Improve the Low-Income Working Family Allowance

Updated: 2014-01-21 07:06

By Ho Lok-Sang(HK Edition)

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I have been advocating a family allowance for the working poor for a long time (Feb 22, Aug 23 and Sept 22, 2011, China Daily). I am pleased to see the Chief Executive introduce a Low-Income Working Family Allowance. To me, this is almost like a dream come true.

However, the scheme has triggered a backlash from some members of the middle class, who complained they are not well off at all, but instead of benefiting from it, might even in the end have to foot the bill for funding it.

The fact is that given that Hong Kong's overall median monthly household income is now only about HK$22,500, the highest household income to qualify for the scheme is merely HK$13,500. It is not difficult to imagine that a family with an income over this is struggling to make ends meet, especially if it does not have public housing. Actually, even for a median household income, a household with three members, life will not be easy. But all those whose incomes are higher than 60 percent of median household incomes will get nothing.

My question remains the same that I have raised before: Why can't the benefits "taper off" gradually for those whose incomes have exceeded the stated thresholds? The either "you are in" or "you are out" approach is highly distorting, since people will be discouraged from earning a bit more if that could disqualify them from the benefits completely. The "taper-off" arrangement will mean that those of the bottom "middle class" who are struggling can also get some benefit, which will gradually diminish as their incomes rise above the threshold.

Actually, the designers of the proposed scheme appear to be aware of the problem. That is why those who earn more than half but less than 60 percent of the median income can still get benefit, at exactly 50 percent of what they would get if their incomes happen to be less than half the median income. It is not at all clear why the benefits suddenly drop to 50 percent and then suddenly falls to zero at the 50 percent and 60 percent thresholds.

Improve the Low-Income Working Family Allowance

Some might argue that the "taper-off" arrangement is too complicated to implement. I disagree. Any household that applies for the allowance already needs to report the income anyway. If the earnings are known, and if the number of dependents are known, and if the status of the household as to whether it pays market rent or enjoys public housing is known, then one can refer to a table to know the benefit, or alternatively it can be generated through the computer. This benefit will continue until the following year, when new information is collected. To simplify things I would propose that public housing tenants be simply assumed to enjoy an additional HK$3,500 of monthly income. I would also propose that a standard notional rental payment (which varies with the size of the household) is applied to calculate how much "disposable surplus" after rent and self-maintenance of the worker is available for the support of dependents. The family allowance should be big enough to ensure basic needs are met. But in order to maintain the incentive to work, each household should be allowed to collect additional, though tapered benefits, even after earnings have risen above the basic needs of the family. The tapered benefits will fall to zero perhaps at 120 percent of the median income.

Of course the proposed changes will not make the Low-Income Working Family Allowance a perfect one, but it will reduce some of the most glaring unfair distortions of the system. There is really a huge difference between the financial pressures for households already accommodated in public housing and for households who have to pay market rents. The likelihood is that those enjoying higher incomes but paying market rents may be far worse off than those living in public housing. Failing to account for the difference may pile more benefits on those who already enjoy significant benefits while leaving more needy people in the cold.

Giving a benefit to families whose incomes are over the median income may appear generous and excessively burdensome to the government, but actually the additional amounts may not be that big because these benefits taper. I am hopeful the family allowance will save money on CSSA as more people prefer to work rather than to rely on the CSSA. Moreover, I would recommend widening the tax bands to further benefit the middle class.

The author is director of Center for Public Policy Studies at Lingnan University.

(HK Edition 01/21/2014 page9)