Thursday, December 14, 2017

The actual poverty situation in Hong Kong; not nearly as bad as some make it sound

One has surely read the line in a paper recently to the effect that “Poverty in Hong Kong hits record high” or that “one million people live in poverty, about 1 in 5”.

The press merely copy and pasted the headlines from the Hong Kong’s Commission on Poverty’s recently released report on poverty in Hong Kong.

Can this really be the case? It is, but only if you consider the Hong Kong government’s definition of poverty as being the state of someone who’s salary is below half of Hong Kong’s median income. That definition does not include investment income of any sorts (except for taxable one such as rental income).

I do believe that a definition of poverty relative to median income is sensible when compared to absolute-need poverty that was more suited for the middle-age.

But the calculation of income should be accounting for all sources of income, or risk being abused, and used to derive bad policies. I think that most would agree that if Li Ka Shing retires and stops receiving a salary from his various businesses, he should not be counted in the Hong Kong “poor”, which, by the current calculation, he would be.

I think it would have been critical for the press to highlight this fact as people have an assumption of what poverty is, and it certainly does not include millionaire retirees and well-to-do see-lais. Another perverse side-effect is that, unless the current calculation is amended to reflect income from all-sources, we would logically see a year-on-year increase in “poverty” as an increasing percentage of the population are retiring, and, by the current definition, automatically becoming “poor”.

I had a feeling that something was afoot as the number of “poor” people just seem so high that it seemed to indicate something fishy in the calculation. Then, I figured that unless the way of coming up with these figures was based on population surveys, only the salary-based income could be included in these as all investment-related gains are not taxable, and therefore not declared here in Hong Kong.

To make sure, I did contact the Hong Kong’s Commission on Poverty, which confirmed that any income derived from investment were not calculated in the Hong Kong definition of poverty as they base their calculations on data from the Internal Revenue Department (ie. your income tax declarations)

Let’s have a look at the document and try to make some reasonable assumptions to establish a more accurate Hong Kong poverty level.

“ES.16 It must be pointed out that adopting household income as the sole indicator for measuring poverty may overstate the poverty situation since some “asset rich, income-poor” persons may be classified as poor. In fact, among the poor population after recurrent cash intervention in 2016, 84.6% (842 900 persons) resided in non-CSSA households, among whom 539 800 persons (64.0%) had no financial needs, which were up by 27 500 persons and 0.3 percentage point when compared with the corresponding figures in 2015 (512 300 persons and 63.7%). Among some 0.34 million poor elders, 87.6% (295 400 persons) resided in non-CSSA households and over 70% of Hong Kong Poverty Situation Report 2016 Executive Summary xii them (211 100 persons) had no financial needs to apply for CSSA. In addition, over 60% of the poor elderly households resided in owner-occupied housing without mortgages, representing the highest share in eight years. This reflects that many poor elders do have considerable assets.”

There you have it; 84.6% of the “defined-as-poor” population actually live within a non-poor household. That’s basically my wife, who’s technically “poor” but actually has quite a nice lifestyle, traveling abroad on a near monthly basis. This is further confirmed by the 64% of that population having ‘no financial needs’. Let’s be conservative and assume that there’s 10% of these that are fringe cases that do need assistance for whatever specific situation, but just happen to fall through the cracks of the system. That would still mean that out of the strictly-by-current-definition 1 million-or-so “poor”, only about a quarter should actually be considered poor (about 240,000).That is a more accurate 3.2%, all-income-sources, median-relative Hong Kong poverty rate.

“ES.20 In 2016, the poverty rates of unemployed, economically inactive and elderly households after recurrent cash intervention were the highest (69.8%, 59.2% and 48.8% respectively) among all socio-economic groups. The corresponding poverty rate of working households was relatively low (8.0%), demonstrating that employment is the best way to prevent poverty.
ES.25 Indeed, for groups that lacked recurrent employment earnings (including elderly persons aged 65 and above, elderly households, households with elderly head and economically inactive households), their poverty rates were persistently high. Conceivably, as members in these groups have mostly retired, their poverty rates, which are defined by income, tend to be relatively high and bear no significant direct relationship with economic cycles.”

This indirectly restates the problem with the calculation; if you don’t have salary income, you are almost guaranteed to be poor as per current definition. That is after the poverty-alleviating measures.

“ES.36 On the other hand, since the poverty line analysis under the core analytical framework does not take assets into account, some “asset-rich, income-poor” elders are classified as poor elders. Among some 0.34 million poor elders, 87.6% resided in non-CSSA households, and around 0.21 million of these poor elders had no financial needs. Over 60% of the poor elderly households resided in owner-occupied housing without mortgages, representing the highest share in eight years. This also reflects that many poor elders do have some assets. In this connection, the Hong Kong Mortgage Corporation Limited announced in April 2017 a life annuity scheme to help the elderly turn cash lump sums into life-long streams of fixed monthly income. Scheduled for launching in mid-2018, the annuity Hong Kong Poverty Situation Report 2016 Executive Summary xvii scheme would provide those elders with some assets an additional financial planning option to manage their longevity risk by turning their assets into regular income streams.”

Again here, hardly the definition the average would make of living in poverty. Also seems that the annuity scheme is a good option to offer, regardless of poverty level.

“1.V.1.15.(i) Poverty situation by age of household head: the existing poverty line only takes income into account while most elders do not have employment income. This may result in overestimating the elderly poverty counts. It is anticipated that this problem will be aggravated by more acute population ageing down the road.”

This is the concern that I stated above; if the poverty line calculation does not account for other sources of income, then the ageing population will skew the stats.

Additionally, it seems that the aim of CSSA is not aligned with the definition of poverty, which makes the popular interpretation of ‘poverty’ unduly confusing: while the poverty line is relative to median (and therefore not basic needs), the CSSA’s designed is for basic needs:
“The Comprehensive Social Security Assistance (CSSA) Scheme is designed to provide financial assistance to individuals and families in need so as to bring their income up to a prescribed level to meet their basic needs.”

In  conclusion, we can now establish that:

·         the real poverty rate in Hong Kong is more likely around 3% after the government measures are applied, a far-cry from the 15% dictated by the current calculation methodology
·         The official poverty level cannot be compared to other developed economies as it does not use the same variables, resulting in an over-representation of Hong Kong poverty when compared to other countries with similar GDP-per-capita
·         Once the poverty rate calculation is amended, it would seem that complete poverty-alleviation is within reach with a bonification of current measures

I wanted to point-out that the Hong Kong’s Commission on Poverty is quite clear on the limitation of the current measurement method and therefore, cannot be faulted for merely following the government’s requirements.
To be used as a meaningful comparator of real poverty level among the 1st world economies, the Hong Kong government should align its poverty calculation on those of Canada, France, or Germany, which all include income from all sources.