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Hong Kong Report Proposes Tax To Fund Pension Reform

by Mary Swire, Lowtax.net, Hong Kong
25 August, 2014

A new universal pension scheme, to be funded by a payroll tax paid by both employers and employees and by the Government, has been proposed by an officially-commissioned study, researched by the University of Hong and entitled the "Future Development of Retirement Protection in Hong Kong."

The new pension, in addition to the present Mandatory Provident Funds (MPFs), Social Security Assistance and the Old Age Living Allowance, would pay elderly individuals over the age of 65 an additional HKD3,000 (USD387) a month, with the aim of taking them all above the poverty line.

With the Government providing an initial investment of HKD50bn and one-half of the ongoing funding, the other half would be provided by the payroll tax, which would range from one percent to 2.5 percent, depending on an employee's salary. The contributions would be on top of employees' current payments to MPFs.

For those earning between HKD6,500 and HKD10,000 per month, both the employee and their employer would pay 1 percent, while those with monthly earnings below HKD6,500 would be exempt, though their employer would still have to pay 1 percent. For employees earning between HKD10,000 and HKD20,000 monthly, both they and their employer would pay 1.5 percent. Finally, for people earning HKD20,000 or above (up to HKD120,000), both they and their employer would have to pay 2.5 percent of their salary.

Unlike the current social security systems available for the elderly, under the proposed pension system all Hong Kong permanent citizens above the age of 65 would be eligible, without a means test on their level of income in retirement.

The study was presented on August 20 to the Government's Commission on Poverty (CoP), which is chaired by Hong Kong's Chief Secretary for Administration, Carrie Lam.

It was reported that, after its presentation, some CoP members pointed out that Hong Kong would need to consider whether the direction to improve retirement protection should be to introduce such a new universal non-means-tested scheme with a uniform payment level, or to build on the existing system to direct public resources to help the elderly most in need through means tests.

CoP members were also said to have expressed concerns that increasing public expenditure to improve retirement protection benefits would worsen the Government's fiscal position and would further advance the anticipated future structural deficit as a result of an ageing population, while highlighting the controversies involved in raising tax or requiring additional contributions by employers and employees to finance new proposals.

The CoP has, in fact, decided that more time is needed to examine the report and discuss relevant issues in depth, and that further meetings to do that should be convened as soon as possible.

In a media interview, Lam confirmed, for the Government, that "at this moment in time, we have an open mind on the various propositions and recommendations. … I believe that at the end of the day we will definitely need to go out for an informed public debate in order to get some broad consensus on this very controversial subject before we could really take it forward."

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