on social welfare
1971	Cash benefits in Public Assistance first established
1973	Old Age Allowance, Disability Allowance first established
1977	Green paper on social security NO to retirement or unemployment insurance
1992	Consultative Paper on: A Community-wide Retirement Protection System
1994	Consultative Paper on: An Old Age Pension Scheme for HK
1995	Report of the Consultancy on the Mandatory Provident Funds System
1995	Legislation on Mandatory Provident Fund Schemes endorsed

Remarks:

The basic philosophy of social security policy , and social welfare in general, in Hong Kong is basically residual or remedial. It is residual for only when oneself, one's family, one's social support network cannot help, the government will come to rescue. It is remedial because the government only provides a safety net and it functions only if you fall. It would not prevent you from falling.
The establishment of the Old Age Allowance (OAA) and Disability Allowance (DA) deviates from the basic philosophy of social security policy of Hong Kong. They are non-means-tested, e.g. anyone aged 70 or above, rich or poor, can receive OAA. The reason for the existence of OAA is a "consolation" for not having a retirement protection scheme.
The debate on retirement protection has been with us since 1965. Since then, every time the issue was raised, the government said no. It was until mid-1995, that the government had finally decided to go ahead with the MPF system. The main body of the legislation was passed in Legislative Council session in 1995. The detailed legislation and subsidiary legislations were brought out to the Provisional Legislative Council in 1998..
The MPF was implemented in December, 2000 (See the homepage of The MPF Schemes Authority for more details)

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Growth of Cases of Public Assistance/Comprehensive Social Security System

1971-2001

CSSA Case type	71/72	81/82	90/91	91/92	92/93	93/94	94/95	95/96	96/97	97/98	98/99	99/00	00/01
Old Age	6,644	31,154	44,806	48,020	53,397	61,026	72,468	84,243	98,765	112,067	124,304	133,070	135,409
Disabilities	3,374	9,041	13,324	15,035	16,940	19,687	19,659	24,508	29,760	34,519	39,782	31,693	31,534
Unemployed	135	521	1,754	2,248	2,957	3,876	5,302	10,131	14,964	19,108	31,942	26,185	23,250
Single parent family	1,407	2,206	3,899	4,325	4,897	6,134	6,453	8,982	13,303	17,161	25,613	25,146	26,078
Low earnings	1,803	1,377	918	1,036	1,007	1,407	991	1,814	3,102	4,714	7,562	8,002	8,319
Others	146	1,453	1,974	2,305	2,777	2,974	4,588	6,523	6,826	8,076	3,616	3,919	3,673
Total	13,509	45,752	66,675	72,969	81,975	95,104	109,461	136,201	166,720	195,645	232,819	228,015	228,263

Notes:

Old age remains to be the main reason for receiving welfare.
The number of low earning cases in CSSA has remained almost the same in the first 25 years, but suddenly began to increase in the last five years. Though theoretically the CSSA can serve as a supplement to low earning, this probably reflect an increasing large number of the working population cannot earn sufficiently to meet their basic needs..
The rate of growth in the first seven years of the 1990s has increased substantially. The number of unemployed cases has increased by 7.5 times. The number of single parent families on welfare has increased by 2.4 times. While the number of elderlies is more than doubled.
A review was conducted in 1998 and the scheme was tightened in 1999. In the subsequent two years, we did not see any growth in the total numbers of cases. The main drop occured in the group of "unemployed".

　

Case growth in the 1990s'

Case growth %	91 - 92	92 - 93	93 - 94	94 - 95	95 - 96	96 - 97	97-98	98-99	99-00	00-01	average of last 5 years
Old Age	7.2%	11.2%	14.3%	18.7%	16.2%	17.2%	13.5%	10.9%	7.1%	1.8%	10.0%
Disabilities	12.8%	12.7%	16.2%	-0.1%	24.7%	21.4%	16.0%	15.2%	-20.3%	-0.5%	5.2%
Single parent families	10.9%	13.2%	25.3%	5.2%	39.2%	48.1%	29.0%	49.3%	-1.8%	3.7%	23.8%
Unemployed	28.2%	31.5%	31.1%	36.8%	91.1%	47.7%	27.7%	67.2%	-18.0%	-11.2%	18.1%
Low earnings	12.9%	-2.8%	39.7%	-29.6%	83.0%	71.0%	52.0%	60.4%	5.8%	4.0%	35.6%
Total	9.4%	12.3%	16.0%	15.1%	24.4%	22.4%	17.3%	19.0%	-2.1%	0.1%	10.9%

The growth rate of the unemployed CSSA cases is alarming between 31/1/95 to 31/3/96, particularly among unemployed, a record of 91% was observed.
The major reasons for these increases include:

Increasing income disparity between the rich and poor.
Chronic unemployment among the unskilled, low-education, and middle-age labour.
Raising cost of living, particularly in housing
Increasing number of single parent families
Retiring old people without retirement protection

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Expenditure on CSSA

	Expenditure (Millions)	Growth
1990/91	960.1
1991/92	1,135.8	18.3%
1992/93	1,408.5	24.0%
1993/94	2,443.4	73.5%
1994/95	3,426.8	40.2%
1995/96	4,831.1	41.0%
1996/97	7,127.8	47.5%
1997/98	9,441.3	32.5%
1998/99	13,028.7	38.0%
1999/2000	13,623.4	4.6%
2000/2001 (revised)	13,494.0	-1.00%
2001/2002 (budget)	14,500.0	7.5%

Notes:

Part of the large increase in 1993/94 is due to the consolidation of the CSSA for the elderly, i.e. the old age allowance for those on welfare is included into the payment of CSSA.
Expenditure increased by almost ten times.

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The Growth Rates of Elderly Population

	Annual Population Growth (aged 60+)
1997	2.6%
2002	1.2%
2007	3.9%
2012	3.9%
2017	4.5%

Notes:

The growth rate of elderly in the 1990's has been quite slow. In other words, in the past few years, the increase in the number of old people has little impact on the increase in the number of old people on CSSA
In fact, the growth rates of elderly are dropping and will rise again. The growth rates will peak in 2016-2026. In other words, the problem is not coming yet. But it will in 20 years time.

　

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The CSSA as a means of retirement protection

It is not designed for this purpose, though it is actually performing this function.
Though conceived as a welfare, the political and public pressure to raise the level of cash benefits is very high. It is both a welfare and a retirement benefit.
Currently, CSSA expenditure on the elderly constitutes only 3.5% of the total government recurrent spending. However, if the total government spending is growing at the rate of 5% (i.e. = economic growth) and the number of elderly on CSSA grows at the rate of 15.5%, ten years later, CSSA expenditure on the elderly will constitute 8.5% of the total government recurrent spending.

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The Mandatory Provident Fund (MPF)

Features

All employees and employers are going to contribute to a provident fund managed by the private sector (Banks, insurance companies, fund managers, trustees.)

The contribution of each party is 5% of the salary of the employee.

Employees of salary < 5,000 per month are not required to contribute. However, their employer still has to contribute

Self-employed persons are required to join a MPF scheme.

The implications of the MPF scheme towards retirement protection

For simplicity of presentation: we can use the following assumption and approximation: At the time of retirement, the retiree puts all his provident fund in an annuity scheme (some form of an insurance), and receives a pension from the scheme monthly. Then: the elderly will be able to receive an amount equivalent to 20% of his last month salary if he has joined the MPF for 20 years, 30% for 30 years, and 40% for 40 years.

For example, the average person earning $9,500 in the last month (i.e. current median income) joined the MPF for 30 years will received a pension of $2,850 per month. This also means that about 50% of the earning population will have less than $2,850 per month! [Which is approximately the amount of CSSA recommended by MacPherson after adjusted by inflation.]

Take another example, a person earning $7000 in the last month and joined the MPF for 30 years, he will be able to receive $2,100 per month which is even less the amount of CSSA after adjustment on 1.4.1998.

For one reason or another about 10% of the male elderly population has less than 20 years of earning history, and about 40% of the female elderly population has less than 20 years of earning history (this will drop to about 25% in about 30 years time).

To conclude, even in 30 years time, slightly more than half of the elderly population will not be able to obtain a security from the MPF that is adequate for the basic level of living, let alone paying the rent and medical expenses. About 20% of the elderly population (mostly female) would hardly receive any benefits from the MPF.

Pros

Higher Rate of Return on investment
Decentralise control of investment: relies on market equilibrium for the impact of large volume of funds on financial, monetary and foreign exchange market

Cons

Financial risk (one may lose everything at the time if the fund manager becomes bankrupt).
High administrative cost (monitoring, economy of scale, inter-scheme flow, advertising and marketing, etc.)
The disposable income of the lower income group will be substantially reduced. Yet, the return of their savings in the MPF will very likely no more than the saving interest rates which in the past 10 years had been 5% less than inflation. Economically, the net effect of MPF reduce the net present value of their life long earnings.
For about half of the working population, the MPF is unable to provide a level of protection better than the CSSA. Housewives are not even protected.

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The Central Provident Fund (CPF)

Features:

A single scheme operated by the government or a statutory body set up for this purpose

Contribution similar to MPF.

Implications for the protection of retirement: similar to MPF yet slightly different (ref. Pros and cons discussed below).

Pros

Low/No financial risk
Low administrative cost (economy of scale, no inter-scheme flow, no advertising, low collection)
Socialization of cost, i.e. lower income groups are slightly better off.

Cons

Low rate of return
Centralized management of large volume of fund (trust on SAR government, unsettling effect on financial, monetary and foreign exchange markets)

　

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The Old Age Pension Scheme (OPS)

1. When it was first proposed in 1994, it has the following features:

1.1 Each permanent resident of HK aged 65+ will receive a pension of $2,300 per month. [It should be almost $2,900 per month now.]

1.2 The Employer and Employee will each contribute 1.5% of salary income to the scheme. [Government does not have to contribute. If it has to contribute, each should contribute 1% of the total salary income, i.e. approximately $8B, which is in fact less than the total $9 B (OAA + CSSA on elderly).]

1.3 The Consultant (The Wyatt Company) and subsequently the Government suggested that the value of the pension should be inflation indexed.

2. Projections

2.1 The total contribution rate will increase from 3% of the total salary income in 1994 to 7.2% in 2036 (peak), and will settle around 6.5% in the long run, i.e. the burden will not be ever increasing.

2.2 If the government has to contribute 1/3, it has hardly any impact on the total government spending now. In fact, there will even be savings in the long run. In ten years time, we can save an amount equivalent to 0.2 point in tax rate (both standard tax rate 15%and corporate profits tax rate 16.5%). In the long run, we can save up to 0.3 point in tax rate.

3. Implications for existing provisions

3.1. With the OPS, there is no need for the OAA.

3.2 With the OPS, there is no need for the CSSA for the elderly, except that we have made provisions for housing and medical expenses for those who have hardly anything else apart from the pension.

3.3 There will be savings to develop other aspects of elderly service.

Pros

Immediate protection for the elderly
Lower income groups are substantially better off
Housewives are protected
People with disability are protected
No stigma for elderly receiving it
Reduce burden on General Revenue of government

Cons

Politically not feasible when MPF is already in place.
Egalitarian value not consistent with capitalistic values of HK people.

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Summary: Issues in social security and retirement benefit

1. Role of Government

Big or small government. (e.g. CPF => big government, MPF => small government)

2. Trust towards the government

Before 1/7/97, the Chinese government did not trust the British Government, and therefore did not support the OPS.
The British Government did not trust the SAR government in the future, and therefore did not support the CPF.

3. Political muscles

The financial sector and the rich always have a stronger influence. The lobby for MPF is very strong.

4. Protection of society or individual

OPS emphasizes more the protection of individual
MPF and CPF emphasize more the protection of society.

5. Individual or collective responsibility

OPS and CSSA emphasize collective responsibility
MPF and CPF emphasize individual responsibility

6. Short term or long term problem

OPS and CSSA solve immediate problems. CSSA as a means to protect retirement in the long term is not quite viable.
MPF and CPF do not solve the present lack of retirement protection. They are meant for the longer term.

7. Values

Egalitarian values support improvement of CSSA and implementation of OPS
Capitalistic values support MPF.

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