Reforming Public Pension Programs in Southeast Asia: Charting Possible Paths

Public pension is both a tricky and complex policy issue that has constantly generally heated debates, but far-reaching solutions have not yet seen the light of the day. Mukul Asher and A. S. Bali, respectively Professorial Fellow and alumnus of the School, point out two common and overarching issues that confront the public pensions systems in the six countries of Southeast Asia — fairness and adequacy.

Their article “Public Financial Management in Singapore: Key Characteristics and Prospects” (published in The Singapore Economic Review, 63, no. 3) highlights the greying of the population as a rising phenomenon in the entire South East Asian region, including middle and lower middle-income countries such as Indonesia and Vietnam. Like China, they are faced with the dim prospect of getting rich before getting old.

If the retirement age in most countries remains unaltered, it would literally translate into a higher financing burden to both the state and individuals. Most countries will need a highly robust pension system to cushion the financing impact. However, the limitations ingrained in the pension design in many of these ASEAN countries seem to suggest that they are mostly unprepared.

The issue of equity and fairness of these six public pension systems in is threefold. First, substantial disparities of benefit remain in different pension schemes. In most cases, civil service and military pensions are far more generous. The current dichotomy between defined contributions for private sector employees and defined benefits for civil service employees suggests that there is fundamental equity issue in the pension system.

The limitations ingrained in the pension design in many of these ASEAN countries such as Singapore, Malaysia, Indonesia, Thailand, the Philippines and Vietnam seem to suggest that they are mostly unprepared.

Second, the translation of tax exemptions from pension fund contributions into implicit subsidies, especially in countries like Singapore and Malaysia with longer history of national provident funds, often end up benefiting more of the upper echelons of the societies with better income protection, as opposed to the lower income group.

Third, the uneven coverage of pension among different segments of the populations also raised serious equity issues. In particular, public pension has not been extended to informal sector workers that constitute the majority in the workforce in economies such as Indonesia and Thailand and foreign workers in high-income and upper-middle income countries such as Singapore, Malaysia and Thailand. Besides, female employees which typically has a much shorter life cycle of labour as compared to male, also face serious threat in their income protection and old age financial security.

The second issue concerns whether pensions meet old age demands. This is crucial when there is a higher tendency for exogenous health shocks to occur and rising care needs during old age. Furthermore, in the light of longevity trends observed across South East Asia and constant inflation, policy-makers will have to arrest the issue of pension fund adequacy to mitigate longevity and inflation risks, before it turns into a hot button issue that would create citizen resentment. In addition, the investment policies and performance of several countries were also brought up as an important macroeconomic issue that could affect the adequacy of old age pension.

(The) uneven coverage of pension among different segments of the populations also raised serious equity issues. In particular, public pension has not been extended to informal sector workers that constitute the majority in the workforce in economies such as Indonesia and Thailand and foreign workers in high-income and upper-middle income countries such as Singapore, Malaysia and Thailand. Besides, female employees which typically has a much shorter life cycle of labour as compared to male, also face serious threat in their income protection and old age financial security.

Currently, the real rate of return for pension funds in many countries remain much lower than real GDP growth and wage growth, which implies lower replacement rate at retirement. The extent to which pension funds received in old age is able to smooth the consumption at old age and prevents elderly from falling into poverty, as well as to mitigate survival risk, remain highly dubious.

Possible directions for reforming the public pension

The authors proposed three reform directions. First, there needs to be an expansion of the role of pension system to give more room for social risk pooling for the oldest old by instilling the element of social transfer through social pension scheme. To date, with the exception of Singapore, all other five countries have their respective social pension scheme, albeit each varies in eligibility and means-test criteria. Nonetheless, social pension should be more intrinsically engraved as part of the old age financing-mix so as to provide adequate support for retirement. While financial sustainability can be raised as an issue, the authors argued that social transfer is feasible when the mechanisms for effective targeting are in place.

The second reform requires professionalising the national pension system. This include enhancing the capacities of professional administrators within the institutions from the simplest task of record keeping, to the mid-level task of information system management, to the highest level task that require in-depth analysis of some of the most sophisticated technical know-how. Enhancing such competences could reduce administrative and compliance costs.

The third reform proposed by the authors is systemic reform. This first necessitates complementary reform in other sectors. For example, in a labour market reform, more and better jobs need to be created in the economy not at the total expense of replacing the existing jobs. It has been acknowledged that higher employment is inversely related to poverty, hence reducing old age financial risk.

A civil service pension reform will require the full cost of civil service pension to be tabulated in order to align with other forms of social assistance to the elderly. This will achieve better redistribution and higher equity. Also, a financial and capital market reform requires re-examination of the investment strategies and financial assets acquired by the national pension funds to make sure that sound investment decisions are made and some of the state enterprises asset are divested to free up the supply of such assets.

The second dimension of systemic reform encompasses developing a financing-mix to increase funding for the beneficiaries. This could take a hybrid form that combines both contributory and non-contributory schemes, and strike a balance between social risk pooling and individual investment choices. Sound investment strategies, robust annuity market, managing the risks during the pay-out phase are some of the instruments that could be incorporated into the financing-mix.

Equally integral to the development of a comprehensive pension system are personal savings, home ownership, human capital development and livelihood activities in old age. The third dimension of systemic reform is to ensure there is effective coverage of pension income to guarantee minimum consumption in the face of catastrophic illnesses or other major health care needs in old age. The health benefits and pension funds should complement each other in the sense that while pension fund is adequate for a minimum living, out-of-pocket health spending should be low and affordable to the elderly at the same time.

Making a case for a paradigm change

Most countries have the necessary institutional and administrative capacities to introduce gradual reform to their pension systems. However, what is most difficult now is the absence of strong political will. There are more uphill battles toward serious reform, as seen in the downplaying careful calibration of the pension system in favour of more populist strategies such as ineffective handouts and tax relief for the rich.

In certain countries, fiscal space may be somewhat limited by the lack of strong and consistent economic growth, hence undermining the long term economic sustainability of the public pension systems. Other times, it could be a priority issue – there are just too many other developmental challenges that await political attention and economic intervention.

The three key reform directions proposed from assessing the performance of six public pension systems in South East Asia offer wider policy implications to other jurisdictions beyond ASEAN, which also offers sound policy advice to policy makers. The journey toward reform is bound to be perilous and never an easy task.

Public pension system in most countries is often entrenched in its old design, so much so that a paradigmatic shift in its philosophies could be encountered with road blocks. While more benefits are always welcomed, cutting down privileges that have been enjoyed by some segments of the population would be an unpopular move that most politicians will avoid. Very often, the inefficient and inequitable schemes can only be slowly phased out over time. However, to achieve equity and fairness, public pension reform ought to be integrated as part of the concerted efforts alongside poverty and income inequality reduction.

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Tan Si Ying is an MPP Student at the LKY School. Her email is siyingtan@gmail.com

Read in Issue 22 of Global-is-Asian Magazine.

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