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The ôPensions at a Glance: Asia/Pacificö report notes that to prepare for the rapid population ageing forecast over the next two decades, it is vital to act now to avoid future problems and repeating many of the mistakes made in Europe and North America.
ôMany of AsiaÆs retirement-income systems are ill prepared for the rapid population ageing that will occur over the next two decades,ö the report says. ôThe demographic transition û to fewer babies and longer lives û took a century in Europe and North America. In Asia, this transition will often occur in a single generation. AsiaÆs pension systems need modernising urgently to ensure that they are financially sustainable and provide adequate retirement incomes.ö
The report analyses the retirement income systems of 18 Asian countries, including Australia, China, India, Indonesia, Pakistan, the Philippines and Vietnam. It says that reform is needed because: coverage of formal pension systems is relatively low; withdrawal of savings before retirement is very common; pension savings are often taken as lump sums and often do not provide adequate income over a personÆs lifetime; pensions payments are not automatically adjusted to reflect changes in the cost of living.
In OECD countries, an average of 70% of the working-age population is eligible for a pension. However, in South Asia, just 7.5% of the working-age population is eligible and in East Asia, only 18%.
Plus, few Asia-Pacific countries have social pensions to provide safety-net retirement incomes for people who are not members of formal schemes. Only in India are social pensions significant, with around 10% to 15% of older people covered.
National pension provision in Asia-Pacific is diverse. Nine countries have public schemes that pay earnings-related pensions, namely the Philippines, Taiwan, Thailand, Vietnam, India, Pakistan, Japan, Korea and Canada. These public schemes are called defined-benefit schemes because the value of the pension is defined relative to individual earnings.
The next most common kind of scheme is again publicly managed but benefits depend on the amount contributed and the investment returns earned and these are known as defined-contribution schemes. China, Indonesia, Malaysia, Singapore, India and Sri Lanka make use of those schemes.
Three countries also have defined-contribution pensions, but managed by the private sector: Hong Kong, Australia, Mexico.
New Zealand does not have compulsory pension contributions, but instead pays a flat-rate benefit to all retirees.
To improve AsiaÆs pension systems, the report makes three key recommendations.
First, Asian countries with defined-benefit schemes based on workersÆ final salaries should shift to calculating pension entitlements using lifetime average earnings, as most OECD countries do. This will make them more financially sustainable and fairer: final salary plans tend to favour the higher paid whose earnings tend to rise more rapidly with age compared to lower paid manual workers.
Second, many countries allow people to withdraw their pension benefits before retirement or pay lump-sum benefits, rather than a regular retirement income. Allowing people to take out their savings only on retirement via regular payments, known as annuities, would reduce the risk of peopleÆs savings running out in retirement.
Third, countries should link pension payments to reflect changes in the cost of living. Of the countries covered in the report, only China and the Philippines currently do so.
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