Asia: Old-age income security in jeopardy

As if the pressures of living in an ever more competitive world were not enough, the challenges of coping with inadequate income support are bearing down on Asia’s growing army of retirees, whose long years of hard work helped the region's economies grow.

With traditional informal family-based support mechanisms cracking, Asia’s seniors are left to depend on pensions that are increasingly unable to meet their needs.
Particularly in rural areas, older people are considered especially susceptible to poverty. That is why increasing numbers of individuals of retirement age continue to seek employment, and most are eventually absorbed by the informal economy. This hardly makes them less vulnerable.

Changing profiles
More worrisome, the number of elderly people is increasing so fast that the demographic profiles of societies across Asia are changing. United Nations estimates point to a tripling of the number of seniors aged 60 years and over between 2007 and 2050 in eight Asian countries -China, Indonesia, Thailand, Malaysia, South Korea, Singapore, the Philippines, and Vietnam- even as their total population is forecast to increase by only 13 percent during that period.

For Asian Development Bank (ADB) senior economist Donghyun Park, the ballooning ratio of retirees to workers requires a change in priorities for Asia’s pension systems. Park concludes in study, “Ageing Asia’s Looming Pension Crisis,” that Asia’s pension systems are “ill-prepared to provide economic security for the large number of retirees who loom on the horizon.”

Park’s study, released by ADB recently, covers pension systems in the eight countries listed above, where the demographic transition toward older populations is much more advanced.

Park notes that while the family network used to be Asia’s pension system, with children taking care of the material needs of their elders, far reaching changes accompanying the region’s economic progress have given rise to smaller nuclear families that are less conducive to intra-family support. Such changes, he says, include rapid urbanisation and the declining relative importance of agriculture in the economy.
The Australian government recently announced increases in pension rates under its 2009-2010 budget. Australia’s pension system offers two sources of retirement income: 1) superannuation, which is paid for through employment-related contributions, and 2) age pension, which is funded by taxpayers and paid through the government.
Total pension assets as of 2006 ranged from less than USD 1 billion in Indonesia to more than USD 180 billion in Korea, with the ratio of pension assets to gross domestic product highest in Singapore, Malaysia, and Korea.

More recently, the international consulting firm Watson Wyatt Worldwide published estimates that Asia’s pension savings bucked the downtrend in 2008 and actually grew while total funds under management by Asia-Pacific pension funds surpassed Europe’s for the first time. The growth in Asia was attributed to the fact that many funds in the region were new, with contributions from working embers outweighing pensions paid to retirees.

Hamstrung by these weaknesses, pension systems in Asia are able to cover only a small portion of the total population. The share of the labour force covered by pension systems ranges from 13.2 percent (Vietnam) to 58 percent (Singapore), according to the ADB study. On the other hand, the coverage rate for the working-age population (15 to 64) ranges from just 10.8 percent to 40 percent. In developed countries, pension systems typically cover around 90 percent of the labour force and 60-75 percent of the working-age population.

Moreover, coverage of Asia’s pension systems has been skewed towards workers in urban areas and the formal sector and towards government employees as opposed to private sector workers. The replacement rate —the ratio of retirement to pre-retirement income --has been largely inadequate, with only the Philippines reaching the recommended level, with a 79 percent rate.

Park’s study lists four major areas for reform: 1) strengthening the institutional and administrative capacity of the pension systems; 2) improvement in their governance and regulation; 3) expanding coverage, and 4) enhancing financial sustainability.
The case for urgent pension reform is as much economic as social. Policy-makers around the region would do well to heed his warning that, if left unreformed, Asia’s pension systems will be unable to honour their future pension promises. (IPS)