Pension reform: repent at leisure

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Just like your younger years, the time to act will pass you by. Allianz Board member Manuel Bauer claims the challenges are upon us and the time to act is now.

Universal pensions have stolen headlines recently in Hong Kong. A universal pension scheme coming to fruition would depend on the political will and determination of the current administration, especially when the public is still waiting for a decision months after the release of a government-commissioned report with no fewer than six proposed retirement protection schemes. It goes without saying that the longer the government shies away from addressing the issues of universal pensions reform, the bigger the problem could become as new studies have once again underscored the deteriorating situation in Hong Kong.

Challenges ahead
A new Pension Sustainability Index (PSI)* published in a recent Allianz study shows Asia ranks poorly – with only two countries within the top 20 and several of its largest economies appearing at the bottom rungs in the world ranking.

Hong Kong emerged top among its Asian neighbours at number 15. Asia’s number 2 is Singapore, ranked 18 globally. This is still a considerable drop from Hong Kong’s previous ranking of 7, dragged down by the fact that its population ageing has accelerated substantially.

Hong Kong emerged top among its Asian neighbours at number 15 – down from 7 in previous studies.

This suggests that there should be increasing pressure on the government to review the system. Having said this, the situation is not unique to Hong Kong but a common denominator across the region. The inconvenient truth is that it is high time to rethink retirement and the burgeoning gaps between Asian pension system commitments and ability to provide.

Reform fail
The Allianz results highlight not only the unsustainable and fragmented pension systems but also the unfavourable 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 that countries across Asia are mostly ill-prepared for the future: their pension systems do not seem to be financially sustainable in the long-term given their rapidly ageing populations. At the same time, current systems struggle to provide an adequate retirement level and the underlying demographic trends might further sharpen the problem. Consequently we see a massive shortfall 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 for very good reasons. Beyond headline figures of impressive GDP and export growth, Asian countries have seen a more than 50 per cent jump in life expectancy and approximately 60 per cent fall in fertility in just half a century. This is a good thing – but also the root of the problems ahead because these triumphs come with a huge price tag: a top-heavy population pyramid. Various research projects have shown that the elderly population in Asia will double to around 1 billion by 2040, putting it on track to become the oldest region in the world. But the more disturbing fact is that Asia’s ageing will be at its most rapid between the years 2010 and 2030. And we are already a quarter of the way through this critical period.

Over 30 per cent of the population will be more than 65 years old in 2036.

Ancient China
Consider, for example, data from the National Bureau of Statistics of China, the world’s most populous country. It shows that its working age population – those aged between 15 and 59 – shrank for the first time in decades, by 3.45 million in 2012. A recent study shows China’s elderly population, aged above 65, will swell 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 time every fourth Chinese citizen will be above 65 years old. Similar scenarios, of varying magnitude, are emerging across the entire region.

Ageing Hong Kong
The Hong Kong situation offers no comfort. Using 2012 statistics, the United Nations has projected over 30 per cent of the population will be more than 65 years old in 2036. The old-age dependency ratio is expected to rise from around 20 percent today to 50 percent in 2035. This could spell trouble for the economy. With more people retiring than entering the workforce, Hong Kong’s working age population will peak in 2015 and then fall nearly 13 percent by 2035.

The common core underlying problem now is that the policies and systems in place in many parts of Asia are hardly prepared for these vast demographic shifts, which means that Asia is rapidly ageing without sufficient pension protection.

The old-age dependency ratio is expected to rise from around 20 percent today to 50 percent in 2035.

Against this backdrop, what Asia needs is to modernize its pension systems to become financially sustainable and provide adequate retirement incomes.

Naturally, there is no one-size-fits-all solution to overhaul the pension systems across the region. It is true that the pension systems vary from country to country with respect to design and institutional arrangements but overall there are similar challenges relating to fundamental issues like adequacy, equity and financial sustainability.

Given the long lag in pension system planning, the urgent reality now is that there is a very narrow window of opportunity for many Asian countries to cope with and also, even more critically, to avoid and repeat many of the mistakes previously made in the West. It’s high time for Asia, and certainly Hong Kong, to act now.

*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.