ON POLICY
From here onwards the private sector in Europe is going to find out just how much the past promises of politicians are going to cost it. It cannot pay. rainy day” nor are these surplus reserves necessary to support the Hong Kong dollar peg. That aside, governments should run only balanced budgets at any time (or at least balanced through a normal economic cycle). Neither borrowers nor lenders should they be – unfortunately that is not the way of the world.
Hong Kong’s future Here is a recent comment from someone described as a “battlescarred veteran of municipal finance boards”: “During my time on two pension boards, the boards did less as the problems got worse. Board members tend to be town employees caught in the headlights. They are not financially trained, and they tend to believe rather unsophisticated consultants who all say the same thing: ‘You can earn your way out in 15 years.’ This is not true. Not even compounding can save you when benefits are rising faster than the return on assets. We have yet to begin to seriously attack this problem. The most we have done is ‘tried’ to initiate cuts of annual percentage increases in benefits.” Maybe Hong Kong public servants would be better than this but I doubt it.
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BEST PRACTICE
The problem with European and US pension schemes is that they have never been fully costed nor have they ever been based on realistic assumptions about what pension scheme managers can be expected to produce as a return. The 8% per annum projected returns of most US state and private pension schemes is an artifact of the inflationary 1970s when pension plans were exploding in addition to state guaranteed benefits. Here is what you have to consider before Hong Kong plunges headlong into the same hole: • What are the realistic outgoings to the Hong Kong old age population based on a realistic monthly pension and a realistic life expectancy? • How much will have to be contributed by every worker in the economy on an annual basis to pay for this scheme out of current income? • Assuming that some portion of the current fiscal reserves can be ring-fenced (I would argue that that is not a safe assumption in any event, but that is by the way) as a bequest to “the old,” what realistic return on that pool of capital can be expected? I would
urge that you do not assume anything better than the risk-free return on a 10-year government bond at best. • What are the demographic dynamics facing Hong Kong over the next 50 years and how do these change the payments and contributions profiles? • What are the chances that, in 2047, Hong Kong’s fiscal balance will be subsumed into a central Chinese pool and how will that change the financing dynamics? At the moment, the government’s finances would tell us that Hong Kong is a very rich place. That encourages politicians and pressure groups to be generous with the money. That is all well and good but it is very different from setting in place an unfunded entitlement programme. It is open-ended, unfunded entitlement programmes that are quickly becoming the rod for people’s backs all over the developed world. It is not good enough to adopt schemes such as old age pensions just because everyone else has done so. Bear in mind that, when all is said and done, “the road to hell is paved with good intentions.” This article first appeared on Webb-site.com Jim Walker is the Founder and Managing Director of Asianomics Ltd., an economic research and consultancy company servicing principally the fund management industry.