Hong Kong's ineffective government seems unable to deal with the looming financial crisis caused by a rapidly ageing population: that was the gloomy message from a recent seminar on retirement protection sponsored by the Hong Kong Retirement Schemes Association (HKRSA).

The HKRSA is leading the effort to keep retirement issues on the government's agenda, by educating industry and human resource officials, and bringing them together with government officials.

Its chairman, Stuart Leckie, speaking in a personal capacity, has called for the introduction of an old age pension for all workers. "It should be considered a right," he says. He notes that Hong Kong has ignored establishing the World Bank-recommended ‘three pillar' scheme of a government-provided basic pension (pillar one), a pension based on individual earnings (pillar two) and voluntary supplementary savings (pillar three). Instead it has the Mandatory Provident Fund, a pillar-two arrangement, which industry experts agree is inadequate to provide for anyone's retirement.

But while many in the government recognize this, they say establishing such a programme is a political impossibility for now. "The government can't chip money into a new scheme for at least five years," says Bernard Chan, member of the Legislative Council and deputy managing director at Asia Financial Group.

He says if there is one thing that companies and employees will agree on, it's that they don't want to contribute more money, particularly given the current economic downturn. Otherwise they are at loggerheads, a division that extends to Legco. "Legco is divided between the grassroots and the business camps," he says. "We all know MPF is insufficient but that's the best we can afford for now. It's strictly a political compromise."

This seems like an anomaly given Legco is stacked with pro-government votes. But this is the paradox of Hong Kong: the government has the ability to act like a dictator, but lacks the will, perhaps because it also lacks popular legitimacy or accountability.

Chan says the solutions to ageing are simple ("Stewart has just said it") but a basic pension scheme requires funding, and that would have to come from taxpayers. Right now Hong Kong's budget is in freefall.

Thanks to land taxes and other revenue-raising measures, in the past the government was able to subsidize services such as healthcare or flashy infrastructure projects. But the crash in the property market means the government no longer has revenues. Add that to the weak economy, and you get a lot of expensive services that Hong Kong can no longer afford, and no one willing to pay for them. The government has no choice but to raise taxes or cut spending, starting with bloated civil servant benefits, but as these are difficult, it seems to be relying solely on an economic rebound.

Eden Woon, director of the Hong Kong General Chamber of Commerce, notes that MPF has been extremely unpopular, particularly among small- and medium-sized enterprises. These companies cannot afford to pay more, and have the political organization to block new measures.

But at least people can identify that MPF savings are in their own account. A national pension would require taxation to pay for someone else.

"The immediate problem is not democracy," Woon says, "but a sense of a lack of fairness. That leads to no desire to sacrifice or contribute. To make progress requires strong leadership and politicians you can trust. But if civil servants' pay is so high, why should businesses contribute to higher taxes?"

Unfortunately, even if the economy turned around tomorrow and enjoyed a sustained recovery, it wouldn't solve the ageing problem.

As Chan notes, the structure of Hong Kong's population is fundamentally changing. Over the next thirty years the percentage of over-65 year olds will grow from 11% in 2001 to 24% in 2031. Even with migration or an improbable rise in fertility rates, the burden on the shrinking workforce to take care of the elderly population will become overbearing. The government will not be able to meet the demand for services in healthcare, residential care and leisure. Meanwhile, Chan believes Hong Kong will evolve into a democracy - creating further pressure by organized social groups to lobby for public assistance.

For Chan, the only solution is to wean Hong Kongers off entitlement programmes and develop more services in cooperation with the private sector. That means reforms in areas such as healthcare, and the introduction of a consumption tax. "You can call it ‘compassionate conservatism with Chinese characteristics'," he quips.

For others, the ageing situation means encouraging older people to work longer, by facilitating flexible employment, and by improving the quality of retired life by promoting volunteerism, for example. Hong Kong must also keep the doors open to mainland immigrant workers.

On the financial side, there are other steps Hong Kong can take before it is ready to provide a basic pension. Dr. EK Yeoh, secretary for health, welfare and food, says MPF needs to be supplemented by new instruments for annuities and reverse mortgages. "These things are badly required but not developed here," he says. "A reverse mortgage market can let people use resources tied into their retirement for everyday needs."

Leckie says a logical first step is to annuitize MPF benefits, instead of handing them out as a lump sum. The local bond market also needs to be developed to allow index-linked bonds and other instruments to allow insurance companies to better match their assets to their liabilities. Last, he says Hong Kong needs to better prepare for integrating its financial markets and retirement systems with those now developing on the mainland. Although China's system is still taking shape and lacks funding, it has done a better job at following the World Bank three-pillar system.