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Hong Kong Consults On Pensions, Warns Of Tax Hikes

by Mary Swire, Lowtax.net, Hong Kong
28 December, 2015

The Commission on Poverty (CoP) has launched a six-month public consultation on the future of retirement protection in Hong Kong, and, in particular, on the substantial tax rises that would be necessary to introduce a universal pension scheme.

On December 22, CoP issued a report, entitled "Retirement Protection, Forging Ahead," which asks whether the "regardless of rich or poor" principle or the "those with financial needs" principle should be adopted. The document puts forth two simulated options and compares their increased expenditure and the impact on public finances.

"Hong Kong has adopted a multi-pillar retirement protection system," said the Chief Secretary for Administration and CoP's chairperson, Carrie Lam. "The social security pillar and the retirement protection system were strengthened through the introduction of the Old Age Living Allowance (OALA) in 2013. While OALA already benefits over 420,000 people, the Government remains determined and committed to enhancing the well-being of the elderly."

Under the "regardless of rich or poor" approach, it is assumed that every elderly person over 65 years of age would receive a pension of HKD3,230 (USD417) per month. Under the "those with financial need" approach, the option would provide the same monthly payment (which is higher than the current OALA payment of HKD2,390) to elderly individuals with assets of no more than HKD80,000 (single person) or no more than HKD125,000 (couple).

The report notes that, under the simulated "regardless of rich or poor" option, the total increased expenditure over 50 years would amount to nearly HKD2.4 trillion (at 2015 prices), or almost 10 times the HKD255.5bn required by the simulated "those with financial need" option.

The former approach would advance the onset of a structural fiscal deficit in Hong Kong by six years to 2023-24, and the depletion of its fiscal reserves by eight years to 2033-34. Under the latter approach, both situations would be brought forward by one year.

It is pointed out that implementing the "regardless of rich or poor" option would therefore need a substantial increase in taxes, or even the introduction of new taxes. This could, it is said, "deviate from Hong Kong's long-established low tax regime."

If the increased expenditure is to be met by tax revenue, it is suggested that, during the 50-year projection period, the Government would be required to raise the profits tax rate by about an additional 4.2 percent to 20.7 percent (as against an additional increase of only 0.4 percent for the "those with financial needs" option), or raise the standard rate of salaries tax payable by 8.3 percent to 23.3 percent (as against a rise of only 0.9 percent).

Further proposed choices to provide the required additional revenue for the "regardless of rich or poor" option would be to introduce a goods and services tax and set the rate at around 4.5 percent, or impose a payroll old age tax with employer and employee tax rates in the range of 1.6 percent to 3.9 percent respectively.

In the report, the Government confirms that it has expressed reservations about the "regardless of rich or poor" option on various occasions, including in the 2015-16 Budget, and that this remains its position. Apart from the prospect of increased taxation, two of the Government's other main concerns are that the increased expenditure arising from the option would "undermine the long-term sustainability of public finances," and would "reduce the financial capacity of the Government in handling other retirement protection initiatives (e.g. healthcare, long-term care, and community care services)."

The six-month consultation period will end on June 21, 2016.

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