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Pension Challenges and Reforms in Asia
Pension Challenges and
Reforms in Asia

Juzhong Zhuang Deputy Chief Economist, Asian Development Bank

and

Ganeshan Wignaraja Advisor, Asian Development Bank gwignaraja@adb.org

Asia-Pacific Social Protection Week

3 August 2016 ADB Headquarters, Manila, Philippines

Week 3 August 2016 ADB Headquarters, Manila, Philippines The views expressed in this document are those

The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent.

reflect the views and policies of the Asian Development Bank or its Board of Governors or

Key Messages

Challenging economic times in developing Asia

Softening growth and subdued inflation

Low investment returns

Population aging and old age poverty

The region’s diverse pension systems have gaps:

Low retirement age

Inadequate present and future coverage

Variable replacement rates

Insufficient public pension spending

Reforms to pension systems needed for mitigating old age poverty and financial sustainability

public pension spending  Reforms to pension systems needed for mitigating old age poverty and financial

Asia - moderating growth and low inflation

Asia - moderating growth and low inflation f: forecast Source: Asian Development Bank, Asian Development Outlook
Asia - moderating growth and low inflation f: forecast Source: Asian Development Bank, Asian Development Outlook

f: forecast Source: Asian Development Bank, Asian Development Outlook Supplement, July 2016.

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Low investment returns

Low investment returns 175 S&P Global Equity Index (annual % change) 125 75 25 -25 -75
175 S&P Global Equity Index (annual % change) 125 75 25 -25 -75 PRC Hong
175
S&P Global Equity Index (annual % change)
125
75
25
-25
-75
PRC
Hong Kong, China
Korea, Rep. of
India
Indonesia
Philippines
Singapore
Thailand
Source: World Bank, World Development Indicators.
Accessed June 2016.
Bank, World Development Indicators. Accessed June 2016. Index Value 750 HSBC Asian LCY Bond Returns Index

Index Value

750 HSBC Asian LCY Bond Returns Index 700 650 600 550 500 450 400 350
750
HSBC Asian LCY Bond Returns Index
700
650
600
550
500
450
400
350
300
250
200
150
100
50
0
PRC
Hong Kong, China
Indonesia
Korea, Rep. of
Philippines
Singapore

Thailand400 350 300 250 200 150 100 50 0 PRC Hong Kong, China Indonesia Korea, Rep.

Source: Asian Development Bank, Asia Bond Monitor, March 2016.

Rapidly aging population

% of population aged 60 and above

2015 2030
2015
2030

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

-

2015 2030 4 0 . 0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - *All OECD

*All OECD member-countries. Source: United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects (2015 Revision). Accessed April 2016.

of Economic and Social Affairs, Population Division, World Population Prospects (2015 Revision). Accessed April 2016. 5

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Diverse pension schemes

Type of public pension scheme

Normal retirement age (current law)

DB

DC

Male

Female

Kazakhstan

Kazakhstan 63 58

63

58

Uzbekistan

Uzbekistan 60 55

60

55

PRC

PRC 60 55 1

60

55 1

Korea, Rep. of

Korea, Rep. of 65 65

65

65

India

India 55 55
India 55 55

55

55

Pakistan

Pakistan 60 60 2

60

60 2

Sri Lanka

Sri Lanka 55 50

55

50

Indonesia

Indonesia 55 55

55

55

Philippines

Philippines 65 65

65

65

Singapore

Singapore 65 65

65

65

Thailand

Thailand 55 55

55

55

Fiji

Fiji 55 55

55

55

Papua New Guinea

Papua New Guinea 55 55

55

55

OECD*

OECD* 64 64

64

64

55 Papua New Guinea 55 55 OECD* 64 64 DC - Defined Contribution DB - Defined

DC

- Defined Contribution

DB

- Defined Benefit

*All OECD member-countries.

1 Blue collar women

2 Public sector only Sources: OECD Pensions at a Glance Asia/Pacific 2013; World Bank, Pensions Database GP Social Protection; and ILO Social Security Department, Scheme Information. Accessed April 2016.

Inadequate pensions coverage*

Present Coverage Future Coverage 100 90 80 70 60 50 40 30 20 10 0
Present Coverage
Future Coverage
100
90
80
70
60
50
40
30
20
10
0
Future Coverage 100 90 80 70 60 50 40 30 20 10 0 *Most recent estimates.

*Most recent estimates. **OECD countries. Note: Present coverage refers to pensioners as percent of population above legal retirement age.

Future coverage refers to contributors as percent of working age population.

Source: ILO Social Protection Statistics and Indicators Database and World Bank, Pensions Database GP Social

Protection. Accessed April 2016.

Insufficient public pension spending

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Public pension spending (% of GDP)* 8.1 6.5 3.4 2.7 2.2 2.2 2.0 1.0 1.0
Public pension spending (% of GDP)*
8.1
6.5
3.4
2.7
2.2
2.2
2.0
1.0
1.0
1.0
0.8
0.5
0.2
0.0
3.4 2.7 2.2 2.2 2.0 1.0 1.0 1.0 0.8 0.5 0.2 0.0 • M ost recent
3.4 2.7 2.2 2.2 2.0 1.0 1.0 1.0 0.8 0.5 0.2 0.0 • M ost recent
3.4 2.7 2.2 2.2 2.0 1.0 1.0 1.0 0.8 0.5 0.2 0.0 • M ost recent
3.4 2.7 2.2 2.2 2.0 1.0 1.0 1.0 0.8 0.5 0.2 0.0 • M ost recent

Most recent estimates.

**High income OECD countries.

Note: Public pension spending refers to both contributory and non-contributory pensions. Sources: OECD Pensions at a Glance Asia/Pacific 2013; World Bank ,Pensions Database GP Social Protection (Accessed April 2016) and OECD Pensions at a Glance Asia/Pacific 2013.

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Possible Pension Reforms

 

Reform Area

Reform Options

1.

Retirement Age

Raise statutory retirement age

 

Tighten early retirement provisions

Increase incentive to work and lifetime learning

2.

Benefits

Limit withdrawal of savings before retirement

 

Calculation based on lifetime average salaries

Less favorable indexation

3.

Private Sector Pensions

Increase incentives for voluntary private sector pensions

 

Encourage entry of reputed foreign pension providers Partial or full privatization

4.

Financial Education

Raise awareness about retirement planning

 

Provide financial literacy and retirement planning education

5.

Social Pensions

Target elderly poor

 

Set at a fiscally affordable level

Simplified administration

6.

Tax

Tax reforms to broaden tax base

 

Improve tax administration

Simplified administration 6. Tax  Tax reforms to broaden tax base    Improve tax administration

Key Messages

Challenging economic times in developing Asia

Softening growth and subdued inflation

Low investment returns

Population aging and old age poverty

The region’s diverse pension systems have gaps:

Low retirement age

Inadequate present and future coverage

Variable replacement rates

Insufficient public pension spending

Reforms to pension systems needed for mitigating old age poverty and financial sustainability

public pension spending  Reforms to pension systems needed for mitigating old age poverty and financial