Asian governments cannot delay in dealing with problems ranging from unacceptable early retirement ages, overgenerous pensions (including in China), a historic dependency on families caring for their elders, and poorly managed public investment funds, warns former banker Satyajit Das.
In a commentary published by Nikkei Asian Review, Mr Das notes that the current global pension deficit is around $70tn, compared with global GDP of just over $80trn, and is expected to rise to $400trn by 2050. A substantial portion of this is in Asia: Japan's pension funding gap is $11trn, expected to rise to $26trn in 2050; China's funding gap is $11trn, expected to rise to $119trn in 2050; India's funding gap is $3trn expected to rise to $85trn in 2050. Aged care and health care costs, such as the proposed "Modicare" initiative in India, are additional and will add significantly to the burden.
Design flaws in retirement funds mean investments and contributions are unlikely to cover future liabilities. Employers and governments traded overgenerous future benefits, which would not need to be paid for immediately, in return for lower current wages or votes.
While idiosyncrasies of individual pension systems make comparisons difficult, Asia increasingly faces similar problems to the West as well as additional issues of its own.
First, falling birthrates and increasing life expectancy mean that the population over 65 will increase rapidly, twice as fast as that in the developed world. This increase will be most marked in Japan, China, South Korea, Singapore and Thailand.
Second, pension system coverage is generally low, reflecting substantial rural populations, a large informal economy and lower income levels. Significant parts of the population lack an adequate post-work income. Avoiding old age poverty relies on family networks, which are weakening. Economic activity will slow as consumption and savings fall as resources are diverted to meeting these needs. Even where there is coverage, pension systems may not provide necessary income because withdrawing savings as a lump sum before retirement is common, with the risk that people outlive their resources.
Third, Asian pension schemes are frequently structurally weak. Many are defined benefit arrangements that pay earnings-related pensions. In some countries, such as China, Vietnam, Pakistan and Taiwan, pension levels are high relative to earnings. The problem is magnified by early retirement ages, especially for women.
Fourth, current investment assets available to finance retirement costs, measured against GDP, are modest compared with developed countries. Pension investment assets in the US, UK, Switzerland, Australia and Canada are above 100% of GDP. Pension investment assets in Japan, China, South Korea, Hong Kong and Malaysia are 63%, 1.5%, 47.4%, 49.1% and 73.4% respectively.
Fifth, Asian pension schemes are generally government-sponsored and publicly managed, exposing them to political pressures. Funds are frequently used as a source of funding for governments and state-owned enterprises, to hold strategic shareholdings or otherwise advance government policy. The returns are often suboptimal.
Sixth, in addition to the global low return outlook, funds must contend with limited investment choices because of typically small domestic capital markets in Asia, necessitating more foreign investment, with the attendant currency risk. It complicates investment decisions. For example, Singapore's highly regarded GIC and Temasek made poorly timed investments in Western banks in 2007-2008. Return and funding pressures are forcing regional pension funds to increase exposure to high-risk growth sectors, including China and nascent technologies.
In developed economies, the pension underfunding problem will require difficult decisions such as deferring retirement, reducing payments or benefits, increasing contributions or taxes or, in extreme cases, allowing funds to go insolvent. In Asia, similar measures are also needed, as well as steps to increase coverage and alter the structure of pension schemes to ensure their financial security.