Aging, Pensions and Fiscal

Sustainability in Asia-Pacific
Peter J. Morgan
Senior Consultant for Research
ADB Institute
Asia-Pacific Social Protection Week
ADB HQ, 2-5 August 2016
DISCLAIMER: This presentation does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government
cannot be held liable for its contents.

Pension spending in Asia-Pacific only weakly

related to income levelJapan an outlier

Source: World Bank Pension Database (2016)

But pension spending strongly related to oldage dependency ratioJapan leads the way

Source: World Bank Pension Database (2016)

Projected old-age dependency ratio (age 65+/age

15-64)Asian NIEs rising rapidly, followed by
PRC, Thailand and Viet Nam

Sources: World Population Prospects: The 2012 Revision of the United Nations Population Division, available
at:http://esa.un.org/wpp/Excel-Data/population.htm and Council for economic planning and development
(Taipei,China), available at: http://www.cepd.gov.tw/encontent/m1.aspx?sNo=0001457,accessed 28.12.2015

Contribution shares low in many countries, but

rises strongly with income level

Source: World Bank Pension Database (2016)

Basic ways to reform

Reduce benefits
Raise the minimum age to receive public pensions
Reduce replacement ratios to sustainable levels, but allow
adjustments for changes in cost of living
Switch from defined benefit to defined contribution

Raise pension premiums and/or investment

assets

Raise premium rates

Tax incentives for private savings

Increase share of labor force making contributions

Reduce disincentives for labor participation in formal sector

Restrict early withdrawals from the system

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Japans macro-economic slide

(Mechanism to adjust benefits according to demographic conditions)
People
who newly
newly start
start receiving
receiving pension
pension (Age
case of
of full
People who
(Age 65-67
65-67 // case
full pension)
pension)
:: wage
growth

slide
adjustment
rate
wage growth slide adjustment rate
People who are currently receiving pension (Age 68 / case of full pension)
: price growth slide adjustment rate

Price (wage)
growth

This acts to gradually reduce the replacement ratio to a sustainable level

But slide is bounded at zero, so does not work if no inflation or wage growth!
Therefore may need to be revised

Kazakhstans Pension System Reform

(2013)

On July 21, 2013, a new version of pension law was signed,

reforming the pension system. Two major changes:

increase of womens retirement age from 58 to 63 years; and

creation of SiAF (single accumulation pension fund), the only legitimate fund to
collect mandatory pension contributions. All NSAFs were obliged to transfer their
pension assets, which were collected before the reform, to SiAF.

Issues relating to the reforms:

They aims to increase the efficiency of the pension system in Kazakhstan;

But they also pose an increased risk of further deterioration of performance due
to lack of competition, conflict of interests in terms of combining regulator and
manager functions, and increased possibility of government interventions.

Other inefficiencies may arise such as reduction in local banks custody services
revenues; the slowdown of development of local capital markets and the
corporate bond market

Viet Nams Pension System Issues

Investment income is one source of financing for the scheme.

Pension fund investments can include:

(i) government bonds, state treasury bills, and bonds of state-owned

commercial banks;

(ii) lending to state commercial banks;

(iii) state economic projects; and (iv) other investments prescribed by the
government.

This portfolio has yielded a lower rate of return than the average market rate.

Two big issues regarding financial sustainability of pension system

First, prevalence of early retirements (together with higher life expectancy)

results in longer retirement duration and hampers the sustainability of current
pension fund system;

Second, low contribution rates may limit the sustainability in the long term. At the
current rate, the pension fund will be unbalanced by 2038 and depleted in 2051.
To balance and ensure the sustainability of pension system, the contribution rate
should be 30% (Giang, 2008) or 40% (OECD, 2008). This, however, could
provide an incentive for contribution evasion.

Conclusions

Japans ratio of public pension spending to GDP is much

higher at 10% vs. 3% or less for non-socialist Asian
economies
This is explained mainly by its old-age dependency ratio, and
many other Asian economies will approach similar levels over
several decades, which points to a need to massively
increase pension resources
The good news is that pension contribution rates also tend to
rise with income levels
However, many reforms will still be needed:

Raising retirement ages in line with productive lifespan

Expanding portion of labor force covered
Raising incentives for contributions and private savings
Establishing mechanisms to adjust benefits to sustainable
levels, while allowing for cost-of-living adjustments
Establishing guidelines to support pension investment returns
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Thank you
For more information:
Peter J. Morgan, PhD
Senior Consultant for Research
ADB Institute
pmorgan@adbi.org

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