Saving up enough to live through one’s ‘golden years’ in retirement has never been easy. Hong Kong’s high cost of living, a longer life expectancy for men and women, plus other negative factors may force young people to plan well ahead to ensure a stable and cozy financial future. Li Xiaoyun reports in Hong Kong.

As Hong Kong people live longer, coupled with soaring expenses and a fast-graying community, how much would one need to live comfortably in retirement, and what’s the best way to secure it?

A recent report by banking giant HSBC, titled “Quality of Life”, shows Hong Kong people believe that $1.1 million would offer them a “comfortable” life after retiring. But their current savings fall far short of that, at only $285,000, leaving a shortfall of $815,000, or 74 percent of the amount they need for retirement.

Another report by the Institute of Financial Planners of Hong Kong in 2020 said retirees in the special administrative region spent HK$11,453 ($1,465) monthly on average. If this amount were to last for 20 years of living after retirement at 60, it would need to be more than HK$2.75 million.

For a comfortable and financially secure retirement, it’s very important for individuals to plan ahead, formulate an investment strategy, and design a long-term objective, especially when they’re young.”

Lo Tak-fong, head of pensions at HSBC Hong Kong

To close the gap, wealth management experts say residents should plan their retirement early to mitigate potential financial pressures in their sunset years, and prevent the risk of poverty. Other stakeholders should come up with comprehensive solutions to help retirees build up a stronger financial foundation, as the Mandatory Provident Fund program isn’t enough to cover all post-retirement expenses.

Financial services company Fidelity International and market research and data analytics firm YouGov jointly conducted a survey in June on women’s investment and financial management plans. It shows that women born after 1981 exhibited an average initiation of investment in their 20s, marking a substantial shift compared to their counterparts born in the postwar baby boom era, who typically made their first investments at the age of 38.

Although the poll specifically examined women’s investment willingness and choices for retirement, it can still shed light on society’s broader shift in awareness of the problem — planning financially for retirement isn’t confined to those intending to call it a day, but rather a practice that should begin at an early stage.

“Hong Kong residents only realize the need to make financial plans for retirement when they reach 40,” says Terence Chong Tai-leung, executive director of the Lau Chor Tak Institute of Global Economics and Finance at the Chinese University of Hong Kong. In that case, anyone in his or her 40s may wonder if it’s possible to save enough for retirement expenses.

Lo Tak-fong, head of pensions at HSBC Hong Kong, says, “For a comfortable and financially secure retirement, it’s very important for individuals to plan ahead, formulate an investment strategy, and design a long-term objective, especially when they’re young, in order to build a strong foundation for their financial future.” 

Apart from the high cost of living, the Investor and Financial Education Council sees longevity as another compelling factor that calls for early retirement planning by residents. The SAR is among countries and regions with the world’s longest life expectancy. In 2022, Hong Kong men had an average lifespan of 81.3 years, while women lived even longer, with an average of 87.2 years.

The council says it’s always wiser to start saving early because the longer the investment period, the more one can benefit from the compound interest earned.

Many Hong Kong people perceive that as they are already saving through the MPF, there’s no need for additional personal savings. But can MPF contributions alone enable them to achieve their desired retirement goals?

The World Bank in 1994 proposed a three-pillar retirement protection framework. It was refined in 2005 by introducing a more well-rounded classification of five pillars. A noncontributory “zero pillar” is designed with the poverty alleviation objective in order to provide all elderly people with a minimal level of protection. A mandatory “first pillar” refers to the provision of retirements benefits by the government to eligible elderly people based on their income. A “second pillar”, which is also mandatory, is typically an individual savings account with a wide set of design options, including active or passive investment management, choice parameters for selecting investments and investment managers, and options for the withdrawal phase. The third and fourth pillars refer to voluntary savings and informal support respectively.

According to the definition, Hong Kong’s MPF falls under the “second pillar”. “But any single pillar alone can’t address all the retirement needs of the working population,” warns Cheng Yan-chee, managing director of the Mandatory Provident Fund Schemes Authority.

Chong, who is also an associate professor of economics at the Chinese University of Hong Kong, agrees, saying that to maintain a preretirement standard of living, it’s essential for young people to cultivate a saving habit at the onset of their professional career by stashing away at least one-third or, ideally, a greater portion of their monthly earnings, as a 10 percent combined contribution from both employees and employers under the MPF program falls short in this regard.

Cheng says managing the MPF has not been without challenges. More specifically, they revolve around addressing prevalent misconceptions held by the public.

Young people, for instance, tend to see retirement as a distant concern that’s irrelevant to their immediate priorities. Such an attitude could lead to inertia in acquiring knowledge about MPF investments.

Some MPF contributors also perceive monthly contributions as relatively insignificant compared to their overall income, undermining their inclination to proactively manage them.

The MPF, with a predominant role, is just a part of Hong Kong’s retirement system, as the city shares a commonly adopted practice worldwide — a “two-legged” retirement system, or a mix of defined benefit and contribution models. The MPF falls under the latter, with the level of retirement protection directly tied to the amount of pre-retirement contributions.

Post-retirement poverty

The SAR’s defined benefit model is primarily regarded as a poverty alleviation measure or welfare extended to the elderly as a gesture of respect, including the means-tested Comprehensive Social Security Assistance and the Old Age Living Allowance programs. However, the benefits offered are relatively low — ranging from HK$3,915 to HK$6,900 a month for single senior citizens, depending on their asset thresholds.

In addition, residents aged 70 and above are entitled to a monthly old-age allowance of HK$1,570 without having to undergo any scrutiny.

By comparison, defined benefit plans account for a larger proportion of the retirement system in the United States, which can be viewed as placing the responsibility of supporting the elderly on the younger generation, Chong says. “This approach implicitly underscores the significance of fertility rates, as an ample number of younger individuals are needed to generate wealth and sustain the well-being of the elderly.” Hong Kong’s low fertility makes such a model infeasible.

The Hong Kong Poverty Situation Report, published by the Census and Statistics Department in November 2021, projected that the proportion of elderly people would see a more pronounced upward trajectory in the next decade, suggesting a rise from 19.2 percent in 2020 to 28.5 percent by 2030, and exceeding one-third of the population at 33.7 percent in 2040.

Hong Kong already had 1.3 million senior citizens three years ago, comprising nearly one-fifth of the total population, with close to 90 percent of them being economically inactive. The report emphasizes that the aging population trend is unlikely to change in the near term, and is expected to add pressure on the city’s poverty situation.

Ray Lee, former chairman of the Institute of Financial Planners of Hong Kong, says, “With the anticipated extension of the average life expectancy and decrease in the birth rate, childless retirees may find themselves financially supporting their parents, but without filial support.”

Confronted with financial burdens, 1 of 7 Hong Kong residents expect to work after retiring, according to HSBC’s “Quality of Life” report.

Taking proactive steps for retirement savings and financial planning at an early stage may prove instrumental in mitigating post-retirement poverty. Janet Li, vice-chairperson of the executive committee of the Hong Kong Retirement Schemes Association, says she believes there has been growing recognition of the imperative to bolster the younger generation’s preparedness for retirement.

A comprehensive solution

Cheng says the MPFA has always encouraged employers, employees and self-employed people to increase their retirement reserves by making voluntary contributions, in addition to mandatory contributions.

The SAR government introduced the MPF tax-deductible voluntary contribution program in 2019 as an incentive to encourage MPF members to make voluntary contributions, which have seen a remarkable surge — having grown more than sevenfold, from HK$2.3 billion in 2004 to HK$19.3 billion in 2022. 

In the past decade alone, the amount of voluntary contributions had climbed by 112 percent. Out of the total contributions of HK$83.99 billion under the MPF in 2022, voluntary contributions accounted for 23 percent at HK$19.34 billion.

Cheng says that about one-third of the 70,000 tax-deductible voluntary contribution accounts were held by MPF program members under the age of 45 as of August. He says this suggests many young members prioritize early planning for retirement protection.

Under the MPF system, employees have control over their own contributions, but don’t have discretion over the 5 percent contributions from employers. Such an arrangement can be referred to as a “semi-autonomous approach”, Chong says. But he believes that employers’ contributions to the MPF typically aren’t driven by a pursuit of high returns. He suggests that the government should elevate this “semi-autonomous” program to “fully autonomous”, enabling employees to exercise control over employers’ contributions.

Promoting early retirement planning among the younger generation requires concerted efforts from all relevant stakeholders.

Li, of the Hong Kong Retirement Schemes Association, says she believes that young people, who are still working, have more time to plan their lives, enabling them to select financial products that are in line with their long-term objectives, while being aware that risk is an ever-present factor in investment.

From a market perspective, an average worker without financial literacy may find it arduous to navigate through the multitude of retirement products and make informed decisions. This highlights the fact that residents require not just a specific product, but a comprehensive solution that offers end-to-end services.

Li says that the association would like to see the government leverage its objective role in public welfare, and coordinate with entities, such as the Hospital Authority, the Hong Kong Mortgage Corp, the MPFA, and the Labour and Welfare Bureau, to establish a cross-bureau office to lead and implement a comprehensive retirement planning policy.

Contact the writer at irisli@chinadailyhk.com