Demographic Changes, Pension Reform Needs in Asia and Prospects for International Cooperation GIANG THANH LONG Associate Professor & Deputy Director Institute of Public Policy and Management, National Economics University (NEU) & Institute of Social and Medical Studies (ISMS) Presentation at the Demographic Megatrends in Asia and Eastern Europe - Challenges and Opportunities for Health and Social Protection Sheraton Hotel, Hanoi, 13 November 2013
Presentation Contents 1. Key Demographic Changes in Asia 2. Diagnosis of the Pension Schemes in Asia 3. The Way Forward for Reforms
Introduction Demographic transition towards ageing population has been more clearly realized in Asia, especially in developing countries. Population ageing is an Asia-wide phenomenon, but there are major differences across sub-regions. More advanced in East Asia and Southeast Asia than in South Asia As such, old-age income support, particularly in developing Asia, will be one of biggest social and economic challenges. Developing Asia, however, does not yet have mature and well-functioning pension systems, while social assistance still has limited coverage.
1. Key Demographic Changes in Asia Ageing is mostly due to rapidly decreasing fertility rates and swiftly increasing life expectancies (Figures 1 & 2) Older persons (aged 65 and over) as a percent of the total population will increase swiftly (Figure 3) Demographic old-age dependency ratio will also increase substantially in the coming decades (Figure 4) Demographic aging in developing Asia will even happen more quickly than developed Asia (Figure 5)
1. Key Demographic Changes in Asia Figure 1. Fertility Rate, 1950-2050 8 7 6 5 4 3 2 1 0 1950-1955 1965-1970 1980-1985 1995-2000 2010-2015 2025-2030 2040-2045 PRC Indonesia Malaysia Philippines Singapore Korea, Rep. of Thailand Viet Nam Source: Park et al. (2012), compiled from UN (2010)
1. Key Demographic Changes in Asia Figure 2. Life Expectancy at Birth (Years), 1950-2050 90 80 70 60 50 40 30 1950-1955 1965-1970 1980-1985 1995-2000 2010-2015 2025-2030 2040-2045 PRC Indonesia Malaysia Philippines Singapore Korea, Rep. of Thailand Viet Nam Source: Park et al. (2012), compiled from UN (2010)
1. Key Demographic Changes in Asia Figure 3. Ratio of Older Population to Total Population, 1950 2050 40 % 35 30 25 20 15 10 5 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 PRC Indonesia Malaysia Philippines Singapore Korea, Rep. of Thailand Viet Nam Source: Park et al. (2012), compiled from UN (2010)
1. Key Demographic Changes in Asia Figure 4. Demographic Old-age Dependency Ratio ( 65/15-64), 1950-2050 70 % 60 50 40 30 20 10 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 PRC Indonesia Malaysia Philippines Singapore Korea, Rep. of Thailand Viet Nam Source: Park et al. (2012), compiled from UN (2010)
1. Key Demographic Changes in Asia Figure 5. From aging to aged the number of years needed Source: Kinsella and Gist, 1995; U.S. Census Bureau, 2005; UN (2010) for Indonesia and Vietnam
2. Diagnosis of the Pension Schemes in Asia A number of other factors also point to an urgent need to strengthen old-age support in Asia. Most of the old-age income sources from agricultural products, which are usually low values. Older people in developing Asia rely mostly on their labour incomes and familial support, but these countries are experiencing the weakening of informal family-based old-age support mechanisms. (Figure 6) As such, formal income support, in which pensions play a central role, should be in place with large coverage for older people.
2. Diagnosis of the Pension Schemes in Asia Figure 6. The main sources of income for older people Source: Vietnam (VNAS 2011) Source: Indonesia (HAI 2012) Source: China (WB 2013)
2. Diagnosis of the Pension Schemes in Asia The basic structure of the pension systems in Asia is diverse and reflects each country s constraints and preferences. There is considerable heterogeneity in terms of key pension parameters (such as nominal retirement ages and contribution rates). Financing mechanisms are also diverse.
2. Diagnosis of the Pension Schemes in Asia Table 1. Pension Age and Basic Structure of the Contributory Pension Systems Country Pension Age (Years) Difference Between Life Expectancy and Pension Age (Years) Male Female Defined Benefit (DB) or Defined Contribution (DC)? China 60 (55) 11.3 19.8 DB, DC, and NDC Indonesia 55 13.7 17.7 DC Korea 65 10 17.2 DB Malaysia 55 17 21.7 DC Philippines 65 4.5 8.9 DB Singapore 62 16 19.9 DC Thailand 55 11.5 20 DB Vietnam 60 (55) 12.3 21.2 DB Source: Park et al. (2012)
2. Diagnosis of the Pension Schemes in Asia Figure 7. Contribution rates Source: Park et al. (2012)
2. Diagnosis of the Pension Schemes in Asia The biggest failure of Asian pension systems is low coverage, particularly in developing countries. The share of the labor force which is covered by pension systems ranges from 7.2% to 95%. The coverage rate for working-age population (15-64) ranges from 3.1% to 75% (Figure 8) Replacement rates also vary between countries due to different formulas to calculate benefits (Figure 9) Replacement rate is a widely used measure of the adequacy of pension benefit as a source of post-retirement income. By and large, Asian pension systems are not providing an adequate retirement income.
2. Diagnosis of the Pension Schemes in Asia Figure 8. Coverage, 2012 Developing vs. Developed Pakistan India Indonesia Sri Lanka Vietnam Philippines Thailand China Malaysia Korea Hong Kong Italy France Singapore OECD34 Germany Australia Canada United States United Kingdom Japan 3.1 6.4 Population aged 15 to 64 8.0 14.9 17.3 17.5 17.7 27.7 28.1 54.2 55.4 57.1 61.4 64.0 64.7 65.6 69.7 70.0 71.4 71.5 75.0 % 0 20 40 60 80 100 Pakistan India Vietnam Indonesia China Thailand Philippines Sri Lanka Malaysia Korea Hong Kong OECD34 Singapore Germany France Canada Italy Australia United States United Kingdom Source: OECD (2013) 7.2 9.2 Labour force 13.5 15.7 20.7 25.9 26.5 34.6 47.0 49.5 78.0 82.8 84.0 87.6 87.9 89.8 90.2 90.7 92.1 92.3 Japan 95.2 % 0 20 40 60 80 100
2. Diagnosis of the Pension Schemes in Asia Figure 9. Replacement rates Source: Park et al. (2012)
2. Diagnosis of the Pension Schemes in Asia Besides coverage and replacement rate, there are a number of weaknesses. Unsustainability Robustness against adverse external shocks Inadequate safety nets for the poor older persons 18
2. Diagnosis of the Pension Schemes in Asia Figure 10. Long-term financial prospects of NPS in RoK (Before & after reform in 2007) (KRW Trillion) 3,000 2,500 After reform 2,000 1,500 1,000 Before reform 500 0 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 Source: Yun (2013) 2050 2053 2056 2059 2062 2065 2068
2. Diagnosis of the Pension Schemes in Asia Figure 11. Pension fund projections for Vietnam, 2008-2050 Source: Giang (2011)
3. The Way Forward for Reforms The diagnosis clearly shows that there is an urgent case for pension reforms throughout Asia, both developed and developing countries. Without adequate reforms, Asia s pension systems will be weak in dealing with old-age income support in face of population ageing and other structural shifts.
3. The Way Forward for Reforms Depending on each country s socio-economic conditions, key areas of reform can include: Expansion of coverage. Improvement of institutional and administrative capacity. Improvement of pension fund investments. Enhancement of financial sustainability. Protection for the poor older people. As international movements of labour force have increased significantly, reforms can also include: Portability of pensions. Articulation between the pension schemes.
3. The Way Forward for Reforms In long-term, a pension scheme towards income security should be a multi-pillar one. Target Groups Main Criteria Pillar Lifetime Poor Informal Sector Formal Sector Characteristics Participation Funding/collateral 0 X x x Social Pension, at least Social Assistance, universal or means tested residual Budget/General Revenues 1 X Public Pension Plan, publicly managed, DB or NDC mandated Contributions, Perhaps with financial reserves 2 X Occupational or personal pension plans, FDB/FDC mandated Financial assets 3 x X X Occupational or personal pension plans, FDB/FDC voluntary Financial assets 4 x X X Personal savings, home ownership, etc. voluntary Financial assets Source: Rutkowski (2008)
3. The Way Forward for Reforms Figure 12. Chile s system of solidarity pension introduced in 2008 Source: WB (2013)
Thank you for your attention!