Asia in the ageing century: part II - retirement income

Asia\u27s general reliance on defined benefit schemes could potentially lead to unfunded liabilities similar to those experienced in some countries in Europe, once the tipping point is reached. Some segments of the population lack meaningful pensions, a feature of many developing economies in the region, which means the whole system of retirement income in Asia needs urgent attention. Summary• This is the second research brief in a three-part series that looks at Asia in the ageing century, with a particular focus on the countries of East and South-East Asia.• The context is outlined in the first brief, which describes population, urbanisation and social trends in the region. Specifically, it notes that population ageing in East and South-East Asia is happening faster and at a lower level of economic development than in the West. Many Asian countries now have a decade or so to prepare for the later stages of demographic transition.• With the challenges set out, we turn to responses and opportunities. In this regard, Parts II and III of the series focus on two areas of economic activity which are both pertinent and have enormous scale: providing retirement income (covered in the present brief) and healthcare (outlined in Part III). Getting these right could result in favourable macro-economic rebalancing of growth in the region – where individuals can pool risks and reduce the need for excessive precautionary savings.• As in Europe, Asia’s reliance on defined benefit schemes may result in unfunded liabilities when the ratio of pension recipients to contributors increases, unless sustainability features are built in. China’s generous urban workers’ scheme is only affordable because it is not yet mature or widespread. And poorly designed access arrangements can result in excessive costs and disincentives to work that waste the potential of healthy older people. For example, pension access ages are low in East and South-East Asian countries: on average 59 for men and 57 for women.• Alongside issues of sustainability, adequacy of pension benefits remains important. Many Asians have no pension entitlements. This is not surprising given the region’s economic development, but if demographic and social development is considered, the situation demands more urgent action. Adequacy also depends on ensuring regular retirement income, which is unlikely in the absence of preservation and annuities.• There are also private sector opportunities, including providing financial services to help Asian workers transition into retirement as has happened with assets accrued by baby boomers in the West. The size of pension assets already offers opportunities, but there are varying strategies for foreign entrants to choose from with different levels of capital investment – from opening local branches to building long-term links.• Lastly, a viable private pension sector requires the right set of preconditions. Here, experts from countries such as Japan and Australia have an opportunity to contribute to developing the region’s pension and insurance infrastructure. Both countries have experience in population ageing research and policy implementation.&nbsp

A visual history of demographic projections in Australia

This fact sheet compares historic demographic patterns and central projections from the Australian Bureau of Statistics and the Australian Treasury. It looks at trends relating to the total population, population ageing, fertility, life expectancy and migration. Treasury figures are of particular interest since they form the basis for the Intergenerational Report, an analysis of fiscal sustainability of existing policy. Both the ABS and Treasury emphasise that in describing Australia’s future demography (as well as the related long term fiscal impacts) their figures should be seen as projections, not forecasts. But the two are commonly conflated in public and political discourse and the projections have an impact on policy decisions. So the reasonableness of official projections should be subject to scrutiny, evaluated against actual experience and compared to each other. Any differences and inaccuracies can serve as a guide to users of the data.  Transparency is all the more necessary given that the Treasury sets its own demographic assumptions for long-term fiscal reporting rather than using those produced by an independent national statistics office – the usual approach among OECD countries. The fact sheet shows how outcomes can differ based on different assumptions and how it is not uncommon for projections and assumptions to stray from reality

Asia in the ageing century: part III - healthcare

With total health spending in the region worth over a trillion dollars in 2010 and demand for healthcare continuing to grow, Asian governments will have a tremendous challenge meeting and funding this demand.Summary• This is the third research brief in a three-part series that looks at Asia in the ageing century, with a particular focus on the countries of East and South-East Asia.• The context is outlined in the first brief, which describes population, urbanisation and social trends in the region. Specifically, it notes that population ageing in East and South-East Asia is happening faster and at a lower level of economic development than in the West. Many Asian countries now have a decade or so to prepare for the final stages of demographic transition. Parts II and III of the series focus on two areas of economic activity which are both pertinent to population ageing and have enormous scale: provision of retirement income (covered in Part II) and of healthcare (outlined in the present brief).• As Asian societies become wealthier and older they will demand more of their health systems. This translates to extending health insurance coverage to a broader cross- section of the population, and offering reimbursement for a greater proportion of costs on a larger package of benefits. China has enrolled 1.2 billion people into the health insurance system within the last decade but in some provinces benefit packages are lacking. Malaysia achieved universal health coverage in the 1980s, but in 2004 key medicines were only available in a quarter of public health facilities.• East and South-East Asian governments currently have the fiscal capacity to keep expanding health systems, but to avoid the excessive cost growth seen in the West they will need to employ various micro, macro and demand-side measures – heeding the successes and failures of reforms within the region and elsewhere.• An important area for healthcare is the epidemiological transition that comes with ageing societies, where the relative prevalence of non-communicable diseases increases. Health packages in Asia are yet to take a full account of this change.• Health spending in the region was worth over US$1 trillion in 2010. On the financing side, private health insurance is still a niche market making up US$50 billion of spending, but recent growth has been high (e.g. 100% p.a. in China). On the provider side, the size and growth of the market will result in opportunities for pharmaceutical, medical device manufacturing and consumer health companies, as well as for operators of hospitals and specialised facilities. Some of that demand will spill over into the growing medical tourism market.• At the level of the macro-economy, stronger welfare provision offers an opportunity to rebalance growth in the region by reducing excessive precautionary savings. So far, East and South-East Asian countries have been taking this opportunity but much remains to be done for healthcare systems to be fully ready for an ageing population.&nbsp

Mature-age labour force participation: trends, barriers, incentives, and future potential

The fiscal challenges of population ageing can be tackled in a number of ways. These include investing in capital and productivity of the smaller workforce, greater saving for retirement, higher migration, an active population policy, reducing benefits for the old, and/or encouraging and enabling them to work longer. This briefing focuses on the latter. It presents historical and international precedents for higher mature-age labour force participation rates in Australia, summarising available data as well as looking at the public policy response so far and the potential for further intervention.Executive Summary The fiscal challenges of population ageing can be tackled in a number of ways. These include investing in capital and productivity of the smaller workforce, greater saving for retirement, higher migration, an active population policy, reducing benefits for the old, and/or encouraging and enabling them to work longer. This briefing focuses on the latter. It presents historical and international precedents for higher mature-age labour force participation rates in Australia, summarising available data as well as looking at the public policy response so far and the potential for further intervention.The economic case for higher mature-age labour force participation is strong. A five percentage point increase to participation rates of 50-69 year olds is projected to be worth 2.4% of GDP in 2050. If all inactive people aged 55 and over who say they want to work did so, the participation rate for that group would increase six percentage points – also worth 2.4% of GDP. And if Australia had the same mature- age participation as New Zealand, GDP in 2012 would be 4% higher.The Australian Government has undertaken a number of measures to resolve ongoing barriers to employment for older Australians, but important issues remain.Institutional barriers to mature-age participation, resulting from the carrots and sticks that make up the tax, benefit and retirement income system, can be more amenable to policy intervention than those relating to barriers such as health and education. There is also evidence (e.g., from New Zealand) that changing system parameters relating to eligibility age can help.Yet it seems that too little thought has gone into the operation of eligibility ages in Australia. While pension age is increasing from 65 to 67, the eligibility age for Super will remain low, increasing from 55 to 60. At the same time, the age at which Super benefits are tax-free will remain at 60. In the absence of harmonisation of all eligibility ages, there is a case that the tax-free age be increased to 62, moving with the pension age, or to 65, moving with the Super access age.The briefing contextualises the discussion by making use of historic and international benchmarks. A set of scenarios is used to demonstrate the compositional effect of ageing and mature-age participation rates on total participation rates in the long term. Keeping all else equal, ageing would result in a 5 percentage point fall in total participation rates by 2050. If instead Australia were to achieve the higher mature- age rates seen in New Zealand, the fall would be only 2 percentage points. &nbsp

The Australian Retirement Income System: Comparisons with and Lessons for the United States

Australia has an atypical retirement income system: it comprises a flat-rate, non-contributory, affluence-tested age pension, and a mandatory, defined contribution accumulation plan to which employers must contribute 9.25 percent (moving to 12 percent) of wages on behalf of their employees. We briefly compare the Australian and US economies and demographies, and then describe the Australian arrangements and assess its economic efficiency and efficacy in delivering retirement support. We focus especially on the means testing of the first pillar in Australia and the mandated membership of pre-funded private pension plans. We conclude by considering insights for the evolution of the US pension reform debate as demographic change unfolds

The World Health Organization's impacts on age-friendly policymaking: A case study on Australia

This paper reflects on whether and how the World Health Organization (WHO) inspires age-friendly policymaking across different levels of government. This is done via a case study in which we analyse the policies of Australia's three-tiered federated government system against the WHO's eight core age-friendly cities domains. Findings suggest that membership of the Global Network of Age-Friendly Cities and Communities did not appear to overtly inspire the development of age-friendly policies across Australian governments. Content analysis shows there is an overwhelming policy focus on care and support services, with little attention to cultural diversity. This reflects an outdated portrayal of debilitation in later life and a lack of recognition of how diverse circumstances impact the ageing process and corresponding support needs. Our findings also reveal the challenges of a three-tiered federated system, where varying financial and authoritative capacities have influenced how different governments acknowledge and respond to population ageing. Notably, local governments—the main level of implementation targeted by the WHO—are invariably constrained in developing their own age-friendly policies and may opt to adopt those of higher levels of government instead. These challenges will likely impact other resource-limited governments in responding to the needs of their emerging ageing populations

WP 2016-337

Means testing can balance the need to provide adequate retirement incomes with the requirement that such provision is fiscally sustainable and economically efficient. Critics of the policy suggest that to reduce benefits as a retiree’s income and/or wealth increase is to discourage work and savings. Yet such distortions are small compared to those resulting from large earnings related pensions that, due to demographic change, require greater levels of financing via payroll taxes. Some form of means testing exists in most countries, usually involving small, safety-net schemes that target the poorest retirees (e.g., the Supplemental Security Income program in the U.S.). But an appropriately designed means-testing instrument can also be used to reduce the liability of large, publicly financed social security promises by excluding the affluent. This paper summarises means-testing design and implementation in a number of OECD countries as well as tackling key criticisms of means testing. In doing so, we discuss a number of recent, cutting-edge modelling approaches and empirical insights that examine economic impacts of means testing in the Australian and U.S. contexts.Social Security Administrationhttp://deepblue.lib.umich.edu/bitstream/2027.42/121944/1/wp337.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/121944/4/wp337.pdfDescription of wp337.pdf : Working paperDescription of wp337.pdf : Working pape

The impact of demographic change on labour supply and economic growth: can APEC meet the challenges ahead?

This report analyses the components of economic growth in 21 APEC economies in the past 25 years and the next 35. Written to contribute to discussions at APEC Senior Officials’ meetings in the run up to APEC ministerial and leaders meetings, it highlights the critical role played by population ageing and discusses relevant policy interventions.  The analysis adopts a supply-side, GDP accounting framework to decompose the contribution of population, participation, and productivity to economic growth. This is similar approach used in the Intergenerational Report for Australia, but economic outcomes are modelled for the whole set of 21 APEC member economies.  Wheras in the population size and age structure contributed positively to past growth it is expected to contribute less, or indeed act as a headwind to growth in future. Historically high rates of productivity growth are expected to decline as emerging economies converge toward rates seen in advanced economies. Between 2015 and 2050, declines in the size of labour forces are expected in China, Hong Kong, Japan, Korea, Russia, Thailand, and Chinese Taipei. A deceleration in the growth of labour forces is expected in other economies. And only Mexico, Peru, Philippines, and Papua New Guinea are projected to see labour forces grow at above 1% per annum over the next 35 years. This will have profound effects on economic growth, with average real GDP growth declining from an unweighted 4.1% per annum between 1990 and 2015, to a projected 2.2% between 2015 and 2050. China, for instance, is expected to grow at a modest 3.4% per annum over the next 35 years, compared to about 10% over the last 25. Those projected to grow fastest, with rates of 4% or above, include Indonesia, Philippines, and Papua New Guinea. Average growth in the standards of living in APEC, as measured by GDP per capita, is also expected to slow. Various policy levers can affect the population, participation and productivity. Several scenario analyses in the paper show that attracting permanent migrants and increasing international flows of labour, or increasing participation rates of older workers and women can benefit economic activity, raising standards of living and offsetting some of the economic headwinds of population ageing. Such policies are complementary responses; all should be on the table if APEC is to meet the demographic challenges ahead

Two Decades of Pension Reform: What has been Achieved and What Remains to be Done?

The past two decades have seen a wave of reforms to retirement income systems around the world. This paper describes the reform packages that have taken place in 38 industrialised economies, some of them involving incremental changes to existing provision, others, an overhaul of the entire retirement income system. The changes had many objectives. First, improved coverage of the pension system, especially of voluntary private pensions, was a common goal. Second, some reforms aimed to improve the adequacy of retirement benefits to combat old age poverty. Third, the pressure of population ageing and the maturing of pension schemes meant that fiscal sustainability of public pensions – primarily through reductions in future benefits – were very common. Often, the improvement to long-term finances will be achieved through encouraging people to work longer, through increases in pension eligibility ages and adjustments to pension incentives to retire. Finally, some reforms aimed at streamlining the administration of retirement income provisions and to improve the security of benefits in the face of different risks and uncertainties.