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Poor Old Things
By Salil Tripathi, Guardian Unlimited
June 29, 2005
The pensions crisis is a global phenomenon, Salil Tripathi points out.
It may provide cold comfort for people in Europe that they are not alone in worrying about the size of their pensions.
A recent World Bank study of pension policies across the world published last month shows that the crisis is a global one: many countries are unprepared for the huge demographic shift. Across the world, people are living longer and having fewer children.
In Europe, calls to push back the retirement age are widely disliked. But in poorer countries, most people want to go on working because there are few retirement benefits. In the poorest countries, the idea of extending coverage to protect those who have remained poor throughout their lives appears impossible to achieve.
Today, nearly 60% of the world's elderly live in developing countries. But that share is expected to rise to 80% by 2050. As the World Bank publication "Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reforms" points out, while the developed world got rich before its people started living longer, in developing countries people are getting older before the countries have got rich.
The bank calls for creative thinking to ensure that elderly people are looked after without jeopardising commitments to other important sectors. That is easier said than done, because in the developing world only a small minority of population tends to be covered by the most basic form of pension.
As economist Mukul Asher, an expert on pension systems in Asia who teaches in Singapore, points out, there are crucial trade-offs involved: "Resources for pensions must compete with other needs, such as education, healthcare, physical infrastructure."
In Thailand, the proportion of people covered by a pension has risen to about a quarter of the population, but in Indonesia it is 12%. In India, public sector and organised private sector workers account for only 11% of workforce. That means 89% of workers have no retirement benefits.
The pension systems in the developing world simply cannot deliver current and future benefits at the prevailing contribution rate unless the fund is replenished through taxation or other infusion, or unless benefits are cut in the future.
The systems were designed on the assumption that a larger pool of workers would make contributions for a smaller pool of retirees, and retirees would not have a very long life after retirement. But that assumption has broken down, not only in developed countries, but also in emerging economies.
For centuries, Asia's population pyramid looked static, a vast base of young people supporting a sliver of elderly. But increased life expectancy, falling birth rates and improved medical care have changed that.
Most of the poorer Asia seems unprepared to deal with the crisis. Even if India, for example, is to offer universal pension of 25 rupees (31p) per day to its elderly, who form 10% of the population, it could translate to 4% of India's gross domestic product, assuming there are no administrative costs.
For the last decade India has grown at 6% a year. Such scorching growth rate is not sustainable in the longer run without investments in infrastructure. But, even if India manages such a growth rate, the scale of pension funding would daunt the most optimistic planner.
The Chinese population is also ageing rapidly: according to the Beijing Centre of Gerontology the proportion of Chinese over 65 will rise to 20% by 2015. A 75-year-old person in China may get some 90% of his last drawn salary as pension if employed in the organised sector; a five-year-old today can expect a pension of only 36% of his last-drawn salary.
China's problem is accentuated by its one-child policy. It has led to what is known as the 4-2-1 problem, that is, the likelihood of one adult supporting his or her parents and grandparents, with no sibling to turn to for assistance. There will also be fewer young people in future to pay taxes that will support China's elderly. A study at the East West Centre at the University of Hawaii says that the future Chinese workforce will not be large enough to support Chinese seniors as generously, because of the effect of the one-child policy.
In the Indian case, Ajay Shah, a consultant at India's ministry of finance, recognises the gloomy picture: "In the years to come, poverty among the elderly is likely to be the dominant form of poverty in India, given the breakdown of the 'joint family', increasing migration flows of labour within the country and the ineffectiveness of poverty alleviation programmes in serving the needs of the elderly."
But he sees a window of opportunity. Over the next 30 years, a vast pool of Indians will enter the job market. This could allow India to meet the challenge substantially. But well-designed personal pension accounts must be offered that recognise the worker's mobility, allow him or her to take it with him to his next job, permit greater flexibility to add contributions or make withdrawals. They must also be supported by a robust information technology system.
Liberal laws allowing movement of people between countries can help mitigate the crisis, by offering ageing societies, such as those in Europe and East Asia, with an infusion of young, working age people who would contribute to their new homes by paying taxes and contributing to the pension pool. But politically, that can be explosive, so its success would be limited. As the World Bank study points out, the economically active population in Europe is projected to decline by 50 million by 2050. The working-age population in the Middle East and North Africa is expected to rise by 150 million during the same period.
But, as the report says: "Opportunities for such a demographic (and economic) arbitrage that achieves a solution beneficial to both regions, and the migrants, do exist. However, such a dramatic approach carries with it profound political, economic, and cultural consequences."
Recognising the practical impossibility of increasing migration flows, the World Bank study suggests that pension systems should consist of several elements.
Such a system would comprise a non-contributory social pension that provides a minimum level of protection to everybody.
Beyond that, governments will have to consider mandatory individual savings accounts, a voluntary scheme that could be sponsored by employers and an informal element consisting of financial and non-financial support for the elderly.
Such a system should be adequate, affordable, sustainable, and robust. Pension reform, ultimately, should be part of overall fiscal reform and better delivery of government services. It cannot be done in isolation; it requires reforms in other areas.
It is not an easy task, and the risk, as Dr Shah says, can have long term consequences. "Compared with other aspects of economic policy, the pension sector is unusual: mistakes do not show up for a long period," he points out.
Mistakes - such as policy errors, insufficient resourcing of pensions, governments dipping into the pension pool for current expenditure - can take many years to come to light. The cost of fixing the system when shortfalls do emerge could be so large as to require drastic overhaul, including cuts in benefits. Such measures disproportionately hurt the poor, because they have saved the least during their working lives.
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