We call for abolition of non-means-tested schemes, staggered subsidies for public healthcare and a deployment of the savings on a higher socal safety net and better healthcare. HK can't pursue a universal handout without breaching the Basic Law, and even if it could, the Laffer Curve may make it unsustainable as taxable profits and earnings would shift away. Finally, the MPF is a costly interventionist failure that should be scrapped, and if it is not, then LSP must be phased out to allow full portability of MPF assets.

Submission to Public Engagement Exercise on Retirement Protection
21 June 2016

This is the submission of Webb-site.com to the Public Engagement Exercise on Retirement Protection. For the last 6 months, from Winter Solstice to Summer Solstice, the HK Government has been consulting the public on what kind of system it can or should have for ensuring that nobody has less than a socially acceptable standard of living in retirement.

Webb-site supports having a social safety net, regardless of age. Old or young, able or disabled, it is necessary for a secure and harmonious society that we look after those who are unable to look after themselves. At the same time, care must be taken to spend limited public resources wisely, not to raise the social safety net to a level which removes the work incentive or the incentive to save for a better standard of living in retirement, and not to embark on schemes that are fiscally unsustainable or even unconstitutional.

No welfare if you fare well

Welfare payments and other support should be for those who need it, not for those who fare well already. HK has unfortunately accumulated a mixture of conflicting policies which result in wastage of public resources. By providing welfare for those who don't need it, we are already reducing the capacity to provide more for those who do. For example:

Figures from the Social Welfare Department show that when OALA was introduced in 2013-14, the number of OAA recipients (including those aged 65-69 who were previously means-tested) dropped by 354,641 to 191,634, and the number of recipients for the new OALA then was 416,166.

As we noted in our article "Help the needy, not the needless" (12-Oct-2012), the number of eligible claimants of elderly Comprehensive Social Security Assistance (CSSA) (which, just to confuse things further, kicks in at 60, not 65 or 70) had flat-lined for a number of years. This is because although the elderly population is increasing, the lifetime earnings and educational attainment of new retirees is better than earlier ones. In fact, the number of elderly CSSA claimants has now dropped 22% in six years, from 187,128 at 31-Mar-2010 to 146,135 at 31-Mar-2016.

In most remaining cases, persons receiving OAA would not qualify for OALA because their assets or income (excluding their home and insurance policies) would be too high, and those receiving OALA would not qualify for CSSA, because that has a proper means test (including all assets and income) but pays more, with a starting level of $3,150 per month for an able-bodied 60 year-old, plus a "Long-Term Supplement" of $2,090 per year after the first 12 months, plus various supplements in certain circumstances.

Wastage

The 3 wasteful schemes identified above, and these are not the only ones, already cost a total of HK$17.7bn per year, a figure which will rise in real terms as the population ages. This is money which could otherwise be spent in other areas, such as increasing the levels of CSSA payments for the genuinely poor, or expanding the capacity of the public healthcare system, to reduce waiting times. There, again, the Government adopts an irrational policy of charging only HK$100 per night in hospital and $100 per outpatient visit, regardless of wealth, except that payments are waived for CSSA recipients. There is no reason in principle why those patients who have sufficient incomes or assets should not contribute towards their healthcare costs, up to a sensible cap.

In response to a public consultation in 2008, Webb-site proposed a "staggered subsidy" system in which each patient (other than CSSA recipients) would pay, each year, 50% of the first HK$10,000 of their costs, 25% of the next $40,000 and nothing above that, limiting the expenditure to $20,000 per year. The excess would be paid by the Government out of general revenues, providing a de facto community pool of insurance. Such a co-payment system would make the public healthcare system more sustainable at a lower cost to the public purse than will otherwise be the case. Continuing at a fixed token rate per night, even if it is adjusted for inflation, will not address the fact that subsidies are being wasted on those who don't need them.

Basic Law

Any attempt to implement universal handouts at the levels others have suggested for all elderly people, rich or poor, would likely be subject to judicial review for breach of Article 107 of the Basic Law, which states:

"The Hong Kong Special Administrative Region shall follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product."

If the Government adopts a universal handout then it would be deliberately steering Hong Kong onto a path that would cause the budget to grow faster than the growth of gross domestic product, breaching the last part of Article 107. Having entered the post-colonial era with public expenditure in 1997-98 at 17% of GDP, it has already risen to 21.2% of GDP in 2016-17, according to the latest budget estimate. A large part of this increase has been caused by indiscriminate handouts as well as spending on uneconomic infrastructure projects such as the HK$84bn express rail link to Shenzhen.

It's worth mentioning that to a lesser extent, corporate welfare (an oxymoron) has also been involved, such as the HK$1bn BUD Fund (for Branding, Upgrading and Domestic (PRC) sales) launched in 2012, the $11.2bn granted since 2001 under various Innovation and Technology Fund schemes, and the underwriting of SME loans with Government guarantees.

Meanwhile, government revenues (including taxes, land premiums, stamp duty, betting duty and other duties) have significantly exceeded expenditure, resulting in an increasing hoard of public wealth in the Exchange Fund. This is not the "fiscal balance" required by the Basic Law. Taken together, the fiscal reserves, reserves of statutory bodies and the accumulated surplus of the Exchange Fund have increased by about HK$1 trillion since the 1997 Handover, sucking money out of the economy.

Can the revenue be raised?

Even though the Government has hoarded these reserves, that does not mean that a multi-decade commitment to universal handouts for an expanding elderly population, alongside increasing elderly healthcare costs, is sustainable from reserves alone. Government revenues would have to rise, and we should also note that continued heavy infrastructure spending is also likely to eat into those reserves.

Even if such a commitment to a universal handout were to survive the constitutional challenge outlined above, it is doubtful whether the tax revenues could actually be raised sufficiently to cover the future cost. Keep in mind the Laffer Curve. That is a basic observation that, as tax rates are raised, at some point, the revenue reaches its maximum and then declines. If tax rates are 0%, tax revenue is obviously zero. If tax rates were 100%, nobody would have any incentive to work or make a taxable profit, and tax revenues would also be near-zero. Somewhere between these extremes, revenue is maximised, but will it be enough to finance all the promises of the Government? We suggest not.

A large portion of HK's taxable profits are booked in Hong Kong solely because we have a lower rate (16.5%) than the mainland (25%). Manufacturers and traders shift their profits to the lowest-cost jurisdiction as far as they can. Hong Kong's current advantage of being the only financial centre in China without capital controls (apart from Macau) also incentivises that choice, because you can book your profits in hard currency rather than RMB. But as capital controls on the mainland are gradually abolished, retaining profits there will become more attractive if our tax rates are converging, or the profits may be shifted to other lower-tax jurisdictions such as Singapore or Macau instead.

Meanwhile, if skilled professionals in financial services and other mobile sectors can obtain lower tax rates in other jurisdictions, Hong Kong could suffer a brain drain, particularly for younger professionals who are already beginning to question whether the promises in the Basic Law are worth anything after 2047. Anyone graduating in 2027, just as sharp tax increases would be come necessary to fund the handouts, will have a possible 40-year career ahead of them, half of which lies after 2047. If China's markets become more open, many of them may just choose to work in the mainland or elsewhere and pay similar rates of tax instead of HK.

The World is littered with the carcasses of unsustainable non-means-tested welfare schemes. We must learn from others' mistakes. Hong Kong has prospered in the past by pursuing free market principles with a sustainable social safety net, one that we can afford to raise as long as it is means-tested. The legislators from across the political spectrum who have been calling for universal handouts are in fact working against the interests of the poor by calling for the diversion of limited public resources from the needy to the needless.

You, the Government, owe it to the people of Hong Kong, who did not elect you, to make choices in their best interests rather than pander to populist pressures.

The MPF

We cannot conclude without mentioning the Mandatory Provident Fund. The MPF has always been based on the erroneous and insulting assumption that those who can afford to save for retirement will not do so unless the law forces them to. Time has proven this wrong - the number of people who fall into the CSSA safety net has been in decline as the elderly population rises, even after they have spent whatever small amounts they received from the MPF in its early years, because they had other savings. HK, unlike many developed nations, does not penalise personal savings by taxing dividends (which are distributions of profits after tax) or capital gains, so those who can afford to save are not deterred from doing so.

The MPF in fact should stand for "Mandatory Payments to Fund-managers", since there is no option to self-manage the savings by buying non-fund assets such as bonds, equities, time deposits or gold. Over the first 15 years, according to MPFA figures, the average internal rate of return on MPF funds was 4.0%, which is only 2.3% in real terms, after inflation. But we know that the average annual expenses were about 2%, so the MPF has benefitted service providers, including fund managers, banks, auditors, brokers, trustees and custodians, almost as much as it has benefitted the employees.

For every $105 that an employer spends on an employee (up to a cap), $95 goes to the employee and $10 goes into the MPF, dressed up as a 5% contribution from each side on $100 of salary, and of that MPF money, almost half of the gross returns will be eaten up in fees and costs before it is paid out in a lump sum at 65. If the scheme was intended to protect those who could save but won't, then the lump-sum payout may be blown in one night in Happy Valley or Macau, or in paying off pre-retirement debts, so the MPF doesn't even achieve that purpose.

We submit that the MPF is an interventionist failure and should be scrapped. Instead, return free choice by giving $105 to the workers and let them make their own spend-or-save decisions, in the knowledge that the social safety net will still be there if they need it. Most of those who can save will save; the social safety net will catch them if they fall, but few would deliberately fall.

If the MPF is to be retained, then the Long-Service Payment (LSP) system should be phased out as proposed in our article "Solving the MPF-LSP offset problem" (21-Jan-2014). Accrued entitlements would be preserved, but no new LSP entitlements would accrue after a cut-off date, and the amount of MPF assets that could be offset against those LSP obligations would be frozen on that date too. This proposal includes full portability of both employer and employee MPF assets, increasing the administrative efficiency of the scheme.

© Webb-site.com, 2016

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