February 12, 2007

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The demographic time-bomb myth

In the middle an interesting series of pieces on the numerous flaws with Hong Kong's MPF retirement savings system, David Webb finds fears of a demographic time-bomb wanting:

Governments of developed economies around the world, and Hong Kong is no exception, wring their hands over a purported "demographic time bomb" or the "rising cost of old age social security". It makes for sensational headlines, but it is really a myth supported by the vested interests of financial institutions who push for legislative mandates or tax incentives to capture savings. Here are the realities:

  • For sure, people are living longer, and birth rates in the developed economies have fallen below replacement levels, but there is no shortage of young people from the developing world to make up for it - and migration will be incentivised by work opportunities. According to the US Census Bureau, in 2030, the world population is projected at 8.3bn, up from 6.5bn in 2006, and the percentage of working-age between 20 and 64 will be 57.1%, up from 55.6% at present.
  • As people live longer and stay fitter longer, they are able to work longer, helping to offset the increase in the retired/working ratio. In 2030, the global percentage over 65 will increase from 7.4% to 12.0%, but the percentage over 70 will be 8.0%. One option is to raise the retirement age for social security by 1 year every 5 years from now until 2027, which would keep the percentage of the population above that age static.
  • Technology over decades has produced, and continues to produce, productivity gains so that although the retired/working ratio has increased, the number of workers needed to support each retiree on welfare has reduced. We are no longer in a world of subsistence farming.
  • Those who are having fewer or no children will spend less of their lifetime income on child-rearing, increasing their ability to support themselves in retirement.
  • Finally, in the case of a recently-developed economy like Hong Kong, remember that people retiring today started work when Hong Kong was just a backward manufacturing economy with much lower real (inflation-adjusted) incomes than now. They did not have the lifetime earnings capacity that many people have today. The retirees of 2030 will, on average, be more prosperous than those of 2006, and fewer will need social welfare.
  • His analysis is entirely accurate but ignores the political dimension. Hong Kong is busy keeping people out, especially those from the Mainland coming here to have babies that may end up being the productive Hong Kongers of tomorrow. Webb's point that as society ages people can work longer is again true but the trend has pointed the other way: people are looking to retire earlier and earlier, even as they live (and live better) for longer. Eventually this will get taken care of as the pay of those close to retirement increases to entice them into working for longer, but this is likely to make income inequality worse. Ironically the old will get richer, not poorer, as they age.

    Webb's series on the MPF also notes compulsary savings schemes are all the rage for governments these days (expect medical savings accounts soon) because they are effectively a stealth tax. They are also highly regressive - the poorest are hurt the worst, especially because these schemes typically have a cap so that high income earners actually pay a far smaller percentage of income than someone earning below the cap. While saving for retirement is important, the working poor will have far greater utility from having that extra bit of cash to spend now. Furthermore the amounts being saved are tiny and, as Webb describes, get eaten up by fees and charges. These accounts will not do much to relieve the costs of supporting poorer retirees in future.

    By dressing it up as saving for the future, stealth taxes and curbs on individual liberty are easy to impose on an unsuspecting public. That's why you can expect to see more of this kind of thing.

    posted by Simon on 02.12.07 at 04:07 PM in the Hong Kong category.


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    China has another demographic time-bomb to deal with, though: gender balance.

    posted by: Jonathan Dresner on 02.13.07 at 03:20 AM [permalink]

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