Written by Sri Wening Handayani, Principal Social Development Specialist
Providing a decent, secure and dignified way of life for the elderly is set to become one of the most pressing concerns facing policymakers in Asia in coming years. Right now the region has a seemingly endless supply of young working age people. But within a quarter century many countries will have equally large numbers reaching retirement age.
Worryingly, only a small percentage of the elderly in Asia are covered by formal pension schemes (varying from 10% to 25% depending on the country). The rest are left to fend for themselves, relying on meager savings and whatever help they can get from children and relatives. With lifestyle and cultural changes in modern, urbanized societies, the safety net of family support has weakened leaving the aged increasingly vulnerable.
The World Economic Forum’s Global Agenda Council on Aging Societies produced a report in 2013—Developing Future Social Protection Systems: Retirement Income—which highlights the challenges confronting retirement systems around the world. The obstacles outlined in the report seem on the surface to be insurmountable but there is no reason for despair. Small and judicious changes carried out today will reap big dividends in future.
In Asia, one option that has great promise is the social pension, a non-contributory scheme financed by taxes. It can play a key role in bridging the pension coverage gap, extending protection to those outside formal contributory schemes.
What are the rationale and benefits of this approach? First social pensions can play a key role in promoting social equity and inclusiveness. Providing assistance to those who have had minimal or no involvement in the formal labor market can have a substantial multiplier effect on reducing poverty among the elderly. It allows them to continue to consume and gives them resources to invest in small-scale economic activities.
Case studies in Asia have also shown that social pensions ensure the elderly can meet their basic daily needs—food, health care and social activities. In Thailand for example, more than two thirds of beneficiaries of these pensions have indicated that the allowance was their main source of income and most of them spent the funds on food, health care, and medicine.
Another important byproduct of this safety net is that it helps to reduce social exclusion and isolation, caused by a lack of resources that prevents the elderly from availing of public services, or taking part in social activities. Social pensions can not only help the elderly escape poverty but also allow them to be fully engaged in their communities, contributing to their longer term well-being.
For policymakers these pensions are attractive since they can be limited to a clearly defined target group, making it easier to manage future liabilities.
Questions of affordability will of course be inevitably raised. But studies have shown that they are cost effective even in developing countries in Asia. The fiscal cost of social pension schemes in countries such as Bangladesh, India, Nepal, Philippines and Viet Nam, for example, have been estimated at less than 0.5% of gross domestic product (GDP) while the share of tax revenue to GDP in the five countries varies from 9% to 24%. In short, spending on social pensions would make up a small share of government expenditure, and is fiscally affordable for developing Asia.
The onus is now on policymakers to give serious consideration to these schemes, both for the benefit of the elderly and for the wellbeing of their own economies.