Emerging Markets, Frontier Markets

Pension Reform For Asia’s Elderly Needed, The Asian Development Bank Says

As families change and populations age, the elderly from across Asia and the Pacific risk being left behind in the region’s economic boom.

Aging Asia

In the People’s Republic of China, more than half the population lives in rural areas but only about 10 percent of these residents are covered by rural pension schemes, according to a recent study.

In India, the pension system for civil servants and salaried employees in the private sector covers only about 14% of the workforce. Most of India’s workers are employed in the informal sector and are excluded from the benefits of a regulated retirement income system.

The situation is similar in countries around Asia and the Pacific. The elderly are not being covered by formal pensions systems and increasingly are less likely to benefit from the traditional system of caring for older people in society. For centuries, extended families lived together and the young took care of the old. The family’s resources and personal care, were the safety for the region’s grandmothers and grandfathers.

Though many families remain strong, their situations have changed. Millions of individuals have moved to cities in pursuit of the economic prosperity of Asia’s urban centers. Families, and their living spaces in cities, are smaller. Adult children are working longer.

Though Asia’s prosperity has improved the lives of millions, it has also created the unintended side effect of making many of the region’s elderly more vulnerable.

The elderly poor

These societal changes are coming at a time when seismic demographic shifts are underway in the region. The young dynamic populations that fueled Asia’s stunning economic growth in recent decades are entering their retirement years.

“What sets Asia apart from earlier episodes of aging in other parts of the world is the sheer scale and speed of its aging,” notes the report Pension Systems and Old-Age Income Support in East and Southeast Asia. “Indeed, demographic transition is one of Asia’s biggest structural shifts in the medium and long term.”

These and other factors are combining to create a new class of particularly vulnerable poor: the elderly poor. Their number is expected to increase from 410 million in 2007 to about 1.3 billion by 2050. At that point, there will be more elderly people in Asia than there will be workers to support them.

“Many governments are now confronted by a substantial and highly vulnerable segment of the population in urgent need of some form of social protection, largely because older people are disproportionately affected by poverty,” states the report Social Protection for Older Persons, Social Pensions in Asia.

Across the region, the data is staggering.

In Viet Nam, government projections indicate that the percentage of the population that is elderly will grow from 9 percent in 2009 to 26 percent in 2050.

In Singapore, the United Nations projects that the number of people aged 65 and older in will increase 207 percent, from about 460,000 in 2010 to 1.4 million in 2030. In the People’s Republic of China, there are already more elderly people than in all of Europe.

In Malaysia, the elderly population has grown at a faster rate than the general population for every decade since 1970. Contributing to this is the fact that between 1970 and 2005, life expectancy in the country increased by 10 years.

Asia’s last safety net

As noted in the report Aging, Economic Growth, and Old-Age Security in Asia, demographic transition poses two huge strategic challenges for Asia: sustaining growth in the face of less favorable demographic structures, and delivering affordable, adequate and sustainable old-age income support for the region’s elderly population. This is an issue as most Asian countries have spotty coverage of their elderly populations by pension system. The programs are often inefficient, unfair, non-inclusive and not well-established.

For example, in the Republic of Korea 70 percent of people older than 65 do not receive a pension. In Indonesia, 100 percent of government workers receive a pension but only 14 percent of those in the private sector have such a benefit.

To address the situation, and maintain the gains made in the last few decades, Asian countries need to develop pension systems that offer coverage and benefits that are reliable and fair. As longevity increases, and older people want to work, more flexible retirement ages also need to be introduced.

Each country is unique but some broad reforms are generally necessary across the region in order to have effective pension systems.

For one, governments in the region need to build strong, capable institutions staffed with professionals who can efficiently handle the data collection, record keeping and other nitty gritty functions of a strong pension system.

In addition, government regulation of such systems needs to be modernized and made more efficient. Rigorous financial controls and transparency are vital ingredients for a system handling large amounts of government funds that are vital for the well-being of many in society.

The parameters of existing pension systems – including retirement age, contribution rate and benefits – need to be rationalized in light of the national economic and demographic situation.

Policy makers in the region can also make decisions that take the pressure off national pensions systems. Policies can be instituted to encourage a higher birth rate, to encourage more work opportunities for elderly people who want to work for longer, and provide tax breaks for children to support their parents.

This article was first published by the Asian Development Bank (www.adb.org).

About ETFalpha

Chief ETF Strategist & Co-Founder at EMerging Equity


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