Comparison of the Pension System of Hong Kong and Japan

Introduction

Pension funds have a pervasive influence on the economy, affecting in particular the maturity and, to some degree, the magnitude of saving, patterns of employment and retirement, adequacy and distribution of retirement income, and corporate finance. But the best way to conceptualize their function may be as a form of retirement-income insurance.   There are arguments both for and against funding. Governments have accordingly chosen to maintain at least basic levels of pay-as-you-go social security. The scope of such unfunded social-security schemes has historically been the key determinant of the scale of private retirement saving (Davis 1997). But, in addition, demographic difficulties of social security are currently leading many governments to consider a shift away from comprehensive social security towards private funded pensions. Given social-security provisions, the degree to which pension funds are used as the vehicle for retirement saving depends crucially on the fiscal and regulatory regime. Regulation of aspects such as portability of pensions may also have important consequences for economic efficiency. There is little consensus between countries on the appropriate form of regulation; some a priori suggestions based on economic theory as to good practice can be made (Davis 1997). Pensions are used to give finances to individuals after they reach a certain retiring age. There are different systems for pension payments. Each country has a pension system that offers something different. A country’s pension system is aligned to the demands of the internal situation and the needs of the citizen. This paper intends to compare the pension system of Hong Kong and Japan.

 

Social Policies

In general, social policy-makers engage in a range of activities related to discovering and trying to solve social problems, or meeting an array of human needs. Yet the very idea that there are social problems out there waiting to be discovered is also controversial. Spending money and employing people to deliver services is a central part of policy-making, and social policy tends to be one of the biggest single items of expenditure for modern governments. In short, social policy refers to what governments do when they attempt to improve the quality of people’s lives by providing a range of income support, community services and support programs. Although social policy is an activity that governments do, it is not just confined to the realm of government, however. There has already been reference to the fact that some people do research or engage in advocacy for policy change. This is one way of recognizing that policy-making involves many other organizations besides government bureaucracies and departments (Dalton, Smyth & Watts 2006). Although multi tiered institutions are likely to produce some broadly similar features of social policy development, there is also substantial variation within the universe of multi tiered political systems (Leibfried & Pierson 1995).

 

The extent of reserved powers, the nature of shared arrangements for decision making, and the forms in which constituent units are represented at the center have important consequences. The evolution of social policy in multi tiered systems exhibits a pronounced territorial dimension. Social policy integration is a process that involves the interplay of policymakers and policies at the central level with the political actors and policies of a polity’s constituent units. Three broad consequences of multi tiered governance have particular relevance to social policy development: the introduction of constituent members as autonomous policymakers and political actors, the prevalence of dilemmas associated with shared decision making, and the modification of strategies and resources available to social groups (Leibfried & Pierson 1995).The possibility of policy preemption suggests that an important source of variation among multi tiered systems arises from the timing of social policy interventions by constituent members and central authorities. And where constituent members act first, the dynamics of preemption are likely to have consequential effects on social policy development. The relations between different governmental tiers are not exclusively ones of competition and preemption, however. Constituent members may also play a significant role as petitioners, seeking central government responses to collective action problems. Needing to balance policy goals with institutional protections for constituent units, multi tiered systems generally produce far more complex decision making arrangements than do centralized systems (Leibfried & Pierson 1995). Social policies involves the guidelines that governments use to change maintain or create specific living conditions that match situations that are conducive to human welfare.  Social policy is affected by the changing scenario in a country or region. Social policy aims to meet human needs by focusing on concepts such as education, health and housing. Through social policy human welfare is upgraded to acceptable levels.

 

Pension Policies

Like funded occupational plans, mandatory saving schemes can foster long-term saving and capital market development. But unlike defined benefit occupational schemes, they are fully funded by nature rather than by regulation. Their coverage can be broad. They do not imply portability problems or inhibit labor mobility. They permit workers to diversify risk. And unlike defined contribution occupational schemes, they allow workers, who bear the investments risk, to choose the investment manager. Mandatory saving nevertheless creates a new set of problems (Bodie, Mitchell & Turner1996). Most notably, privately managed schemes fail to insure workers against poor investment performance of the funds, a problem especially great where many workers have had little financial experience or information. In addition, they do not assist workers with low lifetime incomes or provide adequate pensions in the start-up years of the plan. For these reasons, a decentralized mandatory saving scheme requires a regulatory structure that protects workers against ill-informed investment choices. In a mandatory saving scheme, the worker’s pension is financed by the saving account that accumulates before retirement and its size depends on the contribution rate, the growth rate of earnings, the interest rate, and the number of working and retirement years (Bodie, Mitchell & Turner1996).

 

If a higher wage replacement rate is desired, a higher contribution rate is required. The required contribution rate rises the longer the retirement period is relative to the working period and the smaller the rate of return is relative to the growth rate of real earnings. The required contribution rate is higher in plans that make poor investments, incur high administrative costs, index pensions to prices or wages, or permit accumulated balances to be used for other purposes such as housing, education, or health care. Traditionally, pension specialists have assumed that real rates of return are about two percentage points higher than the growth rate of real earnings. In mandatory saving schemes workers assume the investment and inflation risks for their own retirement funds. Investment risk arises from variations in investment performance and is closely related to pension fund solvency risk. Investment risk is particularly high at the time of retirement, when many workers use their accumulated assets to purchase a lifetime annuity; the level of interest rates and the state of the financial market on the date the annuity is purchased are critical (Cornwell, Dorsey & Macpherson 1998).  One of the most hotly debated issues in pension economics is the effect of pay-as-you-go versus funded schemes on household and national saving. Some analysts argue that pension schemes have no effect on total national saving, that consumers substitute taxes or saving under the scheme for other forms of saving. Other analysts maintain that pay-as-you-go schemes reduce national saving while funded pension schemes displace some personal saving but not on a one for one basis, so total national saving increases (Cornwell, Dorsey & Macpherson 1998).  A part of a country’s social policy is its pension policies. This kind of policy sets the guidelines in the collection and disbursement of funds for retirees. The pension policies helps in making sure that retirees will have sources of income even if they have stopped working.

 

Japan Pension System

Under the current Japanese pension system, the lifetime pension benefit of an average salaried man born in 1935 is greater than his lifetime pension contributions by 0,000. If he were faced with the contribution and benefit schedules that a person born in 2000 faces, his lifetime benefit would be less than his lifetime contribution by 0,000. This means that the net pension benefit is different between the two cohorts by 0,000 even under the assumption that their lifetime incomes are equal. Such extreme inequity between different cohorts is caused by the fact that Japan’s public pension system is essentially a pay-as-you-go system. There are three public pension systems in Japan: the National Pension (NP), the Private Sector Employee Pension (PEP), and the Government and Education Sector Employee Pension (GEP).  The NP covers all adults from 20 to 60 years old. The PEP covers employees in the private sector, and the GEP covers employees in the public sector and private schools (Ihori & Tachibanaki 2002).  The main cause of the generational conflict over public pensions is that the Japanese pension system is financed basically by the pay-as-you-go scheme, where the benefits for the retired at any given time are financed by contributions from the contemporary workers. Under this scheme, increases in the size of the retiree population relative to the size of the working population push up the pension burden borne by each worker (Ihori & Tachibanaki 2002). The pension system of Japan focuses on the pay as you go system. In such system the finances received by the retiree is affected by the collection from the contributing workers.

 

Hong Kong Pension system

The guiding principles and parameters of Hong Kong’s social-security system were defined between the mid 1940s and the mid 1960s when the government made it clear that its top concern was economic growth and that social welfare was to be provided primarily by family and voluntary agencies The principle of limited state involvement was even more clearly manifested in the launch of the privately funded Mandatory Provident Fund (MPF) in 1995. The establishment of the MPF was the final step in a process that began almost four decades earlier. The adoption of MPF was consistent with the Hong Kong government’s efforts since the mid 1990s to reduce its role in social security. Civil servants are a privileged lot in Hong Kong and this is reflected in their retirement benefits. They have been entitled to pensions since the early years of colonial rule and are currently governed by Pension Benefits Ordinance and Regulations. The scheme is non-contributory and is funded from the government’s general revenues (Ramesh 2003). The government is actively considering replacing the taxpayer-funded civil servants’ pension with an MPF-like scheme. However, instead of the 5 per cent that private employers contribute, the government will contribute 25 per cent to its employees’ individual accounts (Ramesh 2003). Hong Kong is not focused on social security and because of that the government has no direct policy on pension systems. The government only has a mandatory provident fund that aims to help employees to save some money until their day of retirement comes.  This scheme requires the personnel to contribute monthly to MPF Schemes IN approved private organizations.

Table of similarities and differences of Japan and Hong Kong’s pension policy

Similarities

Differences

Both countries require the collection of pension funds.

Japan uses the Pay as you go system; Hong Kong uses the MPF system.

Both countries intend to provide finances to retirees and other people without a job.

Japan has a well organized strategy on pension and its systems; Hong Kong has not given much focus on the Pension system.

Both countries gain commendable funds from the pension collection.

Japan has limitations on private collections for pension systems; Hong Kong gives more freedom for private firms to institute their own pension system.

Both countries use the pension system to demonstrate that the government cares for social security.

Japan constantly amends its policies on pensions; Hong Kong has little concern over such system.

 

The similarities and difference in the pension policies

Changes in the global economy are important, but it is primarily social and economic transformations occurring within affluent democracies that generate fiscal strain. Slower economic growth associated with the transition to a post-industrial economy, the maturation of government policy commitments, and population ageing and changing household structures have all combined to create a context of essentially permanent austerity. At the same time, tax levels strain public tolerance, while payroll contribution rates appear to jeopardize employment. While tax increases have contributed to closing the gap between commitments and resources, it is difficult to imagine that in many countries changes in revenues alone could be sufficient to maintain fiscal equilibrium. Yet support for the welfare state remains widespread almost everywhere. The core constituencies for social programs are broad. Furthermore, social actors have made important commitments over extended periods of time to distinct national systems of health care, labor market, and pension policy. These systems are thus deeply embedded in national polities (Pierson 2001). Finally, most political systems contain major formal or informal veto points which militate against radical change. In most countries, there is little sign that the basic commitments to a mixed economy of welfare face a fundamental political challenge. Nor is there much evidence of convergence towards some neo liberal orthodoxy. Pension systems have become major targets of welfare state reform understandably, given the budgetary implications of current trends in most countries (Pierson 2001).

 

Pension reform, for instance, is high on the agenda almost everywhere. Here, proposed reforms will have major implications for the distribution of benefits and burdens along the lines of income, class, gender, and age. A critical question will be the extent to which adjustments in pension systems fall on those currently in retirement as opposed to current workers. Decisions to tighten links between pension contributions and benefits are likely to disadvantage most women and many blue-collar workers. By contrast, in most cases these controversial reforms of public pension systems are not likely to produce intense divisions between public and private sector workers. A critical issue, however, will be the manner in which both public and private sector unions choose to balance the conflicting interests of different generations of workers (Sparkes 2002).  Social and pension policies affected the similarities of the two country’s pension system.  The social policy of taking care of the citizens paved the way for both countries to render mandatory collection of funds that will be used in their old age. If both Japan and Hong Kong does not have a responsibility to take care of their people, they would not even suggest having a pension fund.  The social policy of providing financial security to the people paved the way for Japan and Hong Kong to provide finances to retirees and other people without a job. The two countries allowed the collection of funds that the people might need as they grow old. The two countries made sure that the people will have financial security through collection of funds that can only be used at a specific period of time. Both countries gain commendable funds from the pension collection. This helped both countries to commence with their social policy on providing infrastructures to the people. The funds collected are reused by both countries to fund for various infrastructure projects.

 

Each country’s focus and policy affected the difference of the two country’s pension system Japan uses the Pay as you go system to show that they really want to participate in providing social security while Hong Kong uses the MPF system to distance itself and focus on things they believe are more important. Japan has a organized strategy on pension systems to make sure that the proper social policy that will be followed; Hong Kong has not given much focus on the Pension system.  Japan has limitations on private collections for pension systems. This shows that it really wants the pension system to work.  Hong Kong on the other hand gives more freedom for private firms to institute their own pension system so that they can concentrate on other issues.

 

Globalization and both welfare systems

Recent fundamental changes in the global economy make world markets and transnational corporate players more powerful than nation states. They amount to a worldwide trend toward privatization and anti-statism. Instead, the international market for goods and capital are seen as the purveyors of not only healthy economies, but good governance and satisfied citizenries. To be sure, various dislocations will occur and there will be clear winners and losers but, ultimately, in this vision, the neo liberal process will triumph. Economic globalization represents a major transformation in the territorial organization of key economic sectors. To what extent it also represents a possible transformation in the structures of politico-economic power is a difficult and controversial question (Smith, Solinger & Topik 1999). The major dynamics at work in the global economy contain the capacity to undo the particular form of the intersection of sovereignty and territory embedded in the modern state and the modern state system. But this may not necessarily mean that sovereignty is less of a feature of the international system. Rather, it may signal the relocation of some components of national state sovereignty onto supranational authorities or privatized corporate systems (Smith, Solinger & Topik 1999). Together with the increasing opportunities that globalization offers borrowers, investors, and financial intermediaries has come a series of challenges to the internal sovereignty of national governments and in particular their regulatory authorities. Some argue that financial integration is causing governments to lose power over their own economies. Not only do the growing powers of national and international bond markets limit the flexibility of governments to chart independent fiscal and monetary policies, but governments also find themselves more constrained in what they can spend, as raising money is not as straightforward as it once was. Moreover, financial integration and footloose capital have combined to make taxation an international rather than a domestic issue (Reinicke 1998). Not only is it difficult to determine where a global company should be taxed; even in cases where jurisdiction can be agreed on, many companies are easily able to reshuffle their tax liabilities from countries with higher to those with lower rates of taxation (Reinicke 1998). Like what globalization does to businesses and countries, it may force a singular system for pension and welfare systems. Globalization may create the need for a unitary pension system that will dictate the contribution and benefits of all employees. This will not be a good thing for employees because this will force them to pay higher fees.

 

Conclusion

Pensions are used to give finances to individuals after they reach a certain retiring age. Pensions ensure that one will have sources of income after they have stopped working. There are different systems for pension payments. Each country has a pension system that offers something different. Hong Kong and Japan has pension systems that have similarities and difference. Hong Kong and Japan’s main focus affects their social policy to the extent that the similarities or differences of their pension policy will depend on their focus.

 

References

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