ASIA has the potential to thrive in 2021 after weathering the pandemic from last year. While economic activity in the region declined about 2% in 2020, the gross domestic product (GDP) only contracted over 4% compared to the global level and 8% in Latin America.
According to Allianz’s Regional Pension Report, Asia’s resilience is attributed to the robust growth of 2.3% in China.
However, its chief economist Ludovic Subran said that Asia’s performance is better compared to other regions, but it could easily forfeit its advantage if the looming demographic crisis is not addressed.
“Next generations of Asians would have to pay a heavy price for such negligence. Not addressing pension reform, key for social justice and resilience, could even spell the premature end of the Asian century,” he added.
While the COVID-19 pandemic caused millions of deaths globally, the underlying demographic trends are expected to remain intact as the region’s population continues to age.
Subran mentioned that the pandemic only slowed the aging trend temporarily and that Asia’s population aged 65 years and above is expected to grow more than double to 955 mil in 2050 compared to the current number of 412 mil.
“The share of this age group in total population is set to reach 18% by then,” he added.
Furthermore, the author off the report and Allianz senior economist Micheala Grimm agreed that COVID-19 will not have a lasting effect on aging, but it may still affect pensions.
“Scars will re-main not only from the deep recession, rising unemployment and interrupted education but also from some of the well-meant counter-measures such as the temporary reduction or sus-pension of pension contributions or the temporary allowance to withdraw pension fund savings,” she opined.
“These short-term fixes are likely to increase old-age poverty in the years to come. If anything, COVID-19 has made thorough pension reforms even more urgent.”
The report also showed that there are still marked differences in the development stages of the region’s pension systems.
Pension coverage ratios, for example, span from 3% in Cambodia to 100% in Japan. Equally huge disparities can be observed in private wealth.
In Taiwan and Hong Kong, net financial assets by households accounted for more than 400% of total GDP in 2019, while in Sri Lanka, Cambodia, Vietnam, Indonesia and the Philippines the corresponding figure was less than 50%.
These differences matter as they signal only limited access to financial ser-vices for some swathes of the population.
The main cause of concern with respect to the long-term sustainability of pension systems is the retirement age in many markets which does not reflect the gains in life expectancy over the last decades.
And although some markets are discussing an increase in the retirement age, the planned changes might not be sufficient to mitigate the expected increases in further life expectancy.
The diverging state of play in pension reform efforts reflects differently on other markets within the region.
While, for example, Indonesia has already decided to raise the retirement age significantly, other markets are still dragging their feet.
Only four markets (China, Japan, South Korea and Taiwan) have already included a demographic factor in their pension formula, in Singapore the annuity payments are regularly adjusted.
A strong capital-funded pillar can be found in just a few markets, for example in Singapore and Japan. As a result, rankings in sustainability and adequacy differ widely among Asian markets.
But with no Asian market ranking among the global top 10, it is clear that all of them have still some homework to do to make their pension systems demography-proof.
The rapid demographic change does not allow to put pension and financial system reforms on the back burner.
For Malaysia, the main reason for concern is the long-term sustainability of the country’s pension system as the still relatively low retirement age of 60 years both for men and women does not reflect the development in life expectancy.
Another challenge is the still relatively low coverage ratio – less than half of the working population is effectively within the public pension system. – Jan 30, 2021
