Old Age Crisis Worldwide How Does it Affect Hong Kong. by Michael Sze December 10, 2003

Transcription

1 Old Age Crisis Worldwide How Does it Affect Hong Kong by Michael Sze December 10, 2003

2 Agenda Worldwide perspective Fundamental theory of social security Pension reforms in various countries Some older economies Some younger economies Some Asia Situation in Hong Kong Mandatory Provident Fund Ultimate solution for Hong Kong

3 Basic Demographic Effect Pension Cost as % of GDP Germany Japan Netherlands United Kingdom United States Souce: OECD Aging Populations: The Social Policy Implications. Paris, 1988.

4 Relationship Between Percentage of the Population over 60 Years Old and Public Pension Spending Pension spending as percentage of GDP Poland Luxembourg France Austria Italy Greece Sweden 8 Uruguay U.K. Panama U.S. 4 Costa Rica Japan Israel Australia China Jamaica Percentage of population over 60 years old Source: Estelle James: The European Pension Crisis

5 Public Health and Pension Spending versus Population Aging Spending as a percentage of GDP 20 Czechoslovakia Austria Sweden Poland Spending on health and pension Swaziland Zambia Brazil Trinidad & Tobago China Jamaica New Zealand Iceland Canada Australia Cyprus Japan Spending on health S. Korea Indonesia Percentage of population over 60 years old U.K. Switzerland Source: Estelle James: The European Pension Crisis

6 Implicit Public Pension Debt, 1990 Canada Explicit debt Implicit public pension debt France Germany Italy Japan United States Source: Estelle James: The European Pension Crisis Percentage of GDP

7 Fundamentals of Social Security Let B be average pension benefit per retiree R be number of retirees Total pension payment = R x B On the other hand, total output = W x P, where W is number of workers, and P is productivity Output not consumed by workers is used to pay the retiree pensions: W P (S + T), where S is saving rate, and T is tax rate R B = W P (S + T)

8 Social Security Formula R B = W P (S + T) R / W = P (S + T) / B Ln R Ln W = Ln P + Ln (S + T) Ln B Taking partial derivative with respect to time r w = p + (s + t) b where each term denotes the % rate of increase of each term If rate of increase in retirees is greater than workers, this must be made up by Productivity increase Savings and tax increase, or Benefit decrease

9 Implication on Pension Reforms Technical formula is independent of DB or DC method Whether it is full funding or PAYGO Some fallacies in reform policy Move from PAYGO to full funding will not save Social Security Pension problems cannot be solved if we all save more Move from PAYGO to private funded pensions will avoid the need to raise taxes Real difference: DB trouble is easier to see

10 Some Social Security Reforms US cannot agree on any reform Canada reformed by tax increase and benefit cut (1999) found inadequate next year In 2002, Italy proposed to increase RA to 65 in failed after general strike 25% workers France proposes increasing RA gradually from 60 to 65 Over 2 million people went on strike (4/2003) Germany encouraged people to take out private pensions or company options not adequate (2001) UK: Modest public PAYGO floor, funded private savings wide spread protests for inadequate pensions

11 Other Social Security Reforms Japan DB reform: increase RA gradually 60 to 65 Singapore Central Provident Fund contribution 20% from employees, 16% from employer Used for housing, education, medical care, retirement Malaysia Employee Provident Fund contribution 9% from employees, 12% from employer China 3 Pillars Pillar I: State Basic Pension: 20% ave. provincial wage Pillar II: Individual account 11% contribution Pillar III: Voluntary private sector supplementary plans

12 Hong Kong Population Hong Kong Population Population ('000) Male Female Population ('000) Male Female Hong Kong Population 2011 Hong Kong Population Population ('000) Male Female Population ('000) Male Female Source: Census and Statistics Department of Hong Kong

13 Hong Kong Male Mortality Rates Death Rate per Thousand Age Source: Census and Statistics Department of Hong Kong

14 Mortality Improvement 60.00% % Decrease in Mortality Rates 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Age Source: Census and Statistics Department of Hong Kong

15 Dependency Ratios Population (in 000 s) Age ,016 1,334 2,054 2,714 Age 60+ 4,686 5,187 5,138 4,990 Dependency Ratio 22% 26% 40% 54%

16 Annual Rates of Increase % Increase in Retirees % Increase r in Workers Difference w r w 2002 to % 1.14% 1.93% 2011 to % % 5.02% 2021 to % -0.32% 3.47%

17 Implications of Demographic Changes for Hong Kong Continual decline in mortality rates Life expectancy from birth 78.2 for males and 84.1 for female in 2001; 82.3/87.8 in 2031 Dependency ratios increases from 22% in 2002 to 54% in 2031 Two workers must carry one retiree % Rate of increase in retirees exceeds that of worker by 4-5%. This must be made up by Productivity increase: not easy Benefit decline: not desirable Savings and tax rate increases: only choice

18 Brief Description of Mandatory Provident Fund of Hong Kong Implemented in 2000 to cover worker with age between 18 and 65 High compliance rate 94.2% of employers 95.6% of relevant employees 78.8% of self employed Contribution Rate 5% pay each from employer and employees Employees with monthly pay < HK$5,000 may opt-out

19 Description of MPF (Continued) Tax deductible contributions Employees: 5% pay, up to $1,000/month Employers: 15% pay Investment options: flexible for employees Investment income: not taxable Retirement age: flexible Retirement benefit: lump sum of individual accumulated fund, with no tax

20 Test Effectiveness of MPF To test the effectiveness of MPF, we constructed a stochastic simulation program Analyze various strategies on retirement income as % of pay On contribution rate Retirement age Entry age Investment This retirement income % is called Pay Replacement Ratio (PRR)

21 Item Projection Parameters for Base Case Study Parameter Entry Age 30 Retirement Age 60 Initial W ealth 0 Contribution Rate Employer 5% Employee 5% Excess Pay Increase 0% Investment Strategy Ages A ggressive Ages Moderate Ages Conservative

22 Investment Strategies Aggressive Moderate Conservative Long Bonds 30% 50% 50% Domestic Stocks 40% 20% 20% Foreign Stocks 30% 30% 10% 3-month Fixed Deposit 20%

23 Data Source Assumptions Data Source Consumer Price Index Census and Statistics Dept. of HK 3-Month Fixed Deposit Census and Statistics Dept. of HK Long Bond Yield US Long Government Bond Yield Executive Wage Increase Census and Statistics Dept. of HK Domestic Stock Return Hang Sang Index Total Return Foreign Stock Return Standard & Poor 500 Total Return Annuity Assumptions Mortality 1983 Group Annuity Mortality Interest Rate 6% per annum

24 Simulation Program Parameters Retirement Initial Employer Employee Entry Age Age Monthly Pay Excess Pay I Wealth ContributionContribution Sex ,000-2% 500,000 10% 5% M Investment Strategy Portfolio Distribution Start Age End Age Long Bonds 3-Months FixeDomestic StoForeign Stocks % 0% 40% 30% % 25% 20% 0% % 25% 20% 0%

25 Retirement Analysis for Male Age % 180% Pay Replacement Ratio 160% 140% 120% 100% 80% 60% 40% 20% 0% Percentile RA 60/5% Er/5% Ee Cont. RA 60/ 15%Er/15% Ee Cont. RA 65/ 10% Er/5% Ee Cont.

26 Simulation Program Parameters Retirement Monthly Excess Initial Employer Employee Entry Age Age Pay Pay Increa Wealth ContributiContributi Sex ,000 2% 50,000 15% 10% M Investment Strategy Portfolio Distribution Start Age End Age Long Bond3-Months FDomestic SForeign Stocks % 0% 40% 30% % 0% 20% 30% % 20% 20% 10%

27 Retirement Analysis for Male Age % 300% Pay Replacement Ratio 250% 200% 150% 100% 50% 0% Percentile RA 60/ 5% Er/ 5% Ee Cont RA 60/ 15% Er/5% Ee Cont. RA 55/ 15%Er/10% Ee Cont.

28 Concluding Remarks Different persons need different degree of assurance The more sure the person needs, the more the person needs to contribute For old employees with sizeable savings already, the retirement income will be grossly inadequate It will take over 30% total contribution to produce decent retirement income These employees must try to retire later, say at 65 There is severe transition issue which must be addressed

29 Concluding Remarks (continued) Even for young employees, 10% contribution is inadequate In general, it takes over 15% contribution to produce reasonable retirement income For early retirement, say at 55, more than 25% contribution may be needed Starting at 30 instead of 45, the person may contribute 5% less Current investment strategy is quite optimal