Voluntary Pensions in Emerging Markets Richard Jackson President Global Aging Institute Presentation at a Global Aging Institute & Principal Financial Group Policy Forum November 15, 2017 American Council of Life Insurers Washington, DC
The Coming Crisis in Retirement Security 2
The emerging world is about to age dramatically. Elderly (Aged 65 & Over), as a Percent of the Population in 2015 and 2050 5% 19% India France 13% 26% 2015 5% 16% Indonesia Canada 14% 26% 2050 6% 10% Malaysia China 17% 28% 6% 10% Mexico Thailand 19% 30% 13% Russia 21% Germany 21% 32% 15% Unite States 15% Hong Kong 22% 35% 8% Brazil 22% Italy 23% 35% United 18% South 13% 25% Kingdom 35% Korea 11% Chile 26% 26% Japan 36% 0% 10% 20% 30% 40% 0% 10% 20% 30% 40% Source: World Population Prospects: The 2015 Revision (New York: UN Population Division, 2015) 3
The Inadequacy of State Retirement Provision: LOW COVERAGE RATES Many workers in emerging markets fail to Effective State Pension Coverage Rate contribute to the state pension system, and and Size of the Informal Sector in the Most Recent Available Year even when they do contribute, they do so irregularly, which means that the benefits 90% they receive will still be inadequate. Effective Coverage Rate 80% Hong Kong Chile 70% South Korea In today’s relatively youthful emerging Brazil 60% Malaysia markets, the limited reach of contributory 50% pension systems is a serious economic and 40% Mexico China social concern. In tomorrow’s emerging 30% Thailand markets, with their soaring old-age 20% = Funded System India dependency burdens, it could become an 10% Indonesia = PAYGO System 0% economic and social catastrophe. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Size of Informal Sector Note: The effective coverage rate is the share of the labor force that contributes to a country's mandatory pension system or systems in a given year. The informal sector is defined as informal employment in the nonagricultural sector plus agricultural employment as a share of total employment. Estimates of the size of the informal sector were derived by adding agricultural employment to published estimates of nonagricultural informal employment. In the case of Hong Kong, nonagricultural informal employment was also estimated by GAI. Source: For the sources, which are too numerous to list here, see Richard Jackson, Voluntary Pensions in Emerging Markets: New Strategies for Meeting the Retirement Security Challenge (Alexandria, VA: GAI, 2017) 4
The Inadequacy of State Retirement Provision: LOW REPLACEMENT RATES From Brazil to China, emerging markets Future State Pension System Replacement with PAYGO pension systems are making Rates for Full-Career Workers deep reductions in the generosity of state Indonesia retirement provision as their populations age. 14% Mexico 29% In principal, emerging markets with funded Hong Kong 33% state pension systems should be better Malaysia 34% positioned to confront their age waves. In Chile 39% practice, however, these systems are South Korea 40% unlikely to deliver on their promise. India 45% Thailand 47% In countries like Chile, Hong Kong, and Mexico China 54% with privately managed personal accounts Brazil 56% systems, contribution rates are too low to finance adequate replacement rates. 0% 20% 40% 60% Note: The projections refer to final salary replacement rates for average-earning workers entering the labor force today at age twenty and retiring at their state pension system's normal retirement age. In countries where replacement rates differ by In countries like India and Malaysia with gender, the projections are male-female averages. For Brazil, the projections refer to the RGPS; for Chile, the AFP System; for China, the Basic Pension System for Urban centrally managed provident funds, low Employees; for Hong Kong, the MPF; for India, the EPF and EPS; for Indonesia, Old Age returns on worker contributions, together Security; for Malaysia, the EPF; for Mexico, SAR; for South Korea, the National Pension System; and for Thailand, the Old Age Pension System. with early retirement ages, mean that Source: For the sources, which are too numerous to list here, see Jackson, replacement rates will also be inadequate. Voluntary Pensions in Emerging Markets 5
The traditional role of the family in retirement security is receding in emerging markets. For most retirees, alternative income Shares of Respondents Saying "Grown sources will not be sufficient to make up Children or Other Family Members" Should for inadequate state pensions. be Mostly Responsible for Providing Income and Personal Care to Retired People As today’s emerging markets develop and 70% modernize, the expectation that the 63% 60% Income 60% extended family will assume responsibility Personal Care for caring for retirees is fading. 48% 50% 40% 34% Traditional family support networks, 32% 30% 29% 30% 26% moreover, will soon come under intense 21% 20% new demographic pressure as populations 20% 13% 11% 11% 10% 10% age and family size declines. 10% 8% 8% 10% 6% 6% 0% In Brazil and South Korea, the average number of children that the typical elder can turn to for support will decline by 1.7 between 2010 and 2040. In China it will Source: Richard Jackson and Tobias Peter, From Challenge to Opportunity: Wave 2 of the East Asia Retirement Survey (Alexandria, VA: GAI, 2015) decline by 2.3 and in Mexico by 2.4. 6
Neither continued work nor personal savings are likely to bridge the gap in retirement income. Share of the Population with at Least a Lower Continuing to work at least part time is an Secondary Degree, by Age Group obvious way to compensate for inadequate 94% 91% 100% 65+ 20-39 85% 84% state pensions. Yet across the emerging world, 71% 80% 67% 65% an enormous gap has opened up between the 52% 60% 42% skills that older workers have and the skills 40% 28% 22% 19% 19% needed to fill the jobs being created in the 17% 16% 20% 8% growth sectors of the economy. 0% India Thailand Brazil Mexico Chile China Malaysia Hong Kong Source: Wittgenstein Centre Data Explorer, Version 1.2 (Wittgenstein As for personal savings, even in high-saving Centre for Demography and Global Human Capital, 2015) East Asia relatively few older workers have Average Net Financial Asset-to-Income Ratio of accumulated sufficient financial assets to Survey Respondents at Age 50 finance more than a fraction of a retirement Indonesia 0.2 that might last 25 years or more. Philippines 0.2 Thailand 0.3 Vietnam 1.1 China 1.4 Malaysia 1.9 Singapore 2.7 Taiwan 2.7 Hong Kong 2.8 South Korea 3.5 0 1 2 3 4 Note: Assets include all classes of household financial assets; ratios are averages for respondents aged 45-54. Source: Jackson and Peter, From Challenge to Opportunity: Wave 2 of the East Asia Retirement Survey 7
Meanwhile, rising life expectancy puts retirees at a growing risk of outliving what savings they do have. Since 1950, life expectancy in Latin America has risen by 23 years, while in emerging Change in Projected Life Expectancy at Birth for East Asia it has risen by 32 years. Looking the Year 2050: UN 2015 Revision versus 2000 to the future, the UN now projects that it Revision will rise by another six years in Latin Japan 0.1 America and another seven in East Asia. India 0.4 US 1.4 It is worth recalling, moreover, that the history UK 2.6 of life expectancy projections has been largely Germany 2.7 a history of embarrassing underestimates. France 3.0 China 3.5 Canada 4.0 Brazil 5.3 Italy 5.5 South Korea 5.7 Chile 7.7 0 2 4 6 8 10 Source: World Population Prospects: The 2015 Revision and World Population Prospects: The 2000 Revision (New York: UN Population Division, 2000) 8
The Case for Voluntary Pensions All of this suggests that the success of emerging markets at ensuring retirement security will increasingly depend on their success at building robust voluntary pension systems. GAI REPORT Until recently, most policymakers assumed that expanding voluntary pension systems ❖ Chapter 1 should be a low priority in societies where mandatory systems cover just a fraction of The Coming Crisis in Retirement the workforce. But it is precisely the limited Security reach of mandatory systems that makes expanding voluntary ones so important. ❖ Chapter 2 Best Practices for Voluntary Nor is it true that expanding voluntary Pension Systems pensions need merely benefit the affluent. To the contrary, they have a crucial role to ❖ Chapter 3 play in shoring up the deteriorating retirement income prospects of the middle Lessons for Emerging Markets class. They can even help to improve the retirement security of informal-sector workers, who currently have none at all. 9
Today’s Voluntary Pension Landscape 10
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