Meeting the Challenges of Aging Economy Taiwan Experience. Outline

Transcription

1 Meeting the Challenges of Aging Economy Taiwan Experience Hsien-Feng Lee Department of Economics National Taiwan University Tel: #528, Tze-Han Yang Department of Public Finance National Taipei University Tel: , A preliminary version Outline I.General View of Demographic Changes in Taiwan II.Sources of Low Replacement Level III.Implication for Public Finance IV.The Industrial Development in the Aging Society V.Public Policy Development VI.Conclusion January

2 Meeting the Challenges of Aging Economy Taiwan Experience The paper will examines the causes, the possible impact of population aging upon public finance, industrial structure, and policy implications in complying with an aging society. In this paper we mix the meaning of an aging society with an aging economy. I. General View of Demographic Changes in Taiwan Taiwan is in the midst of a drastic demographic transition like other developed economies. In 1993 the fraction of the Taiwan population over the age of 65 was greater than 7 percent of the population, and has shifted into an aging society. During 1950 to 1980 there were yearly about 400,000 new babies, after then, it reflected a diminishing trend. In 2000 there were still 305,000 new babies, however, significantly decreased, only 206,000 ones in In July 2006 the Taiwan Council for Economic Planning and Development (CEPD) projected that the total birth rate would reduce to be only person in 2011, 0.9 in 2021, and Taiwan would changed into being an one child society. In addition, between 1970s and 1980s the implementation of family plan, industrialization and urbanization process that led to the change of family structure in Taiwan. Between 1960 and 2005, the total birth rate decreased from 5.75 persons to (The Ministry of Interior Affairs) In 1990 the total birth rate was first time less than 2 persons, since 2000 it continues to decrease, and it was 1.1 in In developed economies like the U.S.A., Iceland and New Zealand the total birth rates are more than 2 persons, while in other developed economies the total birth rates are generally less than 1.5. In Singapore it was 1.4, and both were 1.3 in Japan and S. Korea. (cited from National Health Bureau, National Health Agency) Taiwan experienced the peak of the baby boom in 1957, while the trough of the baby burst in In the same period, the aging index, i.e. the fraction of the population older than the age of 65 over the age of less than 15, increased from 5.4 percent to 49 percent. The CEPD projects the aging index will be 100 percent since 2016, and 6.5 times in In addition, the median age in Taiwan will rise from 27.2 years old in 1990 to 58.6 in (See Table 1) In the last five decades the Taiwan demographic structure has switched from a 2

3 Table 1 Economic growth rate, labor participation rate, total fertility rate in Taiwan Year Economic growth rate % rate 0/00 Total Labor Male Female fertility partici- LPR LPR % pation % rate % Distribution of personal income Unemployment rate % National saving rate % n.a Source: DGBAS, CEPD, Executive Yuan; Ministry of Interior Affairs. Notes: Distribution of person income is referred to the ratio of highest fifth s income to lowest fifth s income of personal income by household. 3

4 pyramid pattern, into a lantern style, and then an inverse pyramid pattern in the fist few years of 2000s. The Taiwan population over the age of 65 grew from 184,622 in 1949 to 2,245,673, i.e percent of the population in May The CEPD projects the fraction of the population over the age of 65 will be 20.6 percent in The shift from 7 percent of the population over the age of 65 into 15 percent takes only 26 years in Taiwan, while it happens 131 years in France, 66 years in U.S.A., 88 years in Sweden, 51 years in the U.K., 44 years in Germany, 26 years in Japan. Thus, the Taiwan population will change from an aging society in 1993, into an aged society in 2018, and then become a super-aged society in It will merely take 8 years shifting from an aged society into a super-aged society in Taiwan that is less than 12 years in Japan, 44 years in the U.K., 40 years in France, 16 years in the U.S.A., 14 years in Canada, and is similar to Korea. (CEPD, 2005) (See Figure 1) 1 According to the United Nations, an aging society is defined as its fraction of population over the age of 65 is greater than 7 percent of the population, an aged society is its fraction of population over the age of 65 was greater than 14 percent, and a super-aged society is its fraction of population over the age of 65 was greater than 20 percent. 4

5 In Taiwan there are more and more dependent elderly people. The old age dependency ratio, i.e. population aged 65 and older as a percentage of population aged 15-64, was only 4.82 percent in 1961, while the youth dependency ratio, i.e. population aged 0-14 as a percentage of population aged 15-64, was percent in the same year. The situation changed a little bit. in The old age dependency ratio was 6.73 percent, and the youth dependency ratio decreased to percent. But it changed very significantly in In 2005 the old age dependency ratio increased to percent, however, the youth dependency ratio decreased further to percent. In 2005 average 7.4 workforce persons will support financially an elderly person, i.e. age over 65. The CEPD predicts this supporting ratio will deteriorate in the future. The supporting ratio will be 3.3 workforce persons to 1 dependent elder after 2026, while it will decrease to only 1.6 workforce persons to 1. Thus, the expenditures of the medical and healthy care can be a heavy burden for each family. The duty has to be taken by the social security system. The correlation between the elderly workforce ratio and the change rate of labor productivity has not yet shown a very clear tendency during in Taiwan, we shall study this point in future. However, it seems to show that the elderly workforce ratio arises since the late 1990s accompanied with a declining labor productivity. EWR(%) Figure 2 Elderly Workforce Ratio(EWR) and Change Rate of Labor Productivity(RLP) in Taiwan Source : DGBAS(2006) RLP(%) Elderly Workforce Ratio Change Rate of Labor Productivity

6 II. Sources of Low Replacement Level of the Population In this section we shall analyze the sources low replacement level of the population in Taiwan. A.Preference change for marriage and having children The low replacement level of the population may be analyzed with a birth decision making by a female in a way of consumer behavior. The demand for children is determined by economic, social factors and others. Other things being equal, the price of children and real income can explain that rural fertility generally exceeded urban fertility, and a rise in the wage of working women reduces their fertility, various government aid programs to mothers have significantly affected the demand for children. In addition, the interaction between quantity and quality of children can explain that education per child tends to be lower in families having more children. (Becker, 1981, pp ) A female (or a family) decides to choose between children and other composite consumption goods. In Figure 3 X stands for the number of children, while Y means other composite goods. U 2 and I 1 is the initial indifference curve and budget constraint line. In the figure, a is the initial equilibrium point for the female, decision maker. The children education such as kindergarten and the children care become more and more expansive nowadays. In general, more and more married women are to be employed or self-employed to increase the economic revenues for the household. Thus, the increasing female working participation rate make woman under more pressure in household affairs. The cost of bringing up children also increases, i.e. the price of children increases very significantly. Women changes to less preferred toward children. The new indifference curve U 1 shifts toward left and locates flatter that means children are relatively less preferred than other composite goods. The budget line changes from I 1` to I 2 clock wisely. Thus, the equilibrium point shifts from point a to point b. It means the demand for children decreases relative to other goods. 6

7 The percent of the preferred number of children zero or one for married women aged in Taiwan among 1,318 respondents was 17 percent in 1998, while 52 percent of the same sample preferred to have 2 children. (The 1998 Survey by the Ministry of Interior Affairs; also Chang, 2003, table 11) However, the preference of married women has changed drastically. In 2002 the percent of the preferred number of children zero or one child among 2,728 respondents increase to 17 percent, while 61 percent of the total respondents preferred to have 2 children, but 5.7 percent of the total respondents replied no intention to bear child in (The 2002 Survey by the Taiwan Ministry of Interior Affairs) The CEPD proposed a solution to offer a allowance of 30,000 to 50,000 NT$ (The exchange rate about 1 USD = 32 NT$ roughly in January 2007) for a second child in a family, or offer tax deduction. Although these proposals can increase the household budget, the budget line can shifts from I 2 outward to I 3, the income and substitution effect of increasing children number could not be substantial. In other Surveys most of the sample marriage female replied that public offering of child care, especially 7

8 under 3 years old, is the most necessary policy tool. It may increase the preference toward more children 2. B.Descriptive Analysis of marriage statistics The average age at entering first marriage of marries women aged 15 years and over in Taiwan increased from aged 21.1 in 1979 to in However, there exists a difference among various educational attainments. The higher educational attainment degree, the older they will marriage. For those with illiterate and self-educated, and primary school the average marriage age remains almost in the same, however, it increased for those with junior college and university and graduate school degree. The average first marriage age was in 1979, and in 2003 for those with junior college degree. For those with university and graduate school degree the average first marriage age increased from to during the same period. In addition, the marriage rate shows a slightly declining tendency. In 1981 the marriage rate was /00, and reduced to /00 in At the same time the divorce couple tends significantly to increase. The divorce rate increased from /00 in 1981 to /00 in It shows that nowadays most of female demand for higher quality of life and marriage when they are more economic independence and with higher educational attainment. C.Descriptive analysis of fertility statistics Since 1980s the total fertility rate declines in Taiwan. In 2000 the total fertility rate was 1,680 0/00, including crude birth rate /00, the general fertility rate 48 0/00 etc. This total fertility rate decreased to 1,115 0/00 in 2005, including crude birth rate 9.1 0/00, the general fertility rate 33 0/00 etc. With regard to the number of birth there were 414,069 persons in 1981, while it declined and was first less than 300,000 persons in Then it decreased significantly, and there were only 204,459 persons in D.Migration and demographics in Taiwan 2 Refer to the reports of several Surveys by the Ministry of Interior Affairs, Executive Yuan. 8

9 Recently Taiwan s outward direct investment and businessmen residence in China tend to increase; it will affect the amount and structure of population, although it is short of accurate statistics. Many traditional industries sites move to China and East Asia because of cheap wage costs and access to markets. On the other hand, more guest workers come to Taiwan, and more foreign marriage partners immigrate. In Taiwan aging society the demand for household keeping helper and care for older or disabled people increase significantly. From 1987 to 2006 there are 383,204 foreign and China, HK, and Macao marriage partners. Among of them 65.06% immigrates from China, HK and Macao, while 34.94% come from other areas. (Ministry of Interior Affairs, January 16, 2007) In % of children were born by foreign marriage female. Immigrate from East Asia needs more educational resources to be accustomed to local society. III. Fiscal Implications of Aging Population aging brings challenges to government budget by reducing the potential tax revenue and rising the expenditure on various aspects. Most of empirical studies are pessimistic about the fiscal impacts of population aging. Both Economic Policy Committee of the EU (2001) and OECD (2001) project a severe deterioration in budget balance for most OECD member countries over Based on these projections, Standard and Poor s (2002) predicts a downward credit rating for the major industrialized countries. The gloomy picture they conveyed not only due to the expenditure increase for the aged but also the revenue decrease. In this session, the potential tax revenue reduction and the expenditure increase on various aspects are analyzed. A. Tax revenue The major sources of Taiwan s tax revenue come from income tax and consumption-type taxes, including value-added tax and commodity tax. The income tax occupies a share of 35% of the total tax revenue and the consumption taxes 28%. Being sensitive to national income, the income tax revenue has moved along with economic growth. Jong (2005, p.57) projects a steadily downward slope of economic growth rate from 6% of 2004 to 1.5% of 2026 due to demographic change. The shrinkage of workforce is the main cause of the reducing trend, which has put into consideration of productivity growth and improved labor participation rate. Without raising the tax rate, the income tax revenue will be significantly reduced. 9

10 The revenue of consumption taxes are also affected by the scenario of aging. The slowdown of economic growth will bring about negative impact on the path of aggregate consumption growth, and therefore the consumption tax revenue. On the other hand, population aging will raise the average propensity of consumption according to the life-cycle hypothesis. The empirical study of Wu (2006) confirms the hypothesis and finds that the marginal propensity of consumption of the household with the head aged is 0.593, much less than of the household with the head aged over 66. With the two effects offsetting each other, the impact of aging on the consumption tax revenue is ambiguous. B. Health care expenditure With advance at age, each person on average requires more medical care. Table 2 shows the rapidly increasing trend of medical expenditure per person in different age groups. It reaches the peak at the age of 70-79, which is 18.7 times to that of the age of 20-29, the lowest among all age groups. As for the distribution of total medical care expenditure generated by each group, the people aged 60 and over utilize 50% of the medical resources counted by expenditure, while they occupy only 13% of the population. When the society becomes aged, the aggregate demand for health care also rises. The share of health care expenditure to GDP increases from 4.62% in 1991 to 6.16% in 2005, or 33.3%. (See Table 2, Figure 4) With the trend above, the role of the National Health Insurance (NHI) becomes more important. The National Health Insurance system were launched in 1995, whose coverage has constantly grown and exceeded 98% of the total population. The accessibility and equality of the citizens in obtaining medical care services have been improved substantially, with a special emphasis on caring for people with major illnesses and injury or the low-income groups. Yet, the increase of the health care demand accompanied by the declining rate of economic and wage growth in the recent years has caused difficulties for NHI finance. Not only that 6 out of the recent 7 years that NHI had run deficit, but also the accumulated balance has quickly drained. As shown in Table 3, the accumulated balance is NT$39 billion in 1999, but there is only NT$1.5 billion left in the end of 2005, which is 0.4% of the expenditure of the year. With the shaky financial condition, government has proposed the health care reform and submitted to the Congress in May The main purpose of this so-called Second Generation Healthcare reform is to strengthen the insurance finance. 10

11 In addition to the stricter cost control and audit to healthcare providers and the mild increase of the self-payment items by patients, the proposed reform changes the basis of contribution from a constant rate of regular wage income to that of total consolidated income. With the inclusion of capital income, such as interest, rents and profits, and non-regular wage income, such as commissions and over-time work payments, the consolidated income can better reflect the economic ability. Thus, the fairness of contribution can be improved. Furthermore, the expansion of the contribution basis also helps to make the system more sustainable. In addition, the differences of NHI premium among the peoples with different occupations are also to be removed. The premium payments and premium rates has originally been designed based on occupations of individuals. The reason for such arrangements was to keep up with the payment systems of various social insurances prior to the NHI implementation, such as government employee s insurance, laborer s insurance, military insurance and farmer s insurance, through which healthcare insurance services had been provided. But the system has been broadly questioned for its fairness. With the adoption of the consolidated income as the contribution basis and the removal of the occupation discrimination, the withholding system applied to the individual income tax can be extended to the NHI and lighten the burden of the withholding agents NT$, & over age Source: Bureau of National Health Insurance website ( Figure 4. Medical Expenses Per Person (2005) 11

12 Table 2 The share of health care expenditure to GDP year Health care expenditure/gdp (%) Source: Website of Department of health, Executive Yuan, Taiwan. ( Table 3. National Health Insurance Finance (accrued basis) Unit: NT$100million Year Revenue Expenditure Surplus(+)/deficit(-) Accumulated balance ,691 2, ,914 2, ,916 3, ,112 3, ,388 3, ,533 3, ,661 3, Source: same as figure 4. 12

13 C. Social assistance and allowance for the elderly With the increase of aged population, the poverty problem of the aged draws much attention. As shown in Table 4, in the last decade, the number of households with the head over 65 is greatly increased, from million to million. Its share to the total households rises from 10.2% to 15.8%. More than sixty percent of them fall into the category of lowest 20% income group. The situation has been improved in the last ten years. Comparing the distribution of the aged household among different income groups, we find that from 1996 to 2005 the share of the aged household falling in the lowest 20% income households has reduced from 68.1% to 61.4%, and the shares in the 2 nd, 3 rd and 4 th income groups all increase. Even so, the average income of aged households remains at the range of 51%-55% to that of total households. It indicates the lack of completion of the social safety net at the aspect of old-aged income security. While government is pressing forward a more complete establishment of labor retirement pension, the social assistances for the old-aged households are also reinforced. There are mainly three programs for the purpose of supporting the old-age with monthly payment. 3 The elderly living allowance is for the medium and low income families, which takes care of 148 thousands of the aged in The aged farmers welfare allowance is to support the farmers and fishermen over 65 and without any other old-aged social welfare benefits. The number of the recipients is 696 thousands. The elderly welfare living allowance is for the aged without any other social welfare benefits, which include the largest number of the aged among the three programs. The total beneficiaries of the three programs are up to 1.59 million in 2005 or 71.79% of the total senior citizens. And the total payment reaches NT$69.5 billion or 19% of the government social welfare expenditure of the year. This expenditure is expected to decrease with the improvement of the public pension system. (See Table 5) 3 There are another two programs: monthly allowance for the aged and disable veterans and aboriginal aged allowance. The number of the recipients is limited and much less than the three main programs. 13

14 Table 4 Income of the households with the head older than 65 The ratio of the household with head older than 65 to total household in five income groups unit:thousand(%) # of total households # of households with head older than 65 1 (lowest 20% income group) (highest 20% income group) 1996 (1) 5, (100.0) 412 (68.1) 91 (15.0) 47 (7.8) 27 (4.5) 28 (4.6) 2005 (2) 7,207 1,135 (100.0) 697 (61.4) 221 (19.5) 115 (10.1) 55 (4.8) 46 (4.1) (2)-(1) 1, Average of total household (1) Disposable income difference Average of the difference household with (1)-(2) head older than 65 (2) unit:nt$ thousand ratio (2) / (1) (%) Note: The numbers in the parenthesis are the shares of the households in each income group. Source: The Directorate-General of Budget, Accounting and Statistics, Executive Yuan, Report on the Survey of Family Income and Expenditure in Taiwan Area, various years. 14

15 Table 5 Elderly Welfare Allowance Year Elderly living allowance for the medium and low income family Aged farmers welfare allowance Elderly welfare living allowance % of aged population Persons Amount (NT million) Persons Amount (NT million) Persons Amount (NT million) ,964 10, ,838 24, ,211 9, ,460 23, ,392 9, ,779 23, ,966 15, ,951 9, ,048 24, ,583 19, ,446 9, ,840 32, ,950 24, ,118 8, ,808 33, ,410 27, ,877 8, ,336 n.a. 797,649 n.a Sources: Website of Ministry of Interior, Executive Yuan ( D. Public Retirement Pensions There are two public pension programs in Taiwan. One is for the civil servants and public school teachers; the other is for the employees of private sectors. Taiwan s contemporary civil service retirement benefits scheme was established in In the beginning, the contributions were fully paid by the employer--the government. Yet with the deterioration of the public finance, the contribution is now shared between the government and individual employees with the rates of 65% versus 35%. The entire contribution rate has been raised from 8% of twice the base salary in 1995 to 8.8% in 2002, then to 9.8% in 2004, and again to 10.8% in 2005 and to 12% in The provision of benefits upon retirement is subject to a number of legal guidelines: the employees or teachers who have been worked consecutively in the public sector between 5 to 15 years are given a one-time, lump-sum payment, while those who have been employed for more than 15 years can choose from three options. There are a lump sum payment, a monthly retirement pension, and some combination of the two alternatives. Currently there are 596,650 of public employees are included in the program. With the flexible adjustments of the contribution rate, the finance of the pension fund is able to remain healthy and sound with the fund balance of NT$ billion at the end of At the same time, government expenditure on this behalf increased from NT$22.18 billion of 2001 to NT$ billion of 2005, or 14%. 15

16 Taiwan s Labor Pension Fund as a public retirement pension system was established through the promulgation of the Labor Pension Act in 2004 and put into practice in July Before the implementation of the new system, laborer s retirement benefits, based on the Labor Standards Act, are a lump-sum payment paid by the employers upon retirement if the laborers are over 60 and have worked for the same employer for at least 15 years. With 58% of Taiwan s enterprises having a lifespan less than 10 years, it is estimated that no more than a half of the retired labor are well protected by the scheme. The new system aims to widen the application by creating an account for each individual. The accounts are portable and can be retained when workers change jobs or the businesses are shut down. The contributions as 6% of the monthly wage are to be paid by employers. Workers may contribute voluntarily additional sums, up to 6% of the monthly wage, to their pension account, which is deductible from taxable income. The annual dividend rate of the Pension Fund is guaranteed no less than that of the two-year fixed term deposit of a local bank. With the consideration of the population aging, the new system adopted the defined contribution scheme in contrast to the defined benefits scheme of the old system. Workers that had been in the old system can choose between the old and new systems, while new workers can only apply the new system. Up to the end of November 2006, the workers choosing the new system has reached 4.28 billion or 68% of the private employees, with the fund balance NT$119.0 billion. Together with the fund balance of NT$405.5 billion from the old scheme, the total reserve for labor retirement is NT$524.5 billion. The economic security of laborers has been greatly improved. E. Education expenditure With the change of age structure, the contents of government education expenditure are also changed. In the recent three years, the total number of students in the level of kindergarten, primary school and junior high school has steadily declined. (See Table 6) The trend of decrease in student number has induced problems and consequently the adjustment in education policies. The policy of reducing the class scale can provide better service for each student, at the same time ease the excess supply of school teachers. With the expectation of continual decrease in school pupils, which trend will soon pass to the higher education levels, the education resource has to relocate and the mechanism of market exit for educational institutes has to be established. To smooth the transition, the overall performance assessment for technical schools and higher education institutes has been undertaken. And the rules for market exit have been established according to the assessment results. It is hoped 16

17 that through the mechanism, the quality of education can be improved, which may help to promote productivity and accelerate the accumulation of human capital. Table 6 Numbers of Pupils in Kindergarten, Primary School and Junior High School Year Total Growth rate (%) Kindergarten Primary School Junior High School ,098, ,090 1,925, , ,107, ,303 1,925, , ,116, ,180 1,918, , ,111, ,926 1,912, , ,077, ,155 1,883, ,927 Source: Website of Ministry of Education, Taiwan, ROC ( On the other hand, the increased number of the aged requires more educational resources. In order to create an environment of active aging (WHO 2002), the facilities for the senior citizens need to be reinforced and the educational expenditure for the aged has gradually increased. The educational services are mainly provided through community colleges. In addition to the contexts of physical and mental health care and recreation activities, the Ministry of Education also emphasizes the digital skill training and social participation, so that the aged manpower can be improved and made for a better use. IV.The Industrial Development in the Aging Society In the transition stage of an economy its industrial structure will happen to change, and even there happens change in the financial and labor market. Although several industries will disappear or diminish, many new manufacturing industries and services will be created and grown up. A.Financial and insurance industries In an aging society financial and insurance become more and more important. Theoretically the aging of the baby boom cohort would contribute to a rise asset values, and asset prices will decline when this group reaches retirement age and draw down its wealth. An empirical study shows that the correlation between asset returns on stocks, bonds, and the age structure of the U.S.A. population during the period is weak. (Poterba, 2004) However, it is nevertheless to recognize that there are theoretically presumptive effects of driving up asset values with a baby boom and 17

18 driving down returns for those in large population. An aging society will rise in the demand for assets management and retirement insurance in complying with the uncertainty of old age. Many banks and insurance companies have provided various kinds of insurance products for the aging people. For example, long-term care insurance can provide insurance against late-life financial risks. Annuities can affect the demand of the aging people for financial services. Households with corporate stock portfolios have other devices for changing their portfolios into cash. The demand for products that combine cash payouts with various types of insurance will certainly grow. B.Elderly care industry The family size has reduced in an aging society. It is gradually in shortage of manpower to take care of elderly people at home. Thus, elderly related industry and services emerge in Taiwan. The elderly health care industry is massive. Elderly related industry and services contain (1) health and medical care: health and disease protection, home care, nursing homes, prescription and nonprescription drugs, and diagnose etc., (2)welfare and care services: supporting instruments, medical equipments, home care etc., (3)others: such as safeguard management, housekeeping help etc. The Industrial Technology Institute predicted that the market turnover will rise from 24.6 billion US$ in 2001 to billion US$ in (CEPD, 2006) In addition, elderly care industry contains hospital, elderly care village, private and publicly contracted elderly care houses, safeguard and seeking services, information and telecommunication (including nursing, emergency help, position seeking) etc. The elderly care houses will increase in 50 units within 7 years in Taiwan. They project to invest at 350 billion NT$ totally. (Ministry of Economic Affairs, cited from CEPD, 2006) C.Medical and health industry Elderly people demand for more elderly instruments, medical care and housekeeping help, elderly educational programs and leisure activities. A new occupation certification of care serviceperson will officially emerge. From 2004 to October 2006 there are 7,812 qualified care servicepersons, and among of them 4,000 persons will provide housekeeping help for elderly. 18

19 D.Elderly residence The demand for elderly houses will rise because of higher labor participation rates of working age in an aging society. Working children of a family have not enough time to take care of elderly parents, especially those who are heavily sick and disabled. However, the supply is still limited, and the expenses of elderly house are still high so far in Taiwan. The government promotes more private institutions to build elderly houses with a Build, Operate and Transfer (BOT) or other variants. V.Public Policy Development In future, it will meet with more challenges due to a rapidly evolved aging society like Taiwan. Government has to design economic and social policy and provide more transfer projects. A.Overview: active aging The WHO (2002) proposed a policy framework of active ageing in complying with aging in the 21th Century. It will provide elderly people a more cooperative society to enjoy a better life. The policy program contains three areas, namely, participation of social activities,, individual health status and social security etc. The goal of economic and social policy is to develop elderly resources, elderly human capital and economic capital, knowledge etc. It also provides a reference guideline of policy design for Taiwan. However, there is still a debate whether it is more important to increase birth rate or enhance population quality. Higher population quality can increase labor productivity; therefore, it can substitute for the shortage of low-skilled labor force. Elderly and general education play more important role. In an aging society the living quality can be better. In July 2006 the government held a Sustainable Development Conference for Taiwan, and announced a first stage plan of the Big Warm Social Welfare Package which will expense 194 billion NT$ to decrease the gap between rural and urban areas, to improve the income distribution, to strengthen elderly care and health care. B.Economic security for the elderly 19

20 1.National pension plan The government can provide the economic security for elderly people by way of national pension plan. In general the present Taiwan national annuity system is in a form of the pay-as-you-go system. Because of the rising fiscal deficit and the deficit of national pension account, the government would like to transfer it into a partially funded system, i.e. individual saving account. However, such kind of national pension reforming plan is suspended due to no consensus. The present national pension framework is composed of three levels. Namely, personal savings locates in the top level. Business providing pension locates in the second level such as personal retirement account and pension insurance. In the basic level is the social security system that is composed of (1) laborer insurance, (2) military persons insurance, public servant insurance and teacher insurance, (3) national annuity plan etc. 2.Labor retirement pension reform On July the Act for Laborer Retirement was promulgated, which was substituted for the old Basic Labor Law. Laborer joins the new retirement system which is in the form of defined contribution, and is a portable personal savings account. Employer pays the partial contribution to this personal savings account, which is not less than 6 percent of the wage with a two-year time deposit interest rate.. 3.Favorable tax allowance for the elder and medical expenses and insurance deduction The Income Tax Act provides tax allowance 77,000 NT$ in 2006 for taxpayer, parents of taxpayers, aged or disabled, and 115,500 NT$ for taxpayer, parents of taxpayers, aged older than 70. (The average exchange rate about 1 US$ = 32 NT$ in January 2007)In addition, children of taxpayer aged under 20, or in school when over 20, disabled can have tax allowance 77,000 NT$ in Educational tax deduction for children of taxpayer enrolling at university or last 2 years at junior college is 25,000 NT$. Besides, medical including bearing expenses in public medical institutions can share also tax deduction. Insurance expense is provided tax deduction of 24,000 NT$, while there is no upper limit of tax deduction 20

21 for national health insurance expense. 4.Tax deduction for voluntary labor pension contribution The voluntary labor pension contribution of less than 6 percent of monthly wage can be deducted from personal income tax. 5.Social allowance for the elderly The government provides also social benefits and respected elderly benefits to those middle and low income older people, elderly farmer, and elderly benefits for qualified elderly. C.Extending the retirement age The average retirement age is at 60 in Taiwan. Employee, officer and teacher at public institutions and schools can retire in the threshold number 75, namely, the sum of the age of 50 plus a working duration of 25 years. Due to the fiscal distress the government plans to lengthen this threshold number of the retirement to 85, namely, the sum of the age 55 plus a working duration of 30 years to reduce the retirement pension expenses of public finance. An international comparison shows that the Taiwan aging labor participation rate at age is less than that of in Japan, USA, Korea and Singapore, while more than in Germany and France. (See Table 7, Table A1, Table A2, and Table A3) Because the national pension system in Germany and France is more complete than in Taiwan, and the threshold age of retirement pension 60 in France and 65 in Germany, the aging labor participation rate in both France and Germany was higher than that in Taiwan. Table 7 International comparison of aging labor participation Item Taiwan Japan Germany France USA Korea Singapore Aged 65 and over(million persons) Fraction of population over 65 (%)

22 Age 0 average life expectancy (years) - male female Aging labor participation rate (5) -age age 65 over Unemployment rate (%) Source: DGBAS 2004, USA 2003 World Population Data Sheet. Thus, the government plans to extend the retirement age, because an earlier retirement leads to the decrease in the labor participation rate. The public institutions promulgated in August 1994, and conducted some measures to enhance the labor participation of middle and older age people such as the on the job training, and occupational training, information dissemination station 4, offering jobs suitable for middle and older age people etc. Besides, some kind of discrimination against the middle and older age employee will be studied to be not permitted D.Migration policy In addition to low skill worker and housekeeping helper invited from East Asia areas, the migration policy has to be more flexible. To meet with an aging society one of the possible policy measures is to revise the migration policy to invite more foreign professionals and tech-migration, that the labor movement and residence permission in Taiwan have to be simplified and more flexible. E.Elderly and child care facility More elderly and child care facility has to be built to meet with an aging society. The quantity and quality of elderly houses should be enhanced and refined. In the 2005 Survey of Elderly Living Situations by the Ministry of Interior shows that more 4 A DGBAS Survey of Laborer on the revised retirement rule shows that information center and consultation services are the most needed one, followed by the increase in the investment profit of laborer pension fund, and solutions of the disputation between employer and employee. See DGBAS, Executive Yuan, June

23 and more elderly people would like to live in the elderly houses or nursing houses in the future. Among 5,815 respondents, percent of aged tends to live in nursing and helping houses, percent would like to live in elderly houses, percent hope to live in elderly house and nursing institutions when they are in weak healthy status in future. For the age over percent would like to live in helping houses, percent hopes to live in elderly houses, and percent likes to live in helping and nursing houses when they are in weak healthy status in future. Furthermore, most of the respondents would like to pay monthly rent of less than NT$ 10,000 in elderly, nursing and helping houses. (The average exchange rate was about 1 US$ = 32.8 NT$ in January 2007) In addition, some baby care vacations have been provided for women employees in public and private institutions. Some child facilities are also supplied by firms. F.Raising female labor participation rate The Act for Equal Opportunity of Female Employment is promulgated to protect the women against the discrimination in employment, and to promote female labor participation rate in Taiwan. The female labor participation rate has been less than that of male. In 2004 the female labor participation rate was percent that is less than percent of male. However, the male labor participation rate decreased from percent in 1995 to percent in In addition, the child care facility has been refined and increased that can contribute to more female labor participation rate to meet partly with the shortage of labor force. In future, more child care facility can be established in community accompanying with in firms that the establishment standard of child care facility will be deregulated. G.Establishing a more flexible working environment and institutions The Labor Standard Act is recently discussed that the flexible working time could be deregulated. It increases the part time employment that reduces the retirement pension expense of business owners and wage expense. It will change the occupational structure of working time in labor market. The part time employment could increase the employment opportunity of middle and older age people. The e-learning, life time learning and a second major education have been conducted to reduce structural unemployment. In addition, middle and older age 23

24 people are persuaded to work in service provision such as seller in department stores and helper for pupils and children after the formal courses at primary school. (CEPD, Council for Labor Affairs) Guest workers will be categorized into industrial guest workers and social helper guest workers. However, a complete flexible working time is still suspended due to no consensus. VI.Conclusion In 1993 Taiwan shifted into an aging society. The birth rate tends to decline. The CEPD projects the fraction of the population over the age of 65 will be 20.6 percent in The shift from 7 percent of the population over the age of 65 into 15 percent takes only 26 years in Taiwan. Furthermore, it will merely take 8 years shifting from an aged society into a super-aged society in Taiwan. Both transitions are far sooner than those in developed countries. In an aging economy, the industrial structure will change significantly. Some financial and insurance industries, elderly care industry, medical and health industry and elderly houses industry will emerge and develop, while some traditional industries will diminish gradually. In complying with an aging society, Taiwan has to reform labor market, and perform active aging, enhance economic security for the elderly, extend the retirement age, revise migration policy, increase elderly and child facility, raise female labor participation rate, and establish a more flexible working environment and institutions. REFERENCES Becker, Gary S. (1981), A Treatise on the Family, Cambridge and London: Harvard University Press. Chang, Ming-Cheng (2003), Demographic Transition in Taiwan: Focusing on Recent 24

25 Trends of Fertility, revised and updating for paper presented at the international Workshop on Comparative Perspective on Issues of Low Fertility and Policy Response in Asia-Pacific Area, March 2003, Tokyo and Kobe. Council for Economic Planning and Development (2004a), The Population Projection in Taiwan: , Taipei. (in Chinese) Council for Economic Planning and Development (2004b), Conference Report on the Aging Population and the Implications of Public Policy, Taipei. (in Chinese) Council for Economic Planning and Development (2005), A Challenge and Opportunity of the Aging Economy, September, Taipei. (in Chinese) Council for Economic Planning and Development (2006), Policy toward an Aging Population: a Summary, November, Taipei. (in Chinese) Economic Policy Committee of the European Union (2001), Budgetary Challenges posted by Aging Populations, Report No. EPC/ECFIN/655/01-EN final (Brussels). Jong, C.W. (2005) The Impacts of Demographic Change on Macroeconomy, Taiwan Economic Forum, 3(3), (in Chinese) OECD (2001) Fiscal Implications of Aging: Projections of Aged-related Spending, in OECD Economic Outlook 69, pp Poterba, James (2004), The Impact of Population Aging on Financial Markets, NBER Working Paper Standard and Poor s (2002), Western Europe Past Its Prime - Sovereign Rating Perspectives in the context of Aging Populations, New York, NY. WHO (2002), Active Ageing: A Policy Framework. Wu, C. H. (2006), The Impacts of Demographic Change on Consumption, commissioned research report, Council for Economic Planning and Development. (in Chinese) Appendix 25

26 Table A1 Labor participation rate by age in Taiwan (unit: %) Year total 15~ 20~ 25~ 30~ 35~ 40~ 45~ 50~ 55~ 60~ over Source: DGBAS, Executive Yuan Table A2 Male labor participation rate by age (unit: %) Year total 15~ 24 15~ 19 20~ 24 25~ 44 25~ 29 30~ 34 35~ 39 40~ 44 45~ 64 45~ 49 50~ 54 55~ 59 60~ over Source: DGBAS, Executive Yuan 26

27 Table A3 Female labor participation rate by age (unit: %) Year total 15~ 24 15~ 19 20~ 24 25~ 44 25~ 29 30~ 34 35~ 39 40~ 44 45~ 64 45~ 49 50~ 54 55~ 59 60~ over Source: DGBAS, Executive Yuan. 27