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Making Welfare Work Better

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Image: YP/Reuters
A version of this article also appeared in the South China Morning Post's Young Post on Thursday, April 28. http://yp.scmp.com/news/features/article/103333/hong-kong-wealthy-city-yet-more-million-are-living-poverty

Asia’s financial capital has a poverty problem. There is no doubting that. According to Hong Kong government figures, between 15% and 20% of the population lives below the poverty line, defined as half the city’s median annual income of about HKD 180,000. In Hong Kong, sky-high rents and limited space mean that poverty poses particularly acute difficulties. With insufficient public housing, many of the impoverished live in dangerous, and often illegal, subdivided flats. Others still are forced to live in cage homes. 

Hong Kong’s social welfare program, the Comprehensive Social Security Assistance (CSSA), is notoriously ungenerous. Payments are as low as HKD 2,000 per month for a single, healthy adult. That’s a mere one-seventh of the median monthly wage. The paltry sum is not nearly enough to maintain a reasonable life in the city.    

What can be done to improve the system? It could be argued that Hong Kong’s welfare model is superior to that of many developed countries such as the United States. In such “welfare states”, a Byzantine system of entitlements and benefits often creates a disincentive to work and has led to mounting government debt. 

This lack of incentive to work is particularly strong for those with low earning potential. Every dollar of income means a dollar less in welfare; those who believe they cannot earn significantly more than their welfare benefit often will not try to enter the job market. In Hong Kong, on the other hand, one cannot live purely off welfare, and all able-bodied recipients are required to actively seek full-time employment.

Hong Kong should not emulate the welfare state model, but it does have options. One is the earned income tax credit (EITC). The EITC, which is used in the United States, offers a tax rebate to working individuals making less than a defined sum of money. By offering a rebate, the EITC does away with the disincentive to work—the benefit can only be availed if there is taxable income. Raising the EITC is widely seen as favorable to raising the minimum wage, as the former does not increase the cost to companies of hiring workers. 

A more far-reaching alternative is the negative income tax. Here’s how it works: take an individual whose income is HKD 5,000 a month. If positive income taxes start at HKD 15,000 a month, and the tax rate is set at 20%, this individual will be paid 20% of the difference between his income and 15,000—in this case, HKD 2,000 a month. The concept is attributed to Milton Friedman, the renowned economist who was a champion for free market values. He saw the negative income tax as the best way to reconcile free-market ideals with the moral imperative to help the needy. The negative income tax provides an incentive to work and also supplements those who cannot earn enough. 

The most radical proposal is for a guaranteed basic income. Instead of myriad welfare benefits, the government would provide a cash transfer to those below a minimum income threshold. Proponents say that the policy will be crucial to protecting the large numbers of people projected to lose jobs as a result of advancements in artificial intelligence and the automation of even white collar jobs. 

Many fear that a guaranteed income would create a strong incentive to quit work. However, the limited studies conducted so far show minimal reduction in hours worked when income is guaranteed. Many postulate that this is because the necessity to earn money is not the sole reason for working—many find fulfillment through their work too. Additionally, by abolishing other welfare benefits, the guaranteed basic income makes welfare administration less bureaucratic and costly.

What is best for Hong Kong? Unlike the vast majority of governments in developed nations, Hong Kong’s runs a consistent budget surplus despite low taxes. The government currently holds reserves of over HKD 800 billion and had a HKD 73 billion surplus in the 2014-2015 fiscal year. The government can afford to experiment with welfare policy. 

A negative income tax and a guaranteed basic income may be politically unpalatable as they call for a fundamental restructuring of the tax and welfare systems. A generous expansion of tax credits and income supplements may be more tenable. Clearly, something must be done. A city with Hong Kong’s wealth, and a government with its financial war chest, cannot accept that over a million are languishing in poverty.   

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