The population of the Asia and Pacific region is aging. Currently, nearly 10% of the population in the region is above the age of 60 and by 2050, people aged 60 years and over will account for nearly one-quarter of its total population. Population aging is underpinned by a declining fertility rate and rising life expectancy.

Rising life expectancy indicates that large numbers of people in the region are living beyond the age normally associated with retiring from the labor force. Unfortunately, pension systems in the region are limited in scope and appear incapable, without further refinement, of addressing the coverage gaps that are emerging now and in the future. The 2019 ADB Social Protection Indicator shows that only 34.2% of the population in Asia and 8.7% in the Pacific is covered by contributory pension schemes. The breadth of pension coverage is low in the region and so is the size of benefits.

Most pension schemes in the region are confined to workers in the formal sector, usually taken to mean individuals working in the public sector, including civil servants, armed forces, and workers in private enterprises above a certain size, usually in terms of a threshold number of employees. Presently a large percentage of the population -- little less than 50% in Asia and close to 70% in the Pacific—are neither covered by contributory pension nor social assistance or tax-funded programs such as cash transfers to the poor. This missing middle usually works in the informal sector, defined as those engaged in economic activity that functions outside of official institutional frameworks. This sector is a vulnerable group. Addressing the concerns of old-age financial security among workers in the informal sector is important because of its large size, and because it employs many poor individuals.

Old-age financial security is of particular concern for women as they generally outlive their male counterparts. This concern is heightened by the fact that women tend to have lower labor force participation rates than men, have less access to property, and have weaker ownership rights than their male counterparts. Women also tend to rely more on informal employment. Even when employed in or retired from the formal sector, women face disadvantages relative to men in ensuring old-age income security. They tend to have lower earning capacity than men and often exit the labor force to bring up children.

Three main challenges are associated with expanding coverage of pension schemes to informal workers. The first has to do with tracking their earnings which range from extremely low (manual laborers and agricultural workers) to extremely high (doctors, lawyers, technical workers, independent consultants). This is underlined by the lack of faith many informal sector workers have in government institutions. The second has to do with significant number of migrants and workers in low paying jobs that cannot afford to pay contribution. Finally, there are considerations relating specifically to employers who choose not to join the ranks of the formal sector even if they meet its appropriate legal definition, or that opt for activities dominated by informal employment.

  Informal workers don’t need to be left out of national pension systems.

What are the strategies to overcome these barriers?

The obvious strategy is to include the informal sector workers in the existing national pension schemes with no redistributive intent, whether voluntary or mandatory. One example of a contribution-based plan can be found in India’s National Pension Scheme, for contributions that exceed a pre-specified minimum.

Another voluntary mechanism that is attracting attention are the “micro pension” products that are specifically tailored to individuals with low income and infrequent earnings. Given their low income, it is unlikely that such individuals can be attracted to contributory schemes with tax benefits (deductions) associated with them. Rather, the emphasis will have to be on products that are easy to understand and convenient, such as those accepting low and infrequent contributions, that reach remote areas, and involve low fees. The main challenges to this scheme are ensuring the safety of funds, nurturing financial literacy among potential contributors, and not creating unrealistic expectations that micro-pensions will be an adequate source of income.

A third approach is a flat non-contributory pension that is growing rapidly in countries such as Bangladesh, Nepal, Philippines, and Thailand. The flat rate pension should be suitably low, for example at a level intended to achieve a minimal survival benefit among the elderly. Alternatively, benefits might be restricted to ages much higher than the official retirement age, as in Myanmar and Nepal.

Finally, inducing family support could be an approach for old-age income security and beyond. Adopting a holistic framework to arrive at an “optimal” pension system requires assessing the appropriate role of family-based support systems for the elderly, given in many countries it continues to be a major source of support. The appropriate strategy may be to crowd in informal support systems in the form of incentives such as imposing outright penalties for neglecting the welfare of elderly relatives (India) or offering housing benefits (Singapore). Additionally, for women, the strategy could include an increase retirement age, providing tax benefits for a portion of the time spent in raising children, or training for re-entry into the labor force to shore up retirement contributions.