Review Essay: Prospects for Old-Age Income Securityin Hong Kong and Singapore

Kok-Hoe Ng

Received: 10 April 2011 /Accepted: 6 November 2011 /Published online: 26 November 2011# Springer Science+Business Media B.V. 2011

Abstract This review shows that Hong Kong and Singapore face a distinct and seriouschallenge to old-age income security due to their mix of public pension provision andintergenerational family support. They are among the fastest ageing societiesinternationally and will be the oldest in Asia after Japan by 2030. Yet their publicpensions remain weak. Defined contribution pensions, even for full-career workers, areprojected to replace just 17% of net lifetime average earnings in Singapore and 41% inHong Kong, compared to 70% across the OECD countries. Instead, older persons inSingapore and Hong Kong depend mainly on their adult children for income security inthe form of co-residence and cash transfers. More than half of them live with adultchildren. In Singapore, more than two-thirds receive financial support from the youngergeneration, compared to just 5% on average in Europe. Current welfare theory wouldsuggest that Singapore and Hong Kong portray an extreme variant of welfare regimewhere the state’s role is more limited than in the liberal regime and the family’s role morecentral than in the Southern European regime. The sustainability of current old-ageincome security arrangements is therefore particularly vulnerable to new social risks thatthreaten the stability of traditional family structures. Already co-residence and financialsupport from adult children are declining. A fuller assessment of the prospects for old-age income security must focus on the interaction of pension policy and family supportfor elderly persons in different gender and income groups.

Keywords Ageing . Pensions . Intergenerational transfers . Hong Kong . Singapore

Population Ageing

Hong Kong and Singapore are rapidly ageing societies by international standards. Interms of old-age dependency ratio (i.e. ratio of population aged 65+ to 15–64), they

Population Ageing (2011) 4:271–293DOI 10.1007/s12062-011-9051-7

K.-H. Ng (*)London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UKe-mail: k.h.ng1@lse.ac.uk

were ranked outside the top forty countries in the world in 2010 (UN 2010). But by2030, they are expected to rank seventh and fourth respectively. In Asia, they willthen have the highest old-age dependency ratios after Japan, surpassing even theEuropean average (Fig. 1).1 Regionally the newly-industrialised economies, includingEast Asia, are at the forefront of a second wave of ageing that will see them overtakemost European countries before the middle of the century (Heller 2006). This dramaticdemographic shift is driven by two underlying trends of declining fertility andimproving life expectancy. The total fertility rates, defined as the average number ofchildren born to a woman over her lifetime, have been falling in Singapore and HongKong for several decades and are currently well below population replacement levels.Between 1980 and 2010, it decreased from 1.9 to 1.3 in Singapore and moredramatically from 2.3 to 1.0 in Hong Kong (UN 2010). Recent pro-natal policies inSingapore have not helped to boost fertility (MCYS 2011a). The opposite hashappened with life expectancy.2 On average, a person at the retirement age of 65 in2010 could expect to live for another 18.8 years in Singapore and 20.4 years in HongKong, compared to 20.9 years in Japan and just 16.8 years in Europe (Fig. 2).

Demographic ageing translates into different pressures for old-age income securitydepending on the prevailing mix of public pension provision and family support. TheEuropean welfare states with mature pay-as-you-go (PAYG) public pensions are mostlyconcerned with balancing the fiscal sustainability of their pension systems with incomeadequacy at the individual level, because population ageing reduces the contributionbase and increases total pension claims (Holzmann and Hinz 2005). But the nature ofthe challenge to old-age income security in Hong Kong and Singapore is different.Compared to Europe, Singapore and Hong Kong are ageing more quickly, offer farless generous public pensions from defined contribution (DC) systems, and relyprimarily on family support in the form of intergenerational co-residence and cashtransfers from adult children. While longer life expectancies similarly demand moreresources for retirement, a more critical risk comes from lower fertility which impliessmaller households and fewer adult children to share the financial responsibilitytowards elderly parents. They therefore present a distinct variant of the universal “old-age crisis” (World Bank 1994), where demographic trends and old-age income arelinked not just via policy structures but also familial mechanisms. This reviewassembles the latest evidence to make the case that Hong Kong and Singapore face adistinct and serious challenge to old-age income security. First, it compares the twopublic pension systems and indicative outcomes. Next, it reviews current understand-ing of family support as a source of income security for the elderly. The conclusion

1 Demographic projections are built on assumptions about fertility and life expectancy that reflect bothhistorical trends and expectations about the future. The UN (2010) makes projections based on a numberof different scenarios. The trends presented here are for the medium variant: Total fertility is assumed toconverge on 1.85 for all countries; life expectancy is assumed to continue increasing but at a lower rate forcountries like Hong Kong and Singapore where it is already high; and recent rates of internationalmigration are assumed to continue.2 Period life expectancy is shown instead of cohort life expectancy. The latter takes into considerationexpected changes in mortality rates in subsequent years and is a more useful measure of life expectancy(Pensions Commission 2005). It is usually higher than period life expectancy where life expectancy isrising. But cohort life expectancy figures are not available in the UN and national projections forSingapore and Hong Kong.

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provides a summative overview of the prospects for old-age income security andhighlights questions that remain unanswered.

Policy

Provision3

Singapore

Singapore’s public pension system has two components, a very limited means-tested public assistance scheme and a DC scheme known as the CentralProvident Fund (CPF) (Table 1). The CPF was introduced in 1955 by the Britishcolonial administration to provide retirement income security (Low and Aw 2004).It is mandatory for all resident employees. Every month, employees contribute20% of their monthly salary, while employers contribute an amount equivalent to15.5%, additional to the salary they pay (CPF Board 2010). These rates varyaccording to age and salary bracket. The state-managed fund is invested centrallywith a pre-determined nominal interest rate of 2.5%–4% per annum that is guidedby the savings interest rates of local banks.4 Under the Minimum Sum Scheme,any savings in excess of a minimum sum may be withdrawn as a lump sum at age

Fig. 1 Ratio of 65+ to 15–64-year-olds, 1950 to 2050 (%)a. a. Asia and Europe refer to all UN membercountries in the respective regions. See source for complete list. Source: UN (2010)

3 For a fuller account of the historical development and features of the public pension systems inSingapore and Hong Kong, and general discussions of their performance, see Holzmann et al. (2000); Lowand Aw (2004); Ramesh (2004); Pai (2006); and Fu and Hughes (2009).4 Additionally, individuals may invest their savings in excess of a minimum amount in approved financialproducts. About 25% of CPF members take part in these investments and 23% of all CPF savings are heldin such private investments (author’s calculations from CPF annual reports, various years).

Prospects for Old-Age Income Security in Hong Kong and Singapore 273

55.5 The minimum sum is then transferred to a Retirement Account which makesmonthly pension payouts for about 20 years from age 62, to be raised to 65 by2018. A new compulsory annuity scheme known as CPF LIFE was introduced in2009 and will fully replace the 20-year payout arrangements by 2013. CPF LIFE isprivately-managed and will offer monthly payouts for life from age 65.

Hong Kong

Hong Kong’s pension system is made up of a social assistance scheme, an old-ageallowance scheme, voluntary occupational pensions, and the Mandatory ProvidentFund (MPF) (Table 1). Social assistance is provided through the ComprehensiveSocial Security Assistance (CSSA) Scheme which supplements the income of needyindividuals so that it reaches prescribed levels, while the Social Security AllowanceScheme (SSAS) provides a means-tested monthly allowance from 65 years old and auniversal allowance from 70 years old (Social Welfare Department 2010c).Voluntary occupational pension schemes had been popular for many years and wereonly loosely regulated under the Occupational Retirement Schemes Ordinance(ORSO) (MPFA 2010). Members of ORSO schemes that were in existence by 1995were granted exemption from the MPF when it was introduced in 2000. Althoughdiscussions regarding a national provident fund for Hong Kong began in the 1960s,the MPF was only decided in 1995 before Hong Kong reverted to Chinese rule(Ramesh 2004). The MPF offers employers a choice of scheme to enroll theemployees in, while employees decide on the specific funds to invest in within thescheme. The employer and employee each contribute 5% of monthly wage to thescheme, making up a combined contribution of just 10% compared to the CPF’s

Fig. 2 Period life expectancy at 65 years old, 2000 to 2050a. a. Asia and Europe refer to all UN membercountries in the respective regions. See source for complete list. Source: UN (2010)

5 Originally, all CPF savings were paid out as a lump sum at age 55. In 1984, a government proposal toreplace this with phased withdrawal from a later age proved to be politically contentious (Low and Aw2004). Since then, a compromise arrangement has been retained, with a small lump-sum withdrawal at 55,and phased withdrawal upon retirement at 62.

274 K.-H. Ng

35.5%. Accumulated savings and return from investment are paid out as a lump sumat 65 years old.

Comparison

Singapore’s limited public assistance scheme covers just 0.5% of the elderlypopulation aged 60+ as it targets only those who are unable to work and lack family

Table 1 Public old-age pensions in Singapore and Hong Kong, 2009–2010a

Pension scheme Benefits Personscovered

Expenditure/ net assetsas share of GDP

Singapore

Social assistance:

ComCare Enable S$360/month (14% mediangross earnings ofall workers)

0.5% of 60+population

Exp: 0.005%b

DC pensions:

Central Provident Fund (CPF) Accumulated savingsless withdrawalsplus interest

88% of 15+labour forcec

Assets: 63%

Hong Kong

Social assistance/old-age allowance:

Comprehensive Social SecurityAssistance (CSSA)

HK$2,590–$4,420/monthd

(26%–44% median grossearnings of all workers)

15% of 60+population

Exp: 1%e

Social Security AllowanceScheme (SSAS)

HK$1,000/month (10% mediangross earnings ofall workers)

55% of 65+population

Exp: 0.4%

Occupational pensions:

Occupational RetirementSchemes Ordinance(ORSO)

Varies across schemes 12% of 15+labour force

Assets:12%

DC pensions:

Mandatory ProvidentFund (MPF)

Accumulated savingsplus returns

74% of 15+labour force

Assets: 18%

a The time period varies across indicators as the latest figures are shown where available. Singapore: Forpublic assistance, 2010 benefits and expenditure, 2009 coverage. For CPF, all 2009 figures. Hong Kong:For social assistance/old-age allowance, 2010 benefit rates, 2006 median earnings, 2009 CSSA coverage,2010 all other figures. For ORSO and MPF, all 2010 figuresb Based on all case types, including persons with disability or medically unfit for work. Figures are notavailable for old-age (60+) cases only, which represent about 85% of all public assistance casesc Based on active members who have contributed within the last 3 monthsd Benefit rates for old-age cases (where the principal applicant is 60+) vary depending on health statuse Based on all case types, including unemployment and single-parent cases. Figures are not available forold-age cases only, which represent about half of all CSSA cases

Singapore—CPF Board (various years), DOS (2010a, 2011), MCYS (2009, 2011b), MOM (2009). HongKong—Censtatd (2008, 2011a), MPFA (MPF Schemes Authority) (2010), Social Welfare Department(2010a, b)

Prospects for Old-Age Income Security in Hong Kong and Singapore 275

support (Table 1). The CPF has a much wider coverage of 88% of the labour force,with significant omissions being the self-employed. Hong Kong’s social assistanceand old-age allowance are much more significant when compared to Singapore. TheSSAS covers 55% of the elderly population aged 65+ while the more generoushousehold-based CSSA Scheme covers another 15% of older adults aged 60+.However the MPF has a lower membership than the CPF, due to the ongoingtransition from pre-existing occupational pensions. Overall, Hong Kong’s pensionsystem appears more balanced, with both non-contributory and employment-relatedpensions playing a role. Singaporeans are almost entirely reliant on the CPF, whichdoes not protect the income security of individuals with partial work histories. Inboth cases, the non-contributory components are ungenerous, as seen in the low totalspending relative to GDP. The DC pensions are funded savings schemes which donot incur public spending in the way that PAYG pensions do. Instead, theseprovident funds represent significant resources for government investment in thecase of Singapore and for boosting commercial pension markets in Hong Kong(Chan 2003; Hu 1986). In 2009, the total balance of all CPF accounts was equivalentto 63% of GDP.

Empirical Outcomes

Singapore

The rules for deriving and revising public assistance rates in Singapore are notpublished by the government. A parliamentary statement in 2009 expressed that “thePA allowance is not for a comfortable life, but to help you get over your difficultyand live a manageable life” (Yu-Foo 2009). The public stance of policymakers is thatpublic assistance is meant to cover basic living needs (MCYS 2011c). The incomesituations and living standards of public assistance recipients have not beensystematically studied in Singapore, but the public assistance rates are low relativeto earnings and expenditure among the general population. In 2010, the publicassistance rate of $360 for a single elderly person was just 14% of median monthlyearnings and 23% of the average monthly household expenditure of single-personhouseholds (Table 1; DOS 2009).

Although the CPF started as a retirement income policy, it gradually extended toother social policy objectives such as housing, healthcare, and children’s tertiaryeducation from the 1960s. Current withdrawal rules are quite flexible in some areas,such as housing. As a result, withdrawal patterns vary between individuals. In theabsence of longitudinal data on CPF account changes at the individual level, the totalannual flow of saving and withdrawal through the CPF helps to indicate the relativeimportance of different sources and uses of CPF funds for all individuals collectively(Table 2). For 2009, 95% of total saving came from wage contributions, while publictransfers accounted for just 5%. Financial assistance in the form of CPF top-upsamounted to about 1% of total saving. In terms of withdrawal, housing andhealthcare together represented almost two-thirds of all the funds withdrawn fromthe CPF, with the largest share of withdrawal going to housing. The size of non-pension withdrawal was equivalent to 42% of total annual saving. In contrast, only27% of all withdrawal was for pensions, equivalent to 16% of total saving. This

276 K.-H. Ng

figure underestimates actual pension payouts because withdrawal figures for otherpurposes reflects utilisation by all age cohorts, whereas pension withdrawals in any1 year can only be made by the oldest cohorts. Nonetheless, the relative size of pre-retirement withdrawal shows that significant resources are diverted from pensions toother uses.

At the individual level, the minimum sum, which has been raised in real termsevery year from 2003, sets a target pension saving which policymakers deemadequate “to support a modest standard of living during retirement” (CPF Board2007, p. 22). Comparing two cohorts who turned 55 in 2003 and 2009, this targetsaving translates into a monthly pension equivalent to 31% of median gross monthlyearnings for the 2003 cohort and 43% for the 2009 cohort under the old MinimumSum Scheme, according to CPF Board projections (Table 3) (CPF Board 2010). Thelater cohort achieves better payouts because their minimum sum was set higher. In a2003 study, Chia and Tsui compared the minimum sum level with projectedretirement consumption consisting of subsistence and medical expenses, and foundthat the minimum sum target, even if achieved, falls short of the needs of female

Table 2 Change in CPF members’ total balance, 2009

Source/Purpose S$m %

Total saving 20,065 100

Wage contributions 19,079 95

Public transfers 986 5

Housing grants 509 3

Workfare Income Supplement for low-earners 262 1

HOPE Scheme for low-income households 17 0.1

Other ad hoc transfers 198 1

Total withdrawal 11,534 100

Pensions 3,131 27

Lump-sum payout at 55 1,800 16

CPF LIFE (new annuity scheme) 1,060 9

Minimum Sum Scheme (old payout scheme) 271 2

Housing 5,898 51

Healthcare 1,476 13

Dependents insurance 180 2

Children’s education 24 0.2

Other non-pension withdrawala 823 7

Dividends and interest 6,214

Other adjustmentsb 752

Total change from previous year 15,497

Total members’ balance in CPF 166,804

a Such as withdrawals for account holders who leave Singapore, die before 65 years old, or sufferpermanent incapacityb Includes refunds for excess contributions and transfers to and from a reserve account

Based on CPF Board (various years)

Prospects for Old-Age Income Security in Hong Kong and Singapore 277

elderly persons by 2% and will become more inadequate if medical expenses grow ata faster rate. Furthermore there is a considerable gap between the minimum sumtarget and what individuals actually save. For instance, in 2009, only 32% of allindividuals who turned 55 achieved the minimum sum (CPF Board various years).Actual average savings of those aged 51–55 was 69% of the minimum sum. Whenthe two cohorts are compared using the same projections but based on the averageaccount balances of the 51–55 age group, monthly pensions are only around aquarter of median earnings. The new annuity scheme, CPF LIFE, disadvantagestransitional cohorts who cannot transfer their Retirement Account savings to theannuity scheme for a full 10 years before turning 65. The 2003 cohort is thereforeprojected to receive payouts that are 12 to 18 percentage points lower than the 2009cohort relative to median earnings. For the younger cohort, expected monthly

Table 3 Estimated monthly pension payouts for cohorts who turned 55 in 2003 and 2009, nominal valuesand share of median gross monthly earningsa

CPF balance Unit ofestimatedpayout

2003 cohort 2009 cohort

Oldschemeb

Newschemec

Oldscheme

Newscheme

Minimum Sum target S$ 610 490 1040 1040

% of earnings 31 25 43 43

Actual average balanceof 51–55 age group

S$ 450 370 710 740

% of earnings 23 19 29 31

a Payouts are maximum amounts derived using an online calculator on the CPF website. The exactactuarial rules for calculating payouts under both schemes are not publishedb The Minimum Sum Scheme allows individuals to withdraw as a lump sum any savings in excess of astipulated minimum sum at age 55. This minimum sum is paid out over 20 years from 65 onwards. Thispayout arrangement will be fully replaced by the new CPF LIFE in 2013c The new CPF LIFE is a mandatory annuity scheme that provides a monthly income for life from 65onwards. The premium is paid for using the minimum sum at age 55. Source: Based on CPF Board (2010,various years)

Net replacement rate, men, %(Women, where different)

0.5 average wagea Average wage

OECD (30) 82.4 (81.9) 70 (68)

United Kingdom 64 41

Taiwan 72 (58) 73 (59)

Hong Kong 37 (34) 41 (37)

Malaysia 36 (32) 36 (32)

Singapore 16 (14.6) 17 (14.8)

Table 4 Theoretical incomereplacement rates by individualearnings

a Refers to economy-wide averages

OECD (2009)

278 K.-H. Ng

pensions from the new scheme are equal to or higher than those from the oldscheme, depending on whether the target minimum sum is met at 55 years old. Butthey still fall below half of median earnings.

Hong Kong

Offiically, it is still maintained that the CSSA Scheme aims to meet the “basicneeds” of needy persons, while the SSA Scheme caters for the “special needs” ofolder persons (SWD 2010c). But whether the rates under the schemes are adequatefor these purposes has been the subject of persistent contention (Chan 1998; HongKong Legislative Council 2008; Wong 2000). Currently, assistance rates are adjustedannually to offset price inflation as indicated by the Social Security Assistance Indexof Prices (SSAIP), which measures monthly fluctuations in the price of standardgoods and services purchased by households with CSSA recipients. The weightingof the component items of the SSAIP is based on the Household Expenditure Surveyconducted once every 5 years (Hong Kong Legislative Council 2011). This approachfaces two problems of lag. First, adjustments to assistance rates are based oninflation in the previous year. Second, changes in spending patterns among socialassistance households between the expenditure survey rounds are not detected. Thereis also a more fundamental problem that the expenditure of households receivingCSSA may in fact fall below their basic needs. Earlier official studies have foundthat the monthly income of CSSA recipients were about 29%–52% of the medianmonthly income of households of equivalent size, and that CSSA rates and theaverage expenditure of households receiving CSSA both fell below the cost of abasket of basic goods and services across different household types (Liu et al. 1996a,b). Representations have been made to the government to review if the CSSA isadequate for meeting the basic needs of living (Oxfam 2011).

Although the MPF attracts lower contributions than the CPF, pre-retirementwithdrawals are not allowed. Investment return is subject to market performance, incontrast to the administratively-determined interest rates for CPF savings. Whereasthe CPF offers up to 4% interest on savings, the MPF achieved an averageannualised internal rate of return of 5.5% from its inception up to the end of 2010(MPFA 2011). But MPF returns are subject to significant fluctuation which reflectsthe volatility of investment in financial markets. Annual returns ranged between−26% and 30% during 2000–2010. Notwithstanding differences in the methodologyfor calculating investment returns, an international study of pension fundperformance found that the average real returns of the MPF were 1.7% between2000 and 2005. This was moderate compared to the investment performance ofpension funds in Western Europe (which ranged from 1.0%–1.9%) and NorthAmerica (0.7%–3.3%), but lower compared to those in Eastern Europe (1.5%–9.6%)and Latin America (2.7%–19.2%) (Tapia 2008). The administrative fees charged byMPF fund providers have also drawn criticism and are one of the motivations behindrecent proposals to legislate for greater choice by MPF members through anEmployee Choice Arrangement (ECA) that is meant to drive down fees throughcompetition among fund providers (Konyn 2011). In a comparative study of theprivate DC pension systems in selected countries in Latin America and East andCentral Europe, the administrative fees of the MPF were found to be at the upper end

Prospects for Old-Age Income Security in Hong Kong and Singapore 279

of the range (Gomez Hernandez and Stewart 2008). Using standardised projectionsof the impact of current administrative fees on an individual’s final account balanceafter a full career of 40 years, also known as the charge ratio, the authors estimatedthat these fees would lower the final MPF balance of the average earner by 36%. Thecharge ratio in other countries ranged from 10% in Bolivia to 46% in Turkey.6

Theoretical Outcomes

Projecting theoretical replacement rates provides an alternative for studying possiblepension outcomes where the pension system has not fully matured, as in the case ofHong Kong, or where detailed data on empirical outcomes are not available, like forSingapore. Income replacement rate is defined as the ratio of pension income to pre-retirement income, and can be expressed relative to previous earnings to assessconsumption smoothing, or relative to a minimal standard of living to examine povertyavoidance (Barr and Diamond 2009; Holzmann and Hinz 2005). The mostcomprehensive comparative study of theoretical replacement rates in the region isthe Asia-Pacific edition of the Organisation for Economic Co-operation andDevelopment’s [OECD] (2009) Pensions at a Glance. The study projects pensionentitlements from mandatory pension systems for formal private-sector workers, bygender and earnings levels. The projections assume that workers join the pensionsystem in 2006 at 20 years old under currently legislated pension rules and retire aftera full career with stable earnings.7 The derived net replacement rates (i.e. the ratio ofnet pension income to net individual lifetime average earnings) in Singapore and HongKong are low by international standards (Table 4). The average male earner willachieve a replacement rate of only 17% in Singapore and 41% in Hong Kong,compared to 70% across the OECD countries.8 Singapore performs particularlypoorly, even by regional comparison. Replacement rates in Singapore are less than halfof those in Malaysia, Taiwan, and Hong Kong. Whereas pension systems in theOECD countries offer higher income replacement to lower earners, pension entitle-ments in Asia are almost proportional to earnings across wage levels. In fact, higherearners achieve slightly better income replacement rates in Hong Kong and Singapore.

Replacement rates are only slightly lower for women in both countries. But given thatthese are theoretical replacement rates, they are likely to conceal gender gaps in attainedpension incomes due to different work patterns between men and women. Pensionsystems that have a tight link between contributions and benefits often disadvantagewomen who tend to have less continuous careers, lower earnings, and an earlierretirement age (Frericks et al. 2009; Leitner 2001). Women also have longer retirementson average due to higher life expectancy and widows in particular may become

6 The project methodology tends to overstate asset-based fees over the long run such as in the MPF, asopposed to contribution-based fees. For a full methodological discussion, see Gomez Hernandez andStewart (2008).7 Different assumptions about economic conditions such as wage growth and inflation are applied todifferent clusters of countries categorised according to recent economic trends, but it is assumed that allcountries will converge towards a common set of baseline assumptions—drawn from the OECD countries—over 40 years.8 For Singapore, the projections are based on the CPF. For Hong Kong, they include the SSAS and theMPF, but not the CSSA.

280 K.-H. Ng

financially vulnerable. In contrast to some European public pensions such as in theUnited Kingdom, the CPF and MPF do not offer credits to women in respect of theircare responsibilities. Women may be particularly at risk of old-age income insecurityin Singapore because there are no universal pensions to protect the low-income.Existing studies have not analysed the outcomes of the CPF and MPF by gender.

Apart from the OECD study, pension entitlements under the CPF and MPF have alsobeen modelled in single-country studies. A study by Chen and Wong (1998) calculatedpension entitlements as annuitised benefits and compared these against a livingstandard benchmark of roughly 40% average wage. They found that under mostassumptions, CPF pensions would be adequate for retirement, but lower earners camecloser to the subsistence threshold. McCarthy et al.’s (2002) more recent workextended this analysis by incorporating housing costs into the accumulation phase, inrecognition that pre-retirement withdrawals to purchase housing are often substantial.They derived an income replacement rate of 28% for the average wage earner. ForHong Kong, Lui (1998) and Siu (2002) have separately projected the potentialoutcomes of the MPF for workers who join the scheme at different ages. Assuming3% real wage growth and 4% real rate of return on savings, Lui estimated thatpensions will replace between 5% (for the oldest workers) and 187% (for theyoungest) of initial wage. Adopting starting wage as the referent inflates the incomereplacement rate and is less informative than using either lifetime average wage or lastdrawn wage, because it does not reflect any changes in living standards in thetransition to retirement. Varying real wage growth from 1% to 3%, Siu estimated finalincome replacement rates of between 67% and 114% for the full-career worker. Thewide range of estimates illustrates the sensitivity of projections to modellingassumptions. Derived income replacement rates therefore cannot be easily comparedacross independent studies. A further limitation of existing studies of the CPF is that,unlike the Hong Kong studies, they assume policy rules do not change. The effects ofrecent reforms across cohorts are therefore not taken into consideration.

Public pensions in Hong Kong and Singapore provide only a low level of incomeprotection in comparison with other developed countries. In particular, the socialassistance schemes are weak, as reflected in low total public spending. Hong Kong’suniversal elderly allowance is ungenerous, while Singapore’s public assistance forthe elderly is subject to strict means-testing. The DC pensions provide the next layerof income security, but both systems do not favour those with low incomes or poorwork histories, such as women with family care responsibilities. Even for full-career

Table 5 Singapore: percentage of elderly persons receiving financial support from children, 1995–2008a

Year Age of elderly persons Percentage receiving support

1995 65+ 84

2005 65–74 76

75+ 78

2008 65+ 68

a The 1995 and 2005 surveys asked about “regular cash contributions”, while the 2008 survey asked about“financial sources to meet old-age needs”

MCYS (1995, 2005), HDB (2010)

Prospects for Old-Age Income Security in Hong Kong and Singapore 281

workers, the picture based on available administrative data from the CPF andprojected income replacement rates suggests that public pensions may not offeradequate income security in retirement. To understand how elderly persons in thesesocieties secure a reasonable standard of living, one must turn to incomemechanisms that are not captured in pension studies—those within the family.

Family

Financial Transfers and Co-residence

Singapore and Hong Kong

Financial support from adult children is an important source of income for elderlypersons in Singapore and Hong Kong. But data from Singapore show that theincidence of support is eroding. In 1995, 84% of elderly persons received regularcash contributions from their children and about 80% cited children as their mainsource of financial security (Table 5). By 2005, fewer than 80% depended on theirchildren for financial help and less than two-thirds regarded their children as theirmain financial source. Published data from Hong Kong are more limited (Table 6).They adopt the perspective of the children instead of the elderly parents, whichprevents comparison with Singapore. About a third of adults gave financial supportto their parents, a much lower figure than Singapore’s because younger adults wouldhave non-elderly parents who are less likely to rely on their children. The amount oftransfers can be substantial. In Singapore, contributions from children accounted forat least half of gross monthly income for more than 60% of elderly persons in 1995(MCYS 1995). Among elderly persons who received financial support from theirchildren in 2008, the average monthly gift was equivalent to 46% of the mediangross monthly earnings of elderly workers (HDB 2010). In Hong Kong, the medianamount of contribution to co-resident parents in 1999 was about 37% of medianelderly earnings (Censtatd 2003). For many elderly persons, the contributions fromtheir children would have been equivalent to holding half a job.

The majority of elderly persons were living with their children, but like cashtransfers, this has declined (Table 7). Singapore has shown more dramatic changes.Co-residence with children decreased by 14 percentage points over 10 years,

Table 6 Hong Kong: percentage of adult children giving financial support to parents, 1999 and 2009

Year Age of adult children Percentage giving support

1999a 15+ 30

2009b 18+ 39–70

a Includes all adults, with or without parents. Based on Yes/No responses. Counts any amount to co-resident parents, but only contributions above a minimum to non-co-resident parentsb Includes only adults with parents. 39% gave financial support “Very often” or “Often”, 31% contributed“Occasionally”. Amounts not recorded

Censtatd (2003, 2010)

282 K.-H. Ng

compared to just six percentage points in Hong Kong. It became more common forelderly persons to live with their spouse only by the mid-2000s, and in Singapore,elderly persons were also more likely to live alone in 2005 compared to 1995.Intergenerational co-residence was consistently more common in Singapore than inHong Kong, but the gap has narrowed.

Comparison with Europe

Despite different bases of calculation, the data on total family exchanges inSingapore and Hong Kong show clear differences when compared with Europe. InSingapore and Hong Kong, the older generations are net recipients in the family(Tables 8 and 9). In the case of Hong Kong, net transfers are upward from adultchildren to older parents in terms of both financial and time resources. Table 10shows data on Germany and Italy as examples, but the trend is similar across mostparts of Europe, with differences only in the magnitude of exchanges acrosscountries (Albertini et al. 2007). Here, the net flow of financial resources isdownward from older parents to adult children, but social support mainly flowsupward from adult children to their parents. Elderly parents therefore hold a morebalanced and less dependent role in the family, both contributing and receiving help.The vast difference in the frequency of financial support to elderly parents highlightsthe importance of adult children to old-age income security in Singapore and Hong

Table 7 Living arrangements of elderly persons aged 65+, 1990s to 2000s (%)

Singapore Hong Kong

1995 2000 2005 1996 2001 2006

Alone 3 7 8 12 11 12

With spousea 6 14 17 16 18 21

With childrenb 84 74 70 60 57 54

Others 6 6 6 13 13 14

Total c 100 100 100 100 100 100

aMay include other persons but not childrenbMay include spouse or other personsc Figures may not add up to 100 due to rounding

MCYS (1995), DOS (2001, 2006), Censtatd (2008)

Table 8 Hong Kong: percentage of adult children aged 18+ that have intergenerational exchanges withtheir parents, 2009

Hong Kong Financial transfers Social support

Parents to children ↓ 15 7

Children to parents ↑ 70 13

Censtatd (2010)

Prospects for Old-Age Income Security in Hong Kong and Singapore 283

Kong—84% of elderly parents received money regularly from their children inSingapore in 1995, compared to less than 5% on average in Europe in 2004.

Although adult children give less direct financial support to their parents in Europe,working-age adults transfer financial resources to elderly parents indirectly throughsocial security contributions to PAYG pension systems (Blome et al. 2009; Attias-Donfut and Arber 1999). This policy mechanism for transferring financial resourcesacross generations is much weaker in Hong Kong and Singapore, due to the adoptionof DC pension systems. There is also a difference in timing. In Europe, there is acyclical flow of financial resources between two generations within any one timeperiod, mediated by public pension systems. But in Hong Kong and Singapore, theflow of financial resources between generations is unidirectional—upward—within asingle time period. The “circle” of exchange is only complete when one considers thatin the next time period, the new cohort of elderly parents will in turn expect financialsupport from their adult children. The differences in family exchanges between HongKong and Singapore on the one hand, and European countries on the other, aretherefore in the transfer channels, directions, and time periods implied in theirrespective generational contracts, which are sometimes obscured in generalisedcultural accounts of East Asian social policy (e.g. Jones 1993).

Theoretical Explanations

The way current systems of intergenerational support in Singapore and Hong Kongare explained can shed light on the sustainability of familial dependence in the face

Table 9 Singapore: percentage of elderly persons aged 65+ that have financial exchanges with theirchildren, 1995a

Singapore Financial transfers

Parents to children ↓ 29

Children to parents ↑ 84

a Cash transfers from parents only include those to co-resident children, but cash transfers to parentspertain to all children, regardless of co-residence

MCYS (1995)

Table 10 European countries: percentage of elderly persons aged 50+ that have intergenerationalexchanges with their children, 2004

Financial transfers Social support

Germany

Parents to children ↓ 27 12

Children to parents ↑ 4 23

Italy

Parents to children ↓ 16 7

Children to parents ↑ 2 12

Albertini et al. (2007)

284 K.-H. Ng

of demographic change. The earliest explanations were cultural ones. Chow (1987)argued that culture determines how societies interpret the objectives of social policy,observing that in Western countries, the state is responsible for redistribution basedon the rights of social citizenship and equality, whereas public welfare provision inChinese societies is perceived as an act of state benevolence. Instead, the family andthe wider kinship network assume primary responsibility for taking care of itsmembers. Jones’s (1993) suggestion that East Asia has a distinctive Confucianwelfare state built on the central role of the family echoes Chow’s observations. Amajor shortcoming of the cultural argument is that it does not allow room for policydiversity within the region and over time (Bonoli and Shinkawa 2005; White andGoodman 1998). As such, it provides limited theoretical leverage for analysing theadaptation of East Asian welfare states when confronted with pressures such aspopulation ageing.

Political analyses point to familial dependence as a response to the outcomes ofpolicymaking in these societies. In Hong Kong, political parties and interest groupshave pressed for a defined benefit pension scheme and even a publicly managedcentral provident fund, yet the MPF was implemented with the support of thebusiness lobby and pro-China parties (Chan 2003; Ho 2001). In the absence of fulldemocratic elections through which the working class might have been able to asserttheir preferences, the residual welfare philosophy of the administration and theinterests of the financial industry have resulted in a pro-market retirement incomepolicy. Not only was familism actively promoted by the administration as anideology, familial dependence was necessitated by the low levels of protection underthe MPF (Sawada 2004). In Singapore, Ramesh (2000) argues that the limited socialsecurity system built around the CPF was first developed by the British colonialgovernment during times of political exigency, and remained ungenerous as the PAPgovernment led a politically successful nation-building campaign based on max-imising economic growth and controlling social spending. Under this strategy,family support was encouraged by the government to counter expectations of publicsocial provisions. In both Hong Kong and Singapore, the importance of the family to

Table 11 Locating Singapore and Hong Kong as a welfare regime

De-commodification De-familialisation

Social democratic High de-commodification, universalpublic benefits

High de-familialisation,comprehensive publicservices

Southern Europea Moderate de-commodification,status-based transfers

Low de-familialisation,family-dependent

Liberal Low de-commodification,means-tested benefits

Moderate de-familialisation,market-based services

Hong Kong, Singapore Low de-commodification,means-tested benefits

Low de-familialisation,family-dependent

a Esping-Andersen’s orginal typology included conservative welfare regimes. The Southern Europeancluster is a sub-type identified later by other scholars as a familialistic variant in Continental Europe. It isincluded here as it offers a more relevant comparison with Hong Kong and Singapore

Based on Esping-Andersen (1990, 1999), except for Hong Kong and Singapore

Prospects for Old-Age Income Security in Hong Kong and Singapore 285

old-age income security is not entirely a matter of cultural tradition. It is also acorollary of the public pension systems that emerged from the political contestationsin these societies.

The political economy literature on welfare regimes, on the other hand, offers anuanced and systematic approach to assessing the role of the family in welfare states.Esping-Andersen’s influential work in 1990 first identified three clusters of welfareregimes among the advanced economies—liberal, social democratic, and conservative—based on the organisation of welfare production between the state and the market.Countries were differentiated based by the degree of de-commodification, or how farwelfare state provisions reduce individual dependence on the labour market for meetingwelfare needs.9 Since then, other scholars have argued that this regime typology isoverly-focused on the male breadwinner and proposed new dimensions forcategorising welfare regimes, such as gender regimes (Lewis 1992) and age orintergenerational regimes (Lynch 2006; Saraceno and Keck 2010). A growing body ofresearch on the role of the family especially in informal welfare production nowcentres on the notion of de-familialisation, or the extent to which welfare stateprovisions reduce individual dependence on the family (Esping-Andersen 1999).Apart from the substantive findings, a major contribution of this literature is inhighlighting the complementarity between different sets of welfare institutions.10

These complementarities have implications for the sustainability and vulnerabilities ofindividual welfare regimes, because they are based on different assumptions about thedivision of responsibility between the state, the market, and the family.

Despite early interest, East Asian countries have never been convincingly situatedwithin the welfare regime typology used in Europe. Scholars have separatelyreferred to the liberal, conservative, or familialistic tendencies of East Asian welfarestates (Aspalter 2001; Esping-Andersen 1997, 1999), or proposed distinct types forthis region such as Confucian (Jones 1993) or productivist (Holliday 2000).11 Whileit is beyond the scope of this review to fully debate the regime type (or types) thatoperates in East Asia, a cursory comparison of Singapore and Hong Kong with otherestablished welfare regime types on Esping-Andersen’s two major dimensions of de-commodification and de-familialisation shows why East Asian welfare states aredifficult to place (Table 11). In terms of de-commodification, Singapore and Hong

9 Although other scholars have proposed modified classifications, especially a fourth cluster comprisingthe Southern European welfare states, Esping-Andersen’s original work still largely sets the tone forcomparative welfare analysis.10 The term “institutional complementarity” was first used by Hall and Soskice (2001) in their work onvarieties of capitalism, in which they also highlighted the fit between particular configurations of market,labour, and welfare institutions.11 Jones (1993) directly compares East Asia to Esping-Andersen’s three worlds of welfare in herdescription of the Confucianist welfare state as: “Conservative corporatism without (Western-style) workerparticipation; subsidiarity without the Church; solidarity without equality; laissez-faire withoutlibertarianism: an alternative expression of all this might be ‘household economy’ welfare states—runin the style of a would-be traditional, Confucian, extended family” (p.214).The productivist welfareregime—a reference to the political economy literature on productivism—is based on the observation thatEast Asian governments prioritise economic development above all else. Scholars have argued that EastAsian governments do not subjugate social welfare to economic development, but rather pursue aprogramme of shared growth that seeks to raise social standards through rapid economic development(Birdsall and Haggard 2000; Hort and Kuhnle 2000). Furthermore, the criterion of prioritising economicgrowth is difficult to demonstrate and not clearly falsifiable.

286 K.-H. Ng

Kong resemble the liberal regime in their use of stringent means-tested benefits. Butin terms of de-familialisation, they bear similarities to the regime in SouthernEurope. In fact, social spending data and intergenerational co-residence rates(Börsch-Supan et al. 2008; ILO 2010) suggest that they are more liberal than theAnglo-Saxon liberal regime and more familialistic than Southern Europe. Socialwelfare for elderly persons is achieved through a set of complementary strategiesthat encourage welfare production through the labour market, promote familysupport, and minimise the substitution of either market or family welfare functionswith state provision. Under these conditions, Hong Kong and Singapore may facethe vulnerabilities of both the liberal and Southern European welfare regimes.Already, the challenge of social stratification in liberal welfare states has surfaced inthe form of income inequality that is higher than in the United States (UNDP 2010).Esping-Andersen (1999) also argues that the familialistic regimes in SouthernEurope have experienced an overall reduction in welfare for families and individualsbecause they continue to place heavy care expectations on the family despitechanges in family structure and gender roles. This signals a possible risk to relyingon adult children as the main pillar of income security in Singapore and Hong Kong,especially at a juncture of social change.

New Social Risks

European pension research is dominated by debates on the fiscal sustainability of PAYGpension systems under rapid demographic ageing. But for Singapore and Hong Kong,the sustainability question concerns the capacity of successive cohorts of adult childrento pay for the old-age income security of the preceding generation via channels of familysupport. What authors call the emergence of new social risks in a period of post-industrialisation has cast doubt on this capacity (Bonoli 2005; Esping-Andersen 1999;Taylor-Gooby 2004). Since the 1990s labour markets and family structure havebecome increasingly unstable in the advanced industrialised societies. A dramatic shiftin employment from manufacturing to services has led to higher and longer periods ofunemployment, worsening wage inequality, and more prevalent flexible employmentsuch as part-time work. The male breadwinner model no longer holds as more womenenter the workforce, making care duties at home a challenge. Traditional familystructures are also being challenged, with divorce and single parenthood on the rise.

Table 12 New social risks in Singapore and Hong Kong, 1990–2010

Singapore Hong Kong

Unemployment 1992–2000 2.6% 1991–2000 3.2%

2001–2010 3.9% 2001–2010 5.5%

Average household size 1990 4.2 1990 3.5

2009 3.5 2010 2.9

Number of divorces per1000 population

1990 1.3 1991 1.1

2009 2.0 2006 2.5

MOM (2011), DOS (2010b), Censtatd (2007, 2011b)

Prospects for Old-Age Income Security in Hong Kong and Singapore 287

Familialistic welfare regimes are especially vulnerable to these new social risksbecause they render many of the assumptions about the role of the family in welfareproduction increasingly invalid. In Singapore and Hong Kong, unemployment hasrisen, the average household has become smaller, divorces have become morecommon, and intergenerational co-residence has declined (Table 12). These trendsappear to be more advanced in Hong Kong than in Singapore.

The interaction of these social risks with existing public pension systems andcurrent levels of familial dependence may expose elderly persons in Hong Kong andSingapore to a set of income risks particular to these societies. Irregular employmentdirectly affects savings into workers’ DC pensions and hence their future incomesecurity during retirement. It also reduces adult children’s financial capacity tosupport their elderly parents at the same time that their responsibility increases asthey have fewer siblings to share the burden within smaller households. When theseadult children eventually retire, they may have less pension savings and possiblyeven fewer children of their own to support them. If current trends persist, theproblem of old-age income security may compound in successive generations.

Particular elderly groups may face higher risks in these times. In Singapore,elderly women are more dependent than men on adult children’s financial support. Anational survey in 1995 and 2005 found that elderly women were less likely to haveCPF savings and other personal income sources, less likely to have made financialplans for old age, and more likely to have received financial contributions fromchildren (Chan 1997; MCYS 1995, 2005). A longitudinal study between 1995 and1999 of persons aged 60 and above found that women were more persistentlydependent on informal support and less likely to switch from private transfers toother income sources than men as they aged, once other sociodemographic attributesare controlled for (Chan et al. 2003). In Hong Kong, a study based on the GeneralHousehold Survey in 2000 found that elderly women when compared to men hadlower incomes and fewer assets such as stocks and property. Other elderly personswho were similarly disadvantaged include homemakers as opposed to those whowere working or retired, single and widowed elderly persons, and those with lowereducation (Chou et al. 2006). Women were over-represented in all these groups. Aseparate study on the characteristics of future elderly persons in 2000 (i.e. those aged45–59) who expected to rely on social assistance for retirement income was equallyrevealing (Chou et al. 2003). Compared to their contemporaries, this group was morelikely to be unmarried, living alone, and childless. They were also more likely tohave lower education, lower income, fewer financial assets, less access to privatepensions, and a lower chance of receiving financial support from children. Newsocial risks associated with employment instability, smaller families, and weakerintergenerational support may result in an increasing proportion of elderly personswho face such overlapping disadvantages and become financially at-risk.

The challenge for research in the context of Hong Kong and Singapore is to takeup issues of demography, policy, and family at the same time. Apart from thetheoretical projections by the OECD (2009) for full-career workers, little is knownabout the possible pension outcomes for individuals with different levels of earningand partial work histories. Previous analyses have also not considered the combinedeffects of Hong Kong’s social assistance, old-age allowance, and the MPF or recentreforms to the CPF. At the level of the family, patterns of reliance on co-residence in

288 K.-H. Ng

terms of income level and gender are not known, as is the extent to which co-residence affects the income of elderly households. Critically, the interaction ofpension policy and family support, and its effects for different sub-groups of theelderly population—especially women and low-income earners—are not well-understood. Conceptual work on the interdependence of the state and the family inwelfare production has been developed for some years now (Esping-Andersen1999). More recently, authors have also begun to carry out empirical work thatgathers these two strands of analysis in the domain of old-age social policy. Blome etal.’s (2009) study of France, Italy, Sweden, and Germany compares exhaustivelystate and family provisions, for elderly persons and families with children, in termsof both benefits and services. The Center for Strategic and International Studiesrecently developed a Global Aging Preparedness Index that measures fiscalsustainability and income adequacy in 20 countries using 14 indicators, includingco-residence and cash transfers from children (Jackson et al. 2010). But so far, theseefforts have focused on deriving national indicators rather than examining the spreadof outcomes within each elderly population, which is the greater concern from asocial policy perspective. This is an urgent research task as it can generate a basis forassessing the possible micro-effects of anticipated social trends and future policychange.

Conclusion

This review set out to demonstrate that Singapore and Hong Kong face a distinct andserious challenge to old-age income security due to their particular mix of publicpension policy and reliance on intergenerational family support. In European welfarestates with mature PAYG pension systems, the attention is rightly focused on thefiscal sustainability of public pensions as the balance between contribution andpayout alters dramatically with demographic ageing. The populations in Singaporeand Hong Kong are ageing even more rapidly and will be among the oldest in theworld within two decades. Yet current pension systems remain very limited.Singapore does not provide a universal pension for elderly persons, while HongKong’s universal old-age allowance pays ungenerous benefits. The main pensionpolicy instruments are the employment-related CPF and MPF. Empirical estimatesand theoretical projections suggest that these DC pensions will not provide adequateretirement incomes, with benefit levels well short of those achieved by otheradvanced economies in the OECD. The CPF performs particularly poorly from anold-age income perspective even by regional standards despite a high contributionrate of 35.5% of monthly salary, because of low stipulated interest rates andsubstantial diversion of savings to other social policy purposes such as housing.

The prospects of old-age income security therefore depend heavily on thesustainability of intergenerational support. Elderly persons in Singapore and HongKong depend primarily on their adult children for income security in the form of co-residence and cash transfers. More than half of all older persons live with their adultchildren and, in Singapore, more than two-thirds receive financial support from theyounger generation. This upward flow of resources from younger to oldergenerations via familial channels is distinct from the cyclical flow of social security

Prospects for Old-Age Income Security in Hong Kong and Singapore 289

payments by working-age adults and financial gifts from elderly parents to theirchildren in European societies. To the extent that they are net recipients dependenton informal support for financial security, elderly persons in Hong Kong andSingapore are more vulnerable than their European counterparts. Current theoreticalunderstanding about the organisation of welfare production between the state and thefamily suggests that Singapore and Hong Kong portray a unique and extreme variantof welfare regime where the role of the state is more limited than in the liberalregime, and the role of the family more central than in the Southern Europeanregime. As a result, the sustainability of current old-age income security arrangements isparticularly vulnerable not just to demographic change but also new social risks thatthreaten the stability of employment and traditional family structures. Already co-residence is declining in both societies. Data from Singapore also show that financialsupport from adult children is decreasing.

Current knowledge of old-age income security in Singapore and Hong Kong islargely drawn from country-level indicators that conceal the distribution of outcomesacross elderly sub-groups. Major questions remain unanswered regarding pensionentitlements for elderly persons with different employment histories and the incomeeffects of co-residence especially for more vulnerable groups such as low-incomeearners and women. Critically, the interaction of pension policy and family supportand its potential outcomes for different groups of elderly persons is not well-understood. This area will be crucial to a fuller assessment of the prospects for theelderly population in these societies as they anticipate demographic and socialchanges that will test their fundamental assumptions about old-age income security.

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