Monday, February 28, 2011

Budget woes and MPF

Recently, Hon Fin Sec John Tsang has said that he will consider other measures in this year's budget. The budget, at best, hasn't been received well by the public, noted through numerous demonstrations and protests at the Government House and LegCo. Like many of us, LegCo has raised concerns about the plan for a one-off injection of HK$6,000 into Mandatory Provident Fund retirement schemes. Their cause for worry is that recipients couldn't immediately use the funds given they would be locked up in the MPF for years.

Real cause for worry is that the MPF is a waste. With such high administrative and management fees, the (opportunity) cost to account holders is high and contributions forced by law into the MPF, where only fund managers have something to gain, could be better invested somewhere else. If there were ever a time for an injection (grating against the tradition of Hong Kong's laissez faire principles in what amounts to a redistribution of wealth), it would have been during the financial crisis, after the Government forced your salary into MPF accounts, and couldn't ensure it's value.

Estimates are that higher fees (administrative costs are ~1.92%) reduce future returns by as much as a third. Therefore, theHK$6000 injection actual value is less by at least one thousand dollars as a result of the high administrative costs. From the HK$24 bn injection, fund companies receive roughly (.02 x 24bn) HK$480 million. There are estimates that administration costs have already made fund companies HK$33 billion. In essense, you pay HK$13 K from your MPF acocunt just to have one.We're glad that political parties and individuals see eye to eye with Lion Rock on this, and further, that Tsang is willing to take a closer look.

See more writing on MPF from Lion Rock's website and the recent article below: 

Extra MPF cash only benefits fund managers
March 1, 2011

Handouts have remained the norm in the government's yearly budget, thanks to a surplus. And, with large fiscal reserves, it finds itself deep in a quagmire of political hypersensitivity, pressured to portray its measures as returning funds to residents. Rather than tax breaks, erroneously perceived to aggravate inflationary pressure, the government suggested a one-off MPF injection of HK$6,000 into all accounts. The logic that, with high inflation, it was safer to make use of the Mandatory Provident Fund is highly questionable; Hong Kong's inflationary problems are a monetary phenomenon, imported from the US. 

An additional HK$6,000 in our pockets would not have significantly increased inflation; instead, it would have made life easier for those having a difficult time. If the government logic is applied, Hong Kong would have been in deflation given that last year's IPOs absorbed approximately HK$480 billion of funding in 2010 (20 times the MPF proposed injection). Now, MPF funds sit useless and losing value.

The MPF, like inflation, acts as a regressive tax and is thus a hypocrisy, forcing residents into arrangements with certain financial institutions. Collusion is evident in that the government forces salary earners to pay into certain funds, cared for by certain banks. It is a tragedy that, regardless of the salary earner's economic situation, their own fiscal choices are cast aside.

Whether it is someone's relative who needs expensive medical treatment, parents who wish to send their children to study abroad, or young professionals who want to make a down payment on a property, the government forces these income earners to buy a fund where only the fund managers have something to gain.
Worse, the HK$6,000 injection faces the same eventuality as all funds thus far contributed: high management fees and, due to a lack of competition, lower rates of return. Should the contributions which employees are forced to pay into the MPF be freed up, people could look at other investment vehicles and competition would rush in, offering 2.3 million workers better options. And returns on other investments should not be underestimated given the relatively poor rates of return and high administrative costs of the MPF accounts.

Legislators and the government supported lifting the minimum income level so that low-income workers could be spared the mandatory contribution, but discussion concerning the other two million workers who remain burdened was stymied last year.

Clearly, the policy agenda for the MPF has expired. It was implemented to save the government from future expenditure, making it mandatory for people, who wouldn't otherwise, to save for a rainy day or retirement. In the mid-1990s, in MPF debates, many legislators had the foresight to claim that businesses would be happier with the MPF than residents. Now is the perfect time to start getting rid of the "mandatory" in the Mandatory Provident Fund.

Nicole Alpert is a research associate at the Lion Rock Institute, Hong Kong's leading free-market think tank

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