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Old Age Pension (Letter to Principal Assistant Secretary for Education & Manpower)

June 20, 1994

Mr. A M Reynalds
Principal Assistant Secretary for Education and Manpower
38th Floor, Exchange Square II,
Central,
Hong Kong.

Dear Mr Reynalds,

Enclosed are various tables the Hong Kong Democratic Foundation has constructed, using different sets of assumptions, to research the parameters of viability for an old age pension and which we hope might be of interest to your Branch in your studies on this matter.

We have produced two sets of tables, one set assuming pension subscriptions by employers and employees of 2% each and alternatively of 2% from employers and 1% for employees, with the Government making a two part contribution, using its present level of support for the elderly and as an employer in its own right The other set also assumes pension subscriptions by employers and employees of 2% each and alternatively of 2% from employers and 1% from employees, but this time with the Government making a contribution equivalent to the employers 2% contribution.

The first set of tables referred to above is labelled OAPB, OAPAB, OAP1B, OAP1AB, OAP2B and OAP2AB. The second set of tables is labelled OAPC, OAPCA, OAP1C, OAP1CA, OAP2C, OAP2CA.

Each set consists of three sub-sets of two tables per sub-set. The three sub-sets use inflation rates of 10%, 8% and 6% respectively with annual average salary increases projected at 11.5%, 9.25% and 7% respectively. The two tables in each sub-set cover two alternative pension subscription rates, 2% of salary each from employer and employee and 2% from employer with 1% from employee.

In calculating the pension subscription, we have used the model labelled Schedule A. This takes a total workforce, including the Civil Service, of 2,775,084. However in forecasting our forward figures, for simplicity's sake we have not assumed any increase in the size of the workforce, although the 1991 census projects the workforce will rise to 3,536,000 by the year 2011. Therefore, our tables actually underestimate the contribution from pension subscriptions, possibly quite significantly.

The pension subscription assumes that in the base year no one earning less than HKS3,000 per month will subscribe, nor will the employer be liable for a contribution on those members of its staff earning less than HK$3,000 per month and that there will be a cap on subscriptions of HKS500 per month per employee for employers and employees alike (HK$250 per month if the employee contribution is 1%). However, in our forward projections we have assumed that both the lower and upper limits will increase in line with inaction.

In our first set of tables, we have made a very rough estimate that the Government's 2% of sally contribution as an employer would be HK$700 million in 1994 and forecast this forward by the same various salary increase rates we have assumed for the private sector. For our estimate of the Government’s contribution based on its current support for the elderly, we have estimated the figure for 1993 to be HK$3 billion and the number of elderly aged 65 and above at 543,500 and therefore arrived at a per capita amount spent of HK$460 per month. Using this as the basis, we have then forecast forward using the relevant inflation rates for the table and taking into account the projected increase in the elderly.

Due to our limited resources, the various assumptions we have made have had to be somewhat arbitrary and coarse. However, we believe that the figures we have produced show quite clearly that an old age pension can be devised that will produce a monthly payment generally acceptable to the majority of people in Hong Kong and at a cost that the community will feel it can afford.

Yours sincerely,

G W H Cautherley
Vice Chairman

Enclosure

Assumptions

1. Annual inflation rate: 8%
2. Annual average salary increase rate: 9.25%
3. Pension subscription base for calculation is as per Schedule A
4. Government allowances to elderly is based on the average figure of HK$460 per month spent per person aged 65+ estimated for 1993 and adjusted annually by the inflation rate as shown in Assumption 1