Our way of thinking about the pension system is equally false as a map would be, indicating Brussels to be due east from Warsaw. A traveler, who would use such a map, would be the further away from his destination the more effort he would make to reach it. Is this the way to go for the citizens of South-East Asia?
When a state pension system was first implemented by German chancellor Bismarck in 1889, the retirement age was set at 70, whereas people usually lived to 50. Such state handouts would be paid out for short periods of time and would not be a burden for the budget, since not many people were entitled to receive a pension and those who were did not think about it as their right. Such an outrageous way of thinking for Europeans is still alive and well in many countries of South-East Asia, where only a small group of state employees and soldiers are entitled to receive pensions.
Some say this may change. Plummeting fertility rates in countries with already-developed pension schemes such as South Korea and Japan are causing their budgets to fall into spiraling debt, much the same way as in Europe and Poland. Even more relevant is the fact that also poorer countries of the region: China, Indonesia, Thailand and Vietnam are experiencing demographic transitions. In 30 years one out of three Chinese will be 60. The working-age population of China will shrink so drastically, that this country, 30 years after Poland, will find itself in a catastrophic demographic situation by 2050. The whole world will change completely until then. Today one person in ten is over 60, but by 2050 this number will double, while elderly people will significantly outnumber children.
The report Asian Development Outlook, published in 2011 by the AsianDevelopementBank implies that demographic change will bring to a halt the South-East Asian economic boom. In consequence, these countries might turn to a bismarckian pension scheme. Many analysts fear that China will grow grey before it grows rich and they may have a point. The fundamental difference with Europe is that South-East Asian politicians are already noticing, that introducing such a system as in ie. Poland would lead to an economic catastrophe. Why? The best description of what our system is is the story of a certain clever Italian immigrant, Charles Ponzi.
Ponzi arrived in Boston in 1903 with only 2 dollars and 20 cents in his pocket. After a
string of frauds and consequent jail time he came up with a perfect idea – he offered investments in post stamps, purchased in Italy, which would then be allegedly exchanged for American stamps. He offered a 50% return on the invested capital in 45 days. He paid off the earlier investors with the money of the next investors, thus creating the model of a financial pyramid. When doubters demanded their money back, Ponzi returned every cent without even blinking, strengthening his reputation in the process. And so it went on. Nevertheless, he underlying idea was eventually discovered and both Ponzi and his investors lost everything.
This story has many fans, among them some economists. There are not many issues on which Nobel-prize winners Paul Krugman, Milton Friedman and Paul Samuelson would agree on. But when it comes to the bismarckian pension scheme, they all agree that it is nothing but a perfect example of a Ponzi scheme. Unfortunately, such financial pyramids tend to last forever. Whereas in the 19th century only people above 70 received pensions, the creation of the Welfare State meant both a greater interference of the state in pensions but also lowering the retirement age. Is this the kind of policy suitable for South-East Asia?
Polish analysts, who see the cost ineffectiveness of the Polish social security (ZUS) are more than sceptical. Meanwhile Western European analysts who are used to the unfailing help of the state have no doubts. A great number of Asian retirement-income systems are poorly prepared for the dynamic population ageing that will occur over the course of the next two decades. While the demographic transition took a century in Europe and North America, in Asia it will last only a single generation. Furthermore, as
it stands already Asia’s pension systems are not providing adequate retirement incomes.
That being said, pension systems in the Asia-Pacific region vary greatly. Nine countries have public schemes that pay earnings-related pensions. These are called „defined-benefit‟ (DB) schemes because the value of the pension is based on individual earnings. Another common kind of system is again publicly managed, but benefits are paid relative to the amount contributed and the investment returns earned. Such systems are known as „defined-contribution‟ (DC) schemes. A further three countries also have defined-contribution pensions, but managed by the private sector.
GDP = Gross Domestic Product
Sources: Barientos, ADBI Working Paper Series, no.351; Pension Watch at http://www.pension-watch.net/country-fact-file/; Barrientos, Niño-Zarazúa, and Maitrot Social Assistance in Developing Countries Report, in: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1672090, 2010; Dutta, Howes, and Murgai, Small but effective: India’s targeted unconditional cash transfers, Economic and Political Weekly 65, 2010; Moon, The role of social pensions in the Republic of Korea. In Closing the Coverage Gap, in: The Role of Social Pensions and Other Retirement Income Transfers, 2009; Takayama, Pension coverage in Japan. In Closing the Coverage Gap, in: The Role of Social Pensions and Other Retirement Income Transfers, 2009; Weber, Social assistance in Asia and the
Pacific: An overview, in: Social Assistance and Conditional Cash Transfers, 2010.
Sources: ILO (2010) World Social Security Survey 2010/11; Barientos, ADBI
Working Paper Series, no.351.
Not many people realise how valuable demographic capital is in Asia. Hard-working employees are the force lifting these countries out of poverty. What is more, Asian countries tend to prioritse economic growth over universal and developed welfare systems. This combination means that Asian citizens prefer to sacrifice their own living standards in order for the next generations to experience the wealth enjoyed by North America and Europe. In South-East Asia everyone works or doesn’t work as long as he would like, meanwhile the state doesn’t get into the way and extract ludicrous pension contributions. In return the population doesn’t expect much from the state, let alone high pensions. This model is economically efficient, but with the demographic transition in Asia will come the temptation to introduce a rich-world pension scheme. To remain competitive, South-East Asian countries should avoid
introducing the Welfare State, which gives more than it can take. Staying efficient will be a challenge.
Without a doubt we are heading towards a world with more flexible, specialised
and meaningful work. More people will have free time and will be able to enjoy life and develop in ways other than in their professional career. Asian countries have known for quite some time now, that the bismarckian system just won’t work in their case, because their populations won’t grow forever. For this reason they will most probably consider the alternative: enjoying work and self-saving by the citizens themselves, which will allow them to avoid using the false map, which leads to nothing but inefficient welfare systems. In this way they will avoid the fate of European countries (such as Poland), which don’t experience a large inflow of immigrants and their demographic dynamics don’t guarantee stability in the long run.