Hong Kong’s senior citizens are being officially invited to take a gamble on their longevity. If they assume they will have a long life, the new public annuity scheme might well prove attractive.
The scheme, launched this week, more or less amounts to being a self-funded pension plan for people above the age of 65.
The way it works is that participants invest a lump sum with the government and, in return, are paid a guaranteed fixed monthly sum for the rest of their lives. Profits, such as they are, only accrue to people with very long lives.
The maximum investment stands at HK$1 million (US$127,412), with a minimum of HK$50,000. Given that women tend to live longer than men, they will get a monthly return on the maximum investment of HK$5,300 (men get HK$5,800), which means that if the investor survives for more than 15 years, they can start earning real money on their investment.
Life expectancy in Hong Kong is unusually long compared with other places; currently, the average life expectancy for men is 84 years and 87 for women.
Therefore, if a 65-year-old were to invest this month, the “profits” of this annuity scheme would start kicking in when they reach 80. Thus, on the basis of average mortality rates, a man who lives until the age of 84 would receive HK$278,400 more than he invested over the additional four years, meaning a gain of just over 25 per cent on his original investment. Or, to put it another way, this is equivalent to an average annual interest rate of 1.6 per cent.
Obviously, not all those taking part in the scheme will be precisely 65; most will be older, so their chances of surviving beyond the point where “profit” kicks in are considerably reduced.
Then there’s the question of how much a monthly payment of HK$5,800 would be worth in inflation-adjusted terms in 15 years. It’s anyone’s guess but it is staggeringly unlikely that there will be a decade and a half of zero inflation so that even investors who survive long enough to take a “profit” will most probably see the gain eaten away by inflation.
Practically any other long-term investment, even in boring old bonds, should yield a much higher return. Indeed, history shows that equity investors – even those solely concentrating on blue chip stocks, are more or less certain to achieve an annual yield exceeding 1.6 per cent over a 15-year period.
In addition, investors in both equities and bonds receive dividends and can make a profit from selling their investment at any time. Government annuity holders will not even get their original investment back and, if they choose to surrender their polices, will have to pay a penalty for doing so.
And yet it is easy to understand why this scheme has attractions for senior investors; indeed, the government believes it will be so attractive that it has raised the cap on the size of the scheme in its first year from HK$10 billion to HK$20 billion.
Those attracted by this scheme will have to pay a great deal for security. They know that the government is highly unlikely to default or disappear and they like the idea that, even in bad times, their monthly payments are guaranteed.
They will probably be less enthusiastic about this fixed sum if Hong Kong embarks on a period of extreme inflation, which will have the effect of reducing the value of their monthly payments.
However, there is something to be said for peace of mind and simplicity, both of which are offered by this annuity scheme.
What the scheme does not address is the very grave problem of old age poverty; currently, more than 31 per cent of the population aged over 65 is living below the poverty line.
Then there’s the matter of the ageing population. As matters stand, roughly 18 per cent of the total population, or 1.3 million people, are aged over 65. That figure is expected to rise to 31 per cent in just 18 years.
If the government has a master plan for tackling this rapidly approaching demographic earthquake, it has managed to keep it well under wraps. While officials remain steadfast in their resistance to the introduction of a comprehensive social security system, they have made some piecemeal attempts to tackle this looming problem.
Usually, they involve one-off giveaways, which indiscriminately go to the rich and poor. Arguably more effective is the subsidised public transport scheme that is more likely to be used by those of modest means. And now we have this annuity plan, which is of dubious value but sort of sounds plausible – until it is subjected to any kind of careful examination.