Frozen for 23 Years: How Inflation Ate HK$390,000 of Severance Protection

Track 1 Data Mirror | 26 October 2026 | mpf.hk

The core proposition: the cap never moved, the money got thinner

Hong Kong’s severance payment and long service payment formula has not changed a word in 23 years: two-thirds of monthly wages multiplied by years of service, with monthly wages capped at HK$22,500, accrual capped at HK$15,000 per year, and a total cap of HK$390,000. For any termination on or after 1 October 2003, that is the ceiling.

Prices did not freeze. On the Composite Consumer Price Index (2010 = 100), the index stood at 89.05 at the end of 2003 and 147.16 at the end of 2025, a cumulative rise of 65.3%. In other words:

• HK$390,000 in 2003 buys what about HK$644,500 buys today;
• HK$390,000 today is worth only about HK$236,000 in 2003 money;
• the cap has lost about HK$154,000 in real terms, close to 40% of its purchasing power.

Nobody miscalculated this, and no employer pocketed the difference. The statute itself never kept pace with inflation: a line drawn in 2003 is being used to measure the cost of living in 2026.

Data penetration: promised versus real

Note: real conversions use the Composite Consumer Price Index at end-2003 (89.05) and end-2025 (147.16), a factor of 1.653. These are illustrative conversions, not official figures.

The cap bites twice. First, the wage cap: an employee on HK$30,000 a month is counted as if earning HK$22,500, so 30 years of service that would be worth HK$600,000 without any cap is cut to HK$390,000, a shortfall of HK$210,000. Second, the total cap: an employee on HK$40,000 a month with 20 years of service would be worth about HK$533,000 uncapped but receives HK$300,000, a shortfall of about HK$233,000. And after 26 years, longer service adds not one more dollar by law.

The dividing line itself is moving under the cap. The Census and Statistics Department reported median monthly employment earnings of HK$23,000 for June to August 2026, already above the HK$22,500 wage cap. The median worker in Hong Kong now stands above the line: being squeezed by the cap is no longer a high-earner problem, it is roughly half the workforce.

The compounding toll: the next 10 and 20 years

Inflation erosion does not stop in 2025. Assuming 2% annual inflation from here, today’s HK$390,000 will be worth:

• about HK$320,000 in real terms in 10 years;
• about HK$262,000 in real terms in 20 years.

At HK$8,000 a month in living costs, HK$390,000 covers about 49 months today; the same nominal sum in 20 years covers about 33 months. A cap that never moves is a cut that compounds with time.

The abolition of the MPF offsetting arrangement on 1 May 2025 makes the frozen line bite harder. For post-transition service, employers can no longer use mandatory MPF contributions to offset severance or long service payment; that portion must be paid in cash (voluntary contributions can still offset service before and after the transition). For employees, that is good news: the MPF pot is no longer raided to settle the severance bill. But for the statutory amount itself, the effect runs the other way. When the post-transition portion has to come out of cash, employers are naturally more cautious about anything above the statutory minimum, so an employee who relies only on the legal floor absorbs the full real-terms shortfall alone.

Do not confuse the government’s HK$33.2 billion subsidy with help for employees. That 25-year subsidy cushions employers’ transition costs. It does not raise HK$390,000 by a single dollar.

The breakthrough: the statute is a floor, not a ceiling

The law sets a minimum, not what an employee is actually owed in total. Four checks, all workable inside the current system:

1. Read the contract, not just the statute. Many employment contracts, staff handbooks or collective arrangements promise gratuities, long-service awards or leaving compensation above the legal formula. The statutory calculation stops at HK$22,500 a month, but a contractual promise is not bound by that line. In the HK$40,000 salary, 20-year example above, the gap at stake is already about HK$233,000.

2. Keep three pots of money separate. Severance or long service payment, the MPF balance, and employer voluntary contributions or service gratuities are three different things. Since the transition, mandatory contributions are no longer used to offset post-transition severance, so the MPF balance stays intact — but that does not make the severance payment itself any larger. In any leaving negotiation, count the three pots separately, and do not let one apparently generous total hide how much the statutory slice has shrunk in real terms.

3. Fill the cap gap with your own portable savings. A cap frozen for 26 years means the “service insurance” provided by statute shrinks every year in real terms. The replacement does not live in the statute; it lives on your own balance sheet. Voluntary contributions beyond the mandatory amount, and tax-deductible voluntary contributions (annual deduction cap HK$60,000, shared with qualifying deferred annuities), convert an employer’s shrinking service obligation into assets in your own name. The key property is portability: changing jobs or schemes does not reset them to zero because of a cap.

4. Know which side of 1 May 2025 you are on. Employees hired on or after 1 May 2025 know from day one that their employer faces a cash bill for post-transition service; employees hired before that date have a pre-transition portion that can still be offset by mandatory contributions. Knowing where your service falls tells you where the employer’s cash pressure sits in a leaving or renewal negotiation. That is not leverage to threaten with; it is the difference between measuring a 2026 negotiation with a 2003 ruler and measuring it with a current one.

Conclusion

In 2003, HK$390,000 was a line of protection. In 2026, it is a line worn thin by inflation by about 40%. The law does not deceive anyone — the cap is printed in black and white. The real danger is mistaking a statutory minimum for adequate protection. After 26 years of service, the law adds nothing more; the rest has to come from the contract, from voluntary savings, and from a clear-eyed calculation of what your years of service are actually worth.