1 (Reprinted from HKCER Letters, Vol. 26, March-July 1994) How Not to Take the Worry out of Growing Old Y.C. Richard Wong Background The government's recent proposal for an old age pension scheme is being promoted as a plan which takes the worry out of growing old. Contrary to its claims, the proposal will achieve the exact opposite and make the vast majority of the population less secure in old age. The proposal was clearly conceived in haste, with little analysis of the broader and more long-term implications, and it will surely spell disaster for Hong Kong. In December 1993, the government, in a totally unexpected move, reversed its previous position and proposed a universal old age pension scheme with central redistributive features. The move was all the more puzzling since there was no public pressure for a redistributive scheme. To most observers, the Hong Kong government was a most unlikely candidate for proposing such a scheme, which most societies have been trying hard to avoid or to eradicate. The details of the original proposal were sketchy but included two key features. First, the scheme was to be financed by a 6 percent payroll tax, with employers and employees each contributing 3 percent of salaries. Second, benefits were to be in the form of equal payments to elderly individuals. A monthly entitlement equivalent to roughly 30 percent of the median monthly income of the working population, i.e., $2,300 in 1994, was initially proposed. The figures were tentative and were to be finalized pending an actuarial study. Whether the proposed old age pension scheme will be solvent depends on: (1) the change in demographics over time; (2) the rate of growth of salaries over time; (3) leakages in collecting tax contributions; and (4) the level of entitlement benefits. Accurate estimates will be very hard to obtain because of the difficulty in predicting economic and demographic changes in Hong Kong over the long run. A number of economic studies have since indicated that the original proposal cannot be financially viable. Professor Isaac Ehrlich, who analyzed the figures, concluded that the scheme would become insolvent