Paying for populations that are living longer than ever before has become a headache to countries across the world. The more retirees there are, the more governments need to pay out in pensions.
It’s an especially acute problem in north Asia, which contains some of the most elderly populaces in the world.
Now the nation with the most aging population—Japan—is seeking a partial solution: it intends to raise the country’s voluntary retirement age from 65 to 70.
On January 18 the Tokyo-based government proposed draft revisions to policy guidelines to respond to Japan’s increasingly decrepit populace. These guidelines are set to be taken up in a Cabinet meeting before the end of January.
Currently Japanese people begin receiving public pensions when they reach 65, but they can opt to start getting payments at a lower rate from 60. Those who wait until 65 get about 40% more than those who start to draw down once they hit their 60th birthdays.
The new changes would mean that people could opt to further defer receiving pensions until after they are 70, in return for getting even better payment rates.
The idea is pretty simple: encouraging people to delay when they start drawing a public pension should save the government money over the longer term, because it has to offer payments over a shorter overall period. It also encourages people to remain in the workforce—and therefore pay taxes—for longer as well.
The plan is likely to be heavily scrutinised by other nations, in Asia and beyond. Korea's people are also aging fast, with its number of elderly overtaking its young for the first time in 2016. China, Taiwan and Hong Kong have similarly greying populaces.
But the level of preparation for this demographic shift varies enormously between these nations. Japan’s government is urgently saving money for its citizens, while encouraging defined benefit and defined contribution funds as well. The country had an estimated $2.8 trillion in pension savings at the end of 2016, or 59.4% of GDP, according to a report by Willis Towers Watson.
Korea is not as well prepared, but it has begun actively saving for pensions; it had $575 billion on hand, or 40.9% of GDP. Most of its public funds are looking to make investment returns of 4% to 5% a year to keep up with mounting drawdown rates that will continue to mount.
Chinese conundrum
It’s a very different story in China. The country had only saved $141 billion as of end 2016 for pensions, equivalent to 1.2% of GDP.
That is badly inadequate. Yin Weimin, China’s minister of human resources and social security (MoHRSS), warned the Communist Party’s 19th national congress in September that the Public Pension Fund only had sufficient funds to cover 16 months of payouts. And it has emerged that 13 local governments, representing almost a third of the country’s 1.4 billion people, are unable to cover their pension liabilities out of worker contributions, so will have to lean on fiscal budgets to make up the shortfall.
In fairness, Beijing recognises the underfunding of its pension system, and has begun taking steps to address it. And Stuart Leckie, a consultant with Stirling Finance and a veteran adviser on pension systems, said Beijing is likely to pay great interest in the latest move by Japan’s government.
“China has got insufficient financing plans and is in the very untenable situation of have a retirement age of 65 years for males, 55 years for white collar females, and 50 years for blue collar females,” he told AsianInvestor. “It needs to look elsewhere for ideas.”
It is a fast-growing problem. In 1990 the average life expectancy for men and women in China 66.9 and 69.7, respectively. But by 2015 these figures had risen to 74.6 years and 77.6, according to the World Health Organisation. The longer China’s people live, they more they will cost in pension payments. And this is being compouded by its fast-aging populace; the median age of is population was 37 in 2015; by 2045 it will be 49.
Leckie, who has advised China about its state pension system since 1997, believes Beijing needs to more aggressively tackle its burgeoning retirement burden, arguing it could be a “100-year” problem.
Raising the retirement age is an obvious solution. It would save China billions of renminbi in savings were China merely to raise its retirement age in line with many other nations and only pay pensions from 65 years-old onwards.
Yet ultimately, even that step would likely to be just a beginning. Leckie believes that China, Japan and others will have to raise the retirement age beyond 70 to avoid running out of money.
“They should extend the retirement age by half a year every two years, or [some ratio of staggered extension] like that,” he argued.
Doing so will not gain governments many popularity contests, but it would help prevent them going bankrupt, and would reflect that fact that people are living longer than ever.
As Leckie said, “I’ve already told my daughter to not expect to be able to retire until she’s 75.”
That’s an increasingly likely outcome that many of today’s working Asians as well.
