Read the following article on the proposal on universal pension plan in Hong Kong. Apply what you learn in class about the time value of money, and provide your evaluation and comments to the plan according to the following questions. Your grade for question 4 will NOT depend on any particular conclusion or numbers. However, make sure you can support your claim with reasons and calculations. Write down your analysis in a Word file and show your calculation in an Excel file.

Suppose the stated annual interest rate is 6%. For Mike who is age 25 now and will receive a monthly wage of HK$15,000 till retirement at age 65,

1. What is the present value (at age 25) of Mikes total contribution to the program and what is the present value (at age 25) of Mikes future total benefit from the pension (suppose he will die at age 85)? Compare these two present values and draw your conclusion. (2 points) 2. Under what annual interest rate that these two present values are equal? (1 point) 3. Repeat the first two exercises for the case that the monthly income increases to HK$25,000. (1 point) 4. To evaluate the value of the pension plan, what do you think are missing in this exercise so far from societys point of view? How do you evaluate those missing components? (2 points)

A long-awaited government-commissioned study said the pension should be funded partly by contributions ranging from 1 to 2.5 per cent of employees' salaries, paid by both employers and workers.

The government would need to inject HK$50 billion but an additional profits tax - as groups such as the Federation of Trade Unions proposed - would not be required.

The study was headed by University of Hong Kong academic Nelson Chow Wing-sun. "If the government can make a decision by 2017 [on whether to introduce the scheme], then I would say that my effort on the study had not been wasted," Chow said after a presentation to the Commission on Poverty yesterday.

Under the suggested "payroll old age tax", those earning less than HK$10,000 a month and their employers would contribute 1 per cent of the worker's salary.

For those paid less than HK$6,500 a month, employers would contribute 1 percent and workers would be exempted.

For salaries of HK$10,000 to HK$20,000, both would pay 1.5 per cent and for HK$20,000 to HK$120,000 the amount would be 2.5 per cent.

But the proposal has some limitations.

The pension pool is expected to go into annual deficit from 2026. By 2041 only about HK$13.5 billion would be left.

The influential Federation of Hong Kong Industries said Chow's proposal would be a "very huge burden" for employers to bear.

Chief Secretary Carrie Lam Cheng Yuet-ngor, who chairs the commission, said it needed more time to study the report.

Lam said she "could not commit the commission to any timetable for the time being except to assure you that the commission will convene another meeting in due course".

Federation of Hong Kong Industries chairman Stanley Lau Chin-ho said employers were already required to make MPF contributions.

"Why do we need to make another contribution?" he asked. "Without a means test, [the billionaire] Li Ka-shing will also get the pension. Does he need it?"

Chow's report also included an analysis of five other proposals including those from the Alliance for Universal Pensions and the Federation of Trade Unions.

The report said the alliance's proposal would record a deficit from 2028 but still have HK$127 billion left by 2041.

The federation's proposal would record a deficit in 2017 and the money would be used up by 2030.

The reports both suggested an additional profits tax and transferring part of the Mandatory Provident Fund contributions to the pension scheme.

"A concern is the impact on public finance," Lam said. "Of the four proposals that do not have a means test, there will be sustainability problems by 2041. The money coming into the scheme will be less than the money to be given away."

Of the two proposals that did require a means test, the annual additional average expenditure for the government would be HK$8.1 billion and HK$15.3 billion.

"That is obviously a huge burden for public finance," Lam said.

Commission member Frederick Fung Kin-kee, of the Association for Democracy and People's Livelihood, said there should be an additional profits tax. "We have been talking about retirement protection for 30 years. Now the government has huge surplus if it is not introduced now, it may be impossible to do so in the future," he said.

FTU lawmaker Tang Ka-piu said he welcomed any proposals as long as the elderly received HK$3,000 a month.

But he believed an additional profits tax would be more sustainable.

New People's Party chairwoman Regina Ip Lau Suk-yee said the best option would be one under which the government met the expense, without needing to adjust the tax system.