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Consultation Paper on the Government's Proposals for an Old Age Pension Scheme

24th October, 1994

The Secretary for Education and Manpower
9th Floor, West Wing,
Central Government Offices,
Central,
Hong Kong.

Dear Sir,

CONSULTATION PAPER ON THE GOVERNMENT'S PROPOSALS
FOR AN OLD AGE PENSION SCHEME

Enclosed is the Hong Kong Democratic Foundation's response to the Government's Consultation Paper on an Old Age Pension Scheme.

The Hong Kong Democratic Foundation enthusiastically supports the broad principles behind the Government's Consultation Paper and is in agreement with most of the specific recommendations.

To ensure that our position in regard to each individual recommendation is clearly understood, the first part of our response indicates our agreement or disagreement with each recommendation as set out in Chapter 2 of the Consultation Paper, "Summary of Recommendations". The second part of our response puts forward our alternative views in respect of those recommendations in the Paper with which we disagree, which we hope will be regarded as constructive suggestions. Finally the third part of our response contains general comments we would like to make on the scheme.

I would particularly like to emphasize our call, in Part III of our response, for the Government to provide a commitment that in addition to implementing the OPS it will also vigorously pursue the question of a more comprehensive system of retirement protection.

It has always been the Foundation's stance that an Old Age Pension scheme was only the first and most urgent stage in the implementation of a comprehensive system of retirement protection for all our citizens and we very much hope that the Government can come round to accepting this view, as we believe it represents the general consensus within the community.

Yours faithfully,

George Cautherley
Vice Chairman

enclosure

HONG KONG DEMOCRATIC FOUNDATION
RESPONSE TO THE CONSULTATION PAPER
ON THE
GOVERNMENT'S PROPOSALS FOR AN OLD AGE PENSION SCHEME
"TAKING THE WORRY OUT OF GROWING OLD"

Part I

Chapter 2 Summary of Recommendations

Eligibility Requirements

2.1 The qualifying age for the receipt of pension benefits should be 65. Agree

2.2 Both men and women should receive their pension benefits at the same age. Agree

2.3 Potential OPS beneficiaries must have spent a minimum of 7 years continuous residence in Hong Kong prior to the date of application for the pension. Agree

Existing NOAA/HOAA recipients who do not qualify under this residence requirement when the OPS is implemented will receive their pension. Agree

2.4 A pensioner must continue to reside in Hong Kong for the pension to continue. Up to 180 days absence per year is permitted. Agree

2.5 No assets declaration is required in respect of potential beneficiaries who have contributed to the OPS for not less than 10 years (or in the transition period have at least 10 years continuous residence in Hong Kong prior to the date of application), and for those who are aged 70 or above. Agree

2.6 Non-contributors between the ages of 65-69 must be able to declare that their overall financial resources are less than $2 million. Agree

Benefits

2.7 The pension level should be set at $2,300 a month in 1994 dollars. Agree

2.8 Future pension increases should be indexed to the Composite Consumer Agree

Price Index.

Contributions and Funding Methods

2.9 All employers should withhold their employees' contributions from earnings and remit it together with their own portion of the contribution on a regular basis to the OPS Administration. Agree

2.10 Arrangements should be made to guard against misuse of contributions collected by employers and to recover withheld contributions collected by employers in the case of declared bankruptcies. Agree

2.11 Owners of unincorporated businesses, including the self-employed, should only contribute once a year. Agree

2.12 Non-local employees, including foreign domestic helpers, and non-local owners of unincorporated businesses are required to contribute. Disagree

2.13 Workers imported under the General Labour Importation Scheme should be exempt from contribution. Agree

2.14 OPS contributions should be in the form of a percentage of assessable income, to be shared equally between employers and employees in case of salary earners, but paid in full by owners of unincorporated businesses, including the self-employed. Agree

2.15 The definition of assessable income in the Inland Revenue Ordinance should be used for OPS calculations for salary earners. Agree

2.16 Non-salary earners should contribute to the OPS on the basis of assessable profits. Agree

2.17 Pensions should not be regarded as income for the purpose of assessing OPS contributions. Agree

2.18 Income earners making less than $4,000 a month should be exempt from contribution but their employers will have to pay the employers' share of the contributions Agree

2.19 There should be no income ceiling for contribution purposes. Disagree

2.20 Contribution records should be kept for each contributor. Agree

2.21 Assistance should be available to help employers calculate assessable income for their employees. Agree

2.22 Government is prepared to make a one-off contribution to the OPS as a start-up fund. Agree

2.23 Contributions to the OPS and benefit payments should commence at the same time. Agree

2.24 The OPS should adopt a fixed contribution rate funding method. Agree

Impact on Existing Schemes

2.25 OPS benefits should not be integrated with civil service pensions or subverted organizations' provident funds. Participants in the civil service pension schemes or provident funds run by subverted organizations should have to contribute to the OPS. Agree

2.26 Members of voluntary occupational retirement schemes should not be allowed to contract out of the OPS. Agree

Administration

2.27 All aspects of the OPS should be run by a new non-civil service public agency - the OPS Administration. Agree

2.28 The administration cost should form part of the total cost of the OPS and should be borne by contributors. Agree

2.29 Simple, user friendly procedures should be adopted by the OPS Administration for pension applications and payments. Agree

Cost of the OPS

2.30 The cost of the OPS will be funded entirely by the total contributions from employers, employees, persons with regular income and the Government. Agree The recommended rate of contribution is 1.5% of assessable income each from employers and employees in the case of salary earners (i.e. each to contribute 1.5% of assessable income), and 3% of assessable profits for the self-employed. Agree

Tax Deductibility and Investment Policy

2.31 Employers' contributions to the OPS should be tax deductible. Agree

2.32 The OPS pension should not be included as taxable income. Agree

2.33 Further consideration should be given to the OPS investment policy once the policy on funding has been determined. Agree

PLEASE SEE THE FOLLOWING SECTION FOR OUR ALTERNATIVE SUGGESTIONS IN RESPECT OF CLAUSES 2.12 AND 2.19 OF CHAPTER 2.

Part II

HKDF Specific Alternative Proposals

Foreign Domestic Helpers

While the HKDF in general supports the Government's principle that all members of the working population should be required to contribute towards the scheme, since under present immigration rules Foreign Domestic Helpers are only entitled to stay in Hong Kong while in employment under legal contract and there is no provision to allow them to remain resident after the completion of their periods of employment, we strongly believe Foreign Domestic Helpers should be exempted from contributing to the scheme.

Although, unlike workers imported under the General Labour Importation Scheme, who are normally restricted to a maximum of three terms of contract, Foreign Domestic Helpers have no limitation to the number of contracts they can work, we consider the principle under which their employment is allowed is similar to workers employed under the GLIS, who will be exempted from contributing to the OPS.

Income Ceiling For Contribution Purposes

We wish to propose that an income ceiling be set above which no additional contribution to the OPS would be required by either employee or employer. Our recommendation is that this ceiling be $480,000 per annum and be adjusted annually in line with increases in the Composite Consumer Price Index. The same ceiling rate of $480,000 per annum should also be applied to the assessable profits for contributors who are non-salary earners (including the self-employed).

Part III

General Comments

Qualifications For Continued Receipt of OAP

We have given serious consideration to recommending that those qualified to receive the OAP who maintain residence in the People's Republic of China should be allowed to continue to receive the OAP without having to comply with the maximum 180 days per year absence allowance proposed. However, we have concluded that while this might be considered a beneficial concession by some of our elderly and enable them to live more comfortably in a less expensive environment, it would not be received with approval by other residents of the People's Republic of China, who may then have to assume responsibility for funding benefits such as medical services for residents who had made no contribution to their economy and might be viewed by them as extending an unwelcome incentive to the elderly to settle permanently in China.

Frequency of Contribution

We are in general agreement with the proposals on this issue made in paragraphs 6.1 and 6.3 of the Proposals. However, we would like to suggest that the option be allowed for all employers to make contributions for themselves and their employees on a monthly basis as an alternative to the quarterly contribution schedule now proposed.

Income Floor

It is our assumption that the income floor of $4,000 for employee contributions will be raised at regular periods, preferably annually or bi-annually, in line with increases in the Composite Consumer Index and if this assumption is incorrect, we strongly suggest that this practice be adopted.

Employees Earning Less Than $4,000 Per Month

The HKDF suggests that the Government examine the financial implications in exempting employers from making a 1.5% contribution in respect of their employees earning below $4,000.

Government's Contribution

Our understanding of the Consultation Paper is that apart from its initial $10 billion start-up funding contribution and its 1.5% of assessable income contribution in respect of its own employees, the Government will also continue to contribute equivalent funds to those it would have expended on the NOAA, HOAA and standard rate of payment under the CSSA for persons aged 65 and above and that this contribution will be adjusted annually to take into consideration increases in the number of elderly and in the Composite Consumer Price Index. If our understanding in regard to future NOAA, HOAA and CSSA contributions is not correct, we wish to record our strong desire that this be adopted.

Sensitivity Analysis

To help allay public misgivings as to the ability of the community to fund the OAP within reasonable means, we suggest that the consultants carry out further sensitivity analysis using various adverse situation scenarios in respect of the three key assumptions of population growth, employment levels and real wage increases.

Private Pension Schemes

The HKDF sees the provision of an OPS as a first step in the establishment of a compre-

hen sive system of retirement protection for the community as a whole. We call upon the Government to provide a commitment that in addition to implementing the OPS it will also vigorously pursue the question of a more comprehensive system of retirement protection, particularly in view of the strong expressions of support for the implementation of compulsory private pension provisions or Central Provident Fund scheme made in many responses to the Government's Consultation Paper. We believe that many opponents of the Government's present OPS proposals would adopt a more conciliatory attitude if the Government were to give such an undertaking.

Scheme Title

Since the term "Old Age Pension Scheme" seems to have generated a degree of negative publicity and misconception in certain sectors of the community as to its underlying scope and purpose, we would like to propose the name of the scheme be changed to "Retirement Insurance Scheme".

Tax or Levy?

It is our understanding, from all the authorities we have studied, that the generally accepted definition of the word tax is that it is a compulsory contribution to the support of the government. Since the funding of "pay as you go" type pension schemes, such as proposed in this instance, is essentially transferred directly to recipients and furthermore as it is proposed that the scheme is run by a non-civil service agency contributions it is evident that it could not be regarded as a tax under this definition and a levy is a more appropriate description.