The Mandatory Provident Fund Schemes Authority has suggested it may offer tax relief to individuals making voluntary MPF contributions. Currently, anyone earning more than HK$24,000 per month and choosing to pay above the mandatory amount is doing so out of post-tax income.
Not surprisingly, the take-up on this has been low when you consider the limited investment choice under MPF, and that the benefits are locked away until at least age 60.
To counter these drawbacks, the proposed move will allow voluntary personal contributions to be offset against taxable income, and make it more financially attractive to save - every extra dollar of salary paid into the MPF will effectively only cost about 84 HK cents of take-home pay.
But despite such apparent basic economics, the MPFA needs to think about how a scheme would fit into Hong Kong's pension system.
Firstly, how much voluntary contributions will be classed as tax-free? Common sense suggests that no one would pay all their salary into the MPF even if they could afford to since the benefits are inaccessible until 60.
But for those closing in on retirement, paying the maximum amount now would actually be an effective way to avoid income tax since they will be able to withdraw the benefits (tax-free) after only a few years. If generous breaks are going to be granted on both contributions and benefits, then the danger is that this turns into a tax loophole.
Secondly, Hong Kong has a relatively low tax base - the Inland Revenue estimates that 1.2 million people paid income tax last year. This means that any tax incentive will miss a significant portion of the population, particular the lower-income earners that the MPF is mainly aimed at.
Encouraging the affluent class to make more contributions could still benefit the system, but may result in the well-off being subsidised to save at the expense of government tax receipts. This criticism has already driven the government in Britain - where the top tax bracket is 40 per cent - to curb personal contributions. From 2011, British high-earners would still receive tax relief on their own contributions, but at only half the 40 per cent rate.
There is plenty of upside to the MPFA's suggestion, and one is that it will help those who are playing catch-up. Except for members of Orso retirement schemes, the majority of people have only been building up retirement savings since the MPF was launched in 2001.
A tax incentive would appeal to the "mid-life" age group of the working population, since many are now reaching the stage in their finances where they have enough to plan for retirement.
Similarly, those who froze their MPF during career breaks would get help in topping up their contributions and making up for lost time.
Employers are likely to welcome any initiative that encourages employees to pay more into their MPF. Many point to the apathy shown by staff when it comes to their pension, even when the company is paying over and above the mandatory amount.
"Matching schemes", where the employer offers to match dollar-for-dollar any voluntary contributions made by the employee, have failed to take off in Hong Kong without the added attraction of tax relief.
But having employees hold a bigger stake in their MPF would increase personal accountability for managing their retirement, and also increase recognition of the help that their employer is providing.
The core reason for the MPFA's proposal is that not enough money is being put aside to meet the expenditures needed by Hong Kong's rapidly ageing population.
The Article: Tax break may boost contributions to MPF
Alex Cheung, Hewitt Associates Hong Kong
31st August 2009