Rethinking Asia’s Retirement Systems
|Willard||Aug 27, 2014|
It’s high time to rethink retirement and the burgeoning gaps in Asia’s pension systems. The new Pension Sustainability Index (PSI)*, published in a recent Allianz study, shows that Asia ranks poorly. Only two Asian countries – Hong Kong at No. 16 and Singapore, No. 19 – are in the global top 20 and several of its largest economies are near the bottom. The latest results highlight not only unsustainable and fragmented pension systems but also unfavorable demographic developments in many parts of the region.
Although pension reform has been at the top of political agendas across the globe for many years, the latest findings once again amplify the fact for counties across Asia that they are mostly ill-prepared for the future: the state of their pension systems will struggle to provide adequate pension cover for their rapidly aging populations. Consequently a massive shortfall is in the making if they do not immediately speed up pension reforms.
No doubt, the Asian economies have been the envy of the world for the past few decades and for very good reasons. Beyond headline figures like impressive GDP and export growth, a more than 50 percent jump in life expectancy and about a 60 percent fall in fertility in just half a century further echoes their great achievements. But that’s exactly the root of the problem ahead because these triumphs come with a huge price tag: a top-heavy population pyramid.
Various research studies have shown that the elderly population in Asia will double to around 1 billion people by 2040, putting it on track to become the oldest region in the world. But the more stark, worrying and disturbing fact is that Asia’s aging will be at its most rapid between the years 2010 and 2030. And we are already a quarter way there.
Consider, for example, data from the National Bureau of Statistics of China. The world's most populous country saw its working age population – those aged between 15 and 59 – shrink for the first time in decades, by 3.45 million, in 2012. And a recent study shows China's elderly population, aged above 65, swelling to 330 million, or a quarter of its population, by 2050, compared to just 5 percent three decades ago and 9 percent today. In other words, in the future every fourth Chinese citizen will be above 65 years old. A similar scenario, though at different magnitudes, is emerging across the entire region.
The common underlying problem is that the policies and systems in place in many parts of Asia are hardly prepared for these vast demographic shifts, which means that the Asian population is rapidly aging without sufficient pension protection.
Against this backdrop, Asia needs to modernize its pension systems to become financially sustainable and adequate in providing for future retirement incomes.
Naturally, there is no one-size-fits-all solution to overhaul pension systems across the region. Pension systems vary from country to country with respect to design and institutional arrangements but there are, however, overall similar problems and challenges relating to fundamental issues like adequacy, equity and financial sustainability.
Given the long lag in pension system planning, the pressing reality now is that there is a very narrow window of opportunity for many Asian countries to get on track and also, even more critically, to avoid repeating many of the mistakes previously made in the West. It’s indeed high time for Asia to act now, act fast and act right.
*The Allianz Pension Sustainability Index systematically examines relevant elements of pension systems and the developments – such as demographic, public finances and pension system designs - that influence them and shows the country’s need to effect reforms.
Manuel Bauer is a member of the board of global insurance company Allianz SE.