Information about Asia and the Pacific Asia y el Pacífico
Equitable and Sustainable Pensions
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Chapter 6. Attitudes toward the Role of the Family, the Individual, and the State in Providing Retirement Income: Survey Evidence from Emerging East Asia

Author(s):
Benedict Clements, Frank Eich, and Sanjeev Gupta
Published Date:
March 2014
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Information about Asia and the Pacific Asia y el Pacífico
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Author(s)
Richard Jackson

Introduction

As the world’s societies age, policymakers are trying to peer into the future and anticipate the retirement needs and preferences of tomorrow’s growing elderly populations. Nowhere is this more difficult to do than in emerging East Asia, where rapid development has opened up a widening gap between the experiences and expectations of older and younger generations, formal retirement institutions are still maturing, and massive age waves loom over the horizon.

To better understand the changing contours of retirement in emerging East Asia, the Center for Strategic and International Studies (CSIS) commissioned a survey in China, Hong Kong SAR, the Republic of Korea, Malaysia, Singapore, and Taiwan Province of China.1 CSIS also commissioned the same survey in the United Kingdom to provide a point of comparison with an advanced Western economy. The survey, which was executed in the summer and fall of 2011, was based on nationally representative samples in all countries except China, where it was limited to urban areas. The respondents consisted of current and retired main earners, who were presumed to be the household members most likely to be responsible for retirement planning. Respondents were asked a series of normative questions designed to identify key social and cultural assumptions likely to affect the future direction of retirement behavior and policy, as well as detailed questions about their own personal retirement experiences and expectations. 2

The overall picture that emerges is one of societies—and retirement systems—in the midst of a breathtaking transformation. Although the survey reveals that the extended family continues to play a far more important role in retirement security in East Asia than it does in the West, it also suggests that the traditional “Confucian ethic” expectation that families should support their own elderly members is rapidly eroding. Only a small minority of respondents in each country believe that grown children should have primary responsibility for providing income to retired people. Moreover, looking ahead to their own retirement, current workers do not expect to receive the same level of support from the extended family that current retirees do. In rapidly urbanizing, industrializing, and modernizing societies, one might expect to find a strong desire for the state to step in and substitute for the family, as happened in the West beginning in the early twentieth century. But this is not the case in most of the East Asian countries surveyed. Except in China and Malaysia, respondents favor individual, savings-based responsibility for retirement income rather than government responsibility. The preference for individual responsibility for retirement income is mirrored by strong preferences, which rise with each new cohort, for individual control over how retirement savings are invested and for individual choice in deciding when to retire—or whether to retire at all.

Just as with any survey, the findings of this one should be interpreted with caution. CSIS took care to ensure that the survey samples were broadly representative and properly weighted by age, gender, and educational attainment. Still, all surveys are subject to potential pitfalls. Both the wording of the questions and the order in which they are asked can affect the responses, sometimes significantly. The answers to seemingly straightforward questions can also be skewed by cultural biases or current events of which the survey author may be unaware—a particular concern in surveys like this one that are conducted across many countries. Interpreting the answers to normative questions can involve additional challenges because respondents may sometimes feel obliged to express socially approved views. These caveats notwithstanding, surveys have enormous potential to inform policymaking because they allow us to answer, or at least attempt to answer, crucial questions about which the macro-level data are silent. How are retirees in East Asia now coping with the cultural and social crosscurrents of rapid modernization? How are workers now planning for their own future retirement? And what type of retirement system would the citizens of different countries actually prefer, if given the choice?

The next two sections of this chapter look more closely at evolving attitudes toward the role of the family, the individual, and the state in retirement security. The subsequent section turns to current workers’ expectations for their own future retirement and examines the extent to which these expectations reflect ideal preferences. The final section discusses the strategic implications of the survey’s findings for policymakers.

Attitudes Toward Family Responsibility

It is difficult to overstate the current importance of the extended family’s role in retirement security in East Asia. Between 35 and 65 percent of the elderly in the six countries surveyed report living in the same household with one or more of their grown children, with Korea at the low end of the spectrum and Singapore at the high end. 3 Among major Western countries, there are only six in which the share exceeds 15 percent and only three—Italy, Poland, and Spain—in which it exceeds 25 percent (Jackson, Howe, and Nakashima, 2010). Also in striking contrast to the West, net financial support within families flows from the young to the old. In the United Kingdom, 16 retired elders report giving more financial support to their grown children than they receive from them for every retired elder who reports receiving more than he or she gives. In China, Korea, and Taiwan Province of China, the number of retired elders who, on net, are helped financially by their grown children exceeds the number who, on net, help their grown children by nearly two to one. In Singapore, the ratio is five to one, in Hong Kong SAR ten to one, and in Malaysia more than fifteen to one.

Yet at the same time, the survey reveals considerable tension between the role that the family now plays and the role that people would like it to play. When asked who, ideally, should have primary responsibility for providing income to retired people—government, former employers, retirees themselves through their own savings, or the grown children of retirees or other family members—only small minorities of respondents answered “the grown children of retirees or other family members.” Even in Singapore, which exhibits the broadest support for the traditional ethic of filial piety, the share was just 22 percent. In Taiwan Province of China the share was 7 percent and in Korea it was 5 percent. The lowest share of all was in China, where only 4 percent of respondents believe that primary responsibility for providing retirement income should fall to the family—not much more than the 1 percent who believe this in the United Kingdom. In most countries, the preference for family responsibility is higher among the elderly, among women, and among less-educated respondents. But in no country does it constitute even close to a majority view among any major segment of the population.

The extended family can, of course, provide other types of support to the elderly besides income support, the most important being personal care for the frail elderly. Not surprisingly, significantly more respondents in all of the countries surveyed believe that grown children or other family members should continue to play the leading role in providing for this dimension of retirement security than in providing for income support. Yet even here, the share is under one-third in every country except Singapore.

To some extent, the weak support for family responsibility for retirement security may simply reflect the demographic realities of declining family size. Virtually all of today’s elderly in East Asia have at least one grown child to whom they can potentially turn for support, and the great majority have two or more children. The family prospects for today’s young adults are dramatically different. In all but one of the countries surveyed, a large share of 20–39-year-olds report that they neither have nor expect to have children. The exception is China, which may limit family size through its one-child policy, but where virtually everybody still expects to have a family (see Figure 6.1).

Figure 6.1Share of Respondents Ages 20–39 Who Neither Have nor Expect to Have Children

(Percent)

If family size were the main determinant of attitudes toward family responsibility, however, one would expect that respondents who have or expect to have children would be more likely to support it than those who do not. But this is not the case. It thus seems that the explanation must lie in broader economic, social, and cultural developments—in particular, in East Asia’s rapid pace of development and the diffusion of more individualistic “Western values” that has accompanied it.

To be sure, many people in East Asia still profess an unconditional belief in the traditional ethic of filial piety. When asked which view about children’s responsibility toward their parents comes closest to theirs, at least one-third of respondents in every country surveyed agreed that children, even when grown, “should always honor and respect their parents and support them in any way that they can.” In Malaysia and Singapore, well over one-half of respondents agreed that they should. The more important finding, however, is that many respondents begged to differ. At least 30 percent of respondents in every country except Singapore instead said that “there is too much emphasis on honoring and respecting parents” and that “both parents and children would be happier if they were more independent and self-sufficient.” In Korea and Taiwan Province of China, this was the majority view (Figure 6.2).

Figure 6.2“Which View about Grown Children’s Responsibility toward Their Parents Comes Closest to Yours?”

(Percent)

Within this overall picture, the survey reveals some interesting differences in attitudes by age. One might expect that young adults, being the most highly educated and Westernized members of East Asian societies, would chafe most at the responsibilities of filial piety—and that support for family responsibility for retirement security would decline linearly with age. This is indeed the pattern in Singapore and Korea. But in China, Hong Kong SAR, Malaysia, and Taiwan Province of China, young adults are actually more likely than midlife adults to believe that grown children or other family members should have primary responsibility for providing income and personal care to retired people—and in some cases, they are as likely or more likely to believe this than the elderly themselves.

This surprising finding may be attributable, in part, to simple life-cycle dynamics. Midlife adults, who are sometimes referred to as the “sandwich generation,” often face the double burden of supporting and caring for their aged parents while still raising and educating their children. Most young adults, however, have yet to experience the full burden of filial piety. But the higher level of support for family responsibility among young adults may also be a leading indicator of a generational shift in values that they will carry with them as they traverse the life cycle. This is a phenomenon familiar to sociologists who have studied the development process around the world. The initial shock of modernization frequently overwhelms tradition—but afterward, tradition sometimes experiences a revival among younger generations (Wallace, 1956).

Unless this shift gathers momentum, however, it is doubtful that it will do much to shore up family-centered retirement security. The share of young adults ages 20–39 who favor family responsibility for retirement income still represents a small minority of all young adults—less than one in six in every country surveyed. And even if the shift does gather momentum, its full effect will not be felt until today’s young adults mature. For at least the next couple of decades, future retirees will have to rely much more heavily on alternative sources of income support than do current retirees.

Attitudes Toward Individual and State Responsibility

If not the family, then who, ideally, should be mostly responsible for providing income to retired people—government, former employers, or retirees themselves through their own savings? From a Western perspective, one might expect the most common answer to be government—and indeed, this was the case among respondents in the United Kingdom, where the share favoring government responsibility exceeded the shares favoring employer or individual responsibility by a wide margin. 4 Yet government was not the most common answer in most of the East Asian countries surveyed. In Korea, a majority of respondents said that retirees themselves should be mostly responsible for providing their own income, and in Hong Kong SAR, Singapore, and Taiwan Province of China pluralities did. In Malaysia, the survey at first seems to suggest that the public favors government responsibility over individual responsibility. However, excluding government employees, who are both overrepresented in the sample and more likely to favor government responsibility, the balance shifts slightly in favor of individual responsibility. Only China leans decisively the other way, toward government responsibility. Meanwhile former employers, the third possible substitute for family support, barely register in most countries. Except in China and Malaysia, fewer than one in ten respondents chose this option (Table 6.1).

Table 6.1“Who, Ideally, Should Be Mostly Responsible for Providing Income to Retired People?”(Percent of respondents choosing different options, by age group)
Retirees Themselves,Grown Children
through Their OwnFormeror Other Family
CountryAge GroupSavingsGovernmentEmployersMembersOther1
China20-3910542367
40-5910651725
60 and older5711725
All9631946
Hong Kong SAR20-3942362163
40-594137877
60 and older36403174
All40375125
Malaysia20-39273521161
40-5937409113
60 and older22496221
All313914142
Singapore20-3935424164
40-5940313224
60 and older43262281
All40323223
Korea20-394440708
40-596027535
60 and older50312143
All5331556
Taiwan Province20-3942401151
of China40-5948341144
60 and older42353163
All4536973
Source: Jackson, Howe, and Peter (2012).

Includes “Don’t know/Not sure.”

Source: Jackson, Howe, and Peter (2012).

Includes “Don’t know/Not sure.”

It is tempting to suppose that the preferences of respondents in different countries may simply reflect the types of retirement systems to which they are accustomed. 5 In Singapore, which has a “provident fund” based on personal savings and no tradition of government-funded retirement support, respondents lean toward individual responsibility. So do respondents in Hong Kong SAR and Taiwan Province of China, which also have national pension systems based in whole or in large part on personal savings. China, in contrast, has a predominantly pay-as-you-go (PAYG) national pension system, a long tradition of employer retirement support dating back to the days of the “iron rice bowl,” little tradition of funded pension savings, and the highest levels of support for government and employer responsibility for retirement income of any country surveyed. This hypothesis, however, cannot explain the results for Malaysia and Korea. Like Singapore, Malaysia has a provident fund based on personal savings—but it also has significantly weaker support for individual responsibility. Like China, Korea has a predominantly PAYG national pension system and little tradition of funded pension savings—but it also has the highest level of support for individual responsibility of any country surveyed.

Perhaps, then, a deeper dynamic is also at work—one that reflects differences in each country’s stage of institutional and market development. Broad and deep capital markets, well-defined property rights, and effective government regulatory oversight that ensures market transparency and accountability are all essential prerequisites for a successful savings-based retirement system. To the extent that the public has confidence that these conditions are present, individual responsibility for retirement income may become a more attractive option. To the extent that the public perceives they are absent, government responsibility may become a more attractive option. In other words, the more effective the overall institutional and market environment is at fostering and safeguarding individual savings, the less demand there will be for government retirement benefits. Conversely, when markets are underdeveloped and regulatory oversight is weak, the demand for government retirement benefits is likely to grow.

Looking beyond the national averages to differences in attitudes by age, it is possible to discern some potentially important trends. In China, for instance, working-age adults are significantly more likely to favor individual responsibility than the elderly and significantly less likely to favor government responsibility, whereas in Singapore the age tilt is precisely the opposite. In the former, the level of comfort with markets is growing, while in the latter, the level of comfort with government is growing.

Along with age, income can naturally affect attitudes toward retirement provision. In most countries, the level of support for individual responsibility for retirement provision rises with household income. In Malaysia and Taiwan Province of China, respondents with incomes of more than five times the median household income are roughly 50 percent more likely to favor it than respondents with incomes of less than half the median. In Korea and Singapore, they are nearly twice as likely, and in Hong Kong SAR they are nearly three times as likely. The shares of upper-income respondents favoring government responsibility are correspondingly low—less than one-quarter everywhere except in China, where even a majority of the affluent support it.

Although support for individual responsibility rises sharply with income in most countries, this does not mean that this support is limited to the affluent. In fact, in all of the countries with a preference for individual responsibility, the survey reveals surprisingly broad support, even at low income levels. At all income levels in Singapore and Taiwan Province of China, even the very lowest, the share of respondents saying that retirees themselves should have primary responsibility for providing their own retirement income is higher than the share saying that government should. In Hong Kong SAR and Korea, the share is higher for respondents at every income level above the median.

Support for individual responsibility varies among different segments of the population in other ways as well. In every country, self-employed respondents are more likely than average to favor it than employed respondents. This may be because a disproportionate share work in the informal sector, are less likely to participate in national pension systems, and must, in any case, rely on their own retirement savings. More “market-oriented” respondents, who are defined here as those who receive (if already retired) or expect to receive (if still working) at least some of their income from stocks or bonds, are also more likely than average to support individual responsibility. In Malaysia, the country’s more market-oriented Chinese minority is much more likely to support individual responsibility than the Malay majority—in fact, it is nearly twice as likely. In China, rural migrants are twice as likely to support it as respondents with an urban hukou—that is, those who are officially registered as urban residents. Like self-employed workers, rural migrants disproportionately work in the informal sector and are much less likely than urban residents to participate in the national pension system.

One difference that was expected to be found but was not is a clear gender tilt. In Western countries, women are generally more risk averse than men, especially in matters of financial planning—which suggests that they should be more likely to support government responsibility for retirement income than individual responsibility (Croson and Gneezy, 2009; Twigg, 2011). This gender tilt is evident in the United Kingdom, where 39 percent of male respondents believe that retirees themselves should be mostly responsible for providing their own income, compared with just 28 percent of female respondents. But apparently this pattern does not always hold in East Asia. In China and Korea, men are indeed more likely than women to support individual responsibility for retirement income. But in Hong Kong SAR and Singapore there is little difference—and in Malaysia and Taiwan Province of China, women are actually much more likely to support it than men.

Interestingly, support for individual responsibility for providing retirement income does not extend to personal care. When respondents were asked who, ideally, should be mostly responsible for providing personal care to retired people when they are disabled or need help with everyday living, “retirees themselves, by paying for caregivers” came in a distant second in Korea and Taiwan Province of China and third everywhere else. The most common answer was “government, by paying for caregivers” in every country except Malaysia and Singapore, where it was edged out by “grown children of retirees or other family members” (Figure 6.3). Korea, which has the lowest level of support for government responsibility for retirement income, has the highest level for personal care. Malaysia, which has the second highest level of support for government responsibility for retirement income, has the lowest level for personal care.

Figure 6.3“Who, Ideally, Should Be Mostly Responsible for Providing Personal Care to Retired People When They Need Help with Everyday Living or Are Sick or Disabled?”

(Percent)

How can this apparent paradox be accounted for? At least two explanations are possible. The first is that governments in most of the countries surveyed already pay for at least some long-term care, and several have recently enacted or are debating major benefit expansions. This naturally creates an expectation of government support. It is perhaps no coincidence that the share of respondents who favor government responsibility for personal care is highest where government now does the most to finance it (Korea) and lowest where it now does the least (Malaysia). The second explanation is that the economics of financing personal care and retirement income are fundamentally different. The need for personal care is inherently unpredictable, and when it does occur the cost can be large and lumpy. Conversely, because most people expect to retire someday, retirement is an event for which they are more willing to plan, prepare, and assume responsibility.

The Expectations of Future Retirees

Looking to the future, the survey suggests that evolving social and cultural attitudes about responsibility for retirement security will translate into a diminished role for the extended family, though the degree to which the role of the family recedes will vary greatly by country and by type of support.

The expectation that grown children will personally care for the frail elderly remains very strong among today’s working generations, even though most people no longer view this arrangement as ideal. In every country surveyed except Korea, at least two-thirds of those current workers who have or anticipate having children expect to be personally cared for by their children if they become sick or disabled when they are retired or elderly. Expected rates of multigenerational living also remain very high in China and Taiwan Province of China and actually increase in Malaysia, although they decline steeply relative to the rates for today’s elderly in Hong Kong SAR, Singapore, and Korea (Figure 6.4). The decline in Korea, where the tradition of family responsibility for retirement security appears to be under more stress than anywhere else, is especially dramatic. In Korea, only 10 percent of current workers who have or anticipate having children expect to live with them when retired or elderly, just one-fourth the rate of multigenerational living among today’s elderly—and, incredibly, less than the expected rate of multigenerational living (19 percent) among current workers in the United Kingdom.

Figure 6.4Share of Respondents Living or Expecting to Live with Grown Children When They Are Retired or Elderly

(Percent)

The dimension of retirement security in which the role of the extended family recedes most sharply and consistently is income support. In every country, the share of current workers who expect to be dependent on their grown children for income when they are retired or elderly is much lower than the actual share among today’s elderly. In only one country—Malaysia—do more than twice as many current workers expect to be net recipients of income from their grown children as expect to be net providers. In China, Korea, and Taiwan Province of China, the expected ratio of net recipients to net providers is less than one to one. In other words, the expected direction of net income transfers reverses in these countries, with more current workers anticipating that they will be giving financial support to their grown children than receiving it (Figure 6.5).

Figure 6.5Ratio of Respondents Who Are Net Recipients of Financial Support from Their Grown Children to Respondents Who Are Net Providers

Current workers’ declining expectation of receiving income from the extended family is in dramatic contrast to their growing expectation of receiving alternative sources of retirement income. In almost every country surveyed, expected rates of pension receipt, both public and private, rise cohort over cohort among future retirees—and in some countries they do so dramatically. In Korea, the share of respondents who receive or expect to receive income from the country’s national pension system increases from 47 percent among current retirees to 72 percent among future retirees. In Taiwan Province of China, it increases to 82 percent from 60 percent, and in Hong Kong SAR to 90 percent from 63 percent. The striking exception is China, where the rapid growth in the number of rural migrants and private sector employees, who are less likely to participate in the national pension system, has, perhaps uniquely among the world’s emerging markets, left today’s working-age adults less well covered by formal retirement arrangements than today’s elderly (Figure 6.6).

Figure 6.6Share of Respondents Who Receive or Expect to Receive at Least Some of Their Retirement Income from a National Pension System: Actual Share for Current Retirees versus Expected Share for Current Workers

(Percent)

Along with rising rates of pension receipt, the survey’s expectational data also point to a dramatic increase among future retirees in rates of income receipt from all classes of financial assets, including bank deposits, annuities and life insurance contracts, and stocks and bonds (Table 6.2). The cohort-over-cohort increase in the share of respondents who expect to receive retirement income from stocks and bonds is especially striking. In China, the receipt rate rises from 4 percent among current retirees to an expected 19 percent among current workers ages 40–59 and to an expected 32 percent among current workers ages 20–39. In Korea, the expected receipt rate among workers ages 20–39 rises to 20 percent, in Taiwan Province of China to 42 percent, in Malaysia to 49 percent, in Singapore to 65 percent, and in Hong Kong SAR to 66 percent. By this measure, young adults in most East Asian countries are not only far more market oriented than today’s retirees, but also far more market oriented than their peers in the United Kingdom, where barely one-third of 20–39-year-olds expect to receive income from stocks or bonds.

Table 6.2Share of Respondents Who Receive or Expect to Receive at Least Some Income from Financial Assets When They Are Retired or Elderly, by Type of Asset(Percent)
Insurance or Annuity
Bank DepositsPoliciesStocks or Bonds
Current workersCurrentCurrent workersCurrentCurrent workersCurrent
age 20–39age 40–59retireesage 20–39age 40–59retireesage 20–39age 40–59retirees
China66653860481832194
Hong Kong755842756121664130
Malaysia453014394829495833
Singapore727767867753655230
Korea615338545014202213
Taiwan765658766339423127
Province of
China
Source: Jackson, Howe, and Peter (2012).Note: Actual share for current retirees; expected share for current workers ages 20–59.
Source: Jackson, Howe, and Peter (2012).Note: Actual share for current retirees; expected share for current workers ages 20–59.

The growing market orientation of today’s working generations appears to be part of a broader mindset that stresses the value of individual initiative. This mindset is evident in the importance that younger respondents place on personal control over their retirement savings. The share of respondents who say that individuals should have some control or complete control over how their retirement savings are invested rises cohort over cohort, whereas the share who say that “government and employers know best what to do with retirement savings” falls, sinking among 20–39-year-olds to slightly less than 15 percent in China, to 10 percent in Taiwan Province of China, and to less than 5 percent everywhere else.

This mindset is also evident in more flexible attitudes toward work and retirement. Midlife and young adults in most of the countries surveyed are less likely than the elderly to say that people should “retire at a fixed age and not work again” or that they should “work as long as they are able”—and more likely to say that they should “be free to start and stop working whenever they are able and willing.” Compared with today’s retirees, current workers plan to retire at significantly later ages. Whereas the majority of current retirees in every country retired before age 60, between half and two-thirds of current workers in every country except Malaysia expect to retire after age 60 (Figure 6.7). Much larger shares of current workers also expect to receive at least some income from work during their retirement years. In fact, at least one-half do in every country except Malaysia and Taiwan Province of China (Figure 6.8). Just as in the West, today’s working generations in East Asia are beginning to question whether the traditional “three box” life cycle of education, work, and retirement fits their life plans.

Figure 6.7Share of Respondents Who Retired or Plan to Retire after Age 60

(Percent)

Source: Jackson, Howe, and Peter (2012).

Note: “Current workers” excludes workers who do not plan to retire.

Figure 6.8Share of Respondents Who Receive or Expect to Receive at Least Some of Their Retirement Income from a Job or a Business They Own

(Percent)

Source: Jackson, Howe, and Peter (2012).

Note: “Current workers” excludes workers who do not plan to retire.

Finally, interest in entrepreneurship is growing among young adults in most East Asian countries, where it sometimes seems that almost everyone wants to be his or her own boss. 6 The survey suggests that today’s rising generations will carry this entrepreneurial bent with them throughout their working lives and into their retirement years. The share of respondents who expect to receive income from a business they own when they are retired or elderly rises cohort over cohort, climbing past one-quarter among 20–39-year-olds in every country surveyed except Malaysia and reaching one-half in China and Singapore. In China, remarkably, nearly twice as many young adults expect to receive income from a business they own when they are retired or elderly as expect to receive income from their grown children. In Korea, three times as many do.

Lessons for Retirement Policy

Most experts would agree that today’s emerging markets face two crucial retirement policy challenges. The first is putting in place a robust floor of protection against poverty in old age and the second is building a contributory pension system that will both ensure adequate income replacement and be sustainable as populations age. Some experts might add a third challenge: encouraging longer work lives and maximizing the productive potential of the growing number of elderly. The CSIS survey offers some useful lessons for East Asian policymakers on all three fronts.

Poverty Protection

In Western societies, the retirement years are often referred to as the “golden years”— a time of well-deserved, and typically highly subsidized, leisure. For a large share of today’s retirees in East Asia, however, retirement is anything but golden. People who have retired in the past decade or so have done so at an awkward juncture in the development of their countries. Traditional family support systems are beginning to weaken, yet government and market substitutes are not yet fully developed. Meanwhile, the meteoric pace of economic growth has opened up a chasm between the living standard of the old and that of the more affluent rising generations. The median household income of respondents ages 60 and older was less than 80 percent of the median for all respondents in all six of the countries surveyed, less than 60 percent of the median in four of the countries surveyed, and less than 40 percent of the median in one—Korea.

Although this income gap can be expected to narrow as younger and more affluent generations arrive in old age, the survey suggests that significant minorities of tomorrow’s elderly will still be at risk of poverty. Even though rates of pension receipt are expected to rise steadily in every country expect China, the persistence of large informal sectors in much of the region means that substantial gaps in coverage remain, even among younger adults. In Hong Kong SAR, Singapore, and Taiwan Province of China, between 10 and 15 percent of respondents ages 20–39 do not expect to receive benefits from their country’s national pension system. That share rises to 24 percent in Korea, 26 percent in Malaysia, and 40 percent in China. Not surprisingly, those workers who do not expect to receive a national pension benefit are also less likely than other workers to expect to receive an employer pension benefit or income from financial assets.

Even those workers whose retirement prospects appear more secure may not be as well prepared as they seem. It is important to note that the growing role played by financial assets in the retirement plans of younger workers in East Asian countries is expectational—and in some cases, perhaps merely aspirational. Things may not work out as planned if public and private policies fail to adequately encourage and reward long-term saving. The same can be said of younger workers’ embrace of more flexible attitudes toward work and retirement. It remains to be seen whether rigid government and employer policies that enforce mandatory retirement ages and lock older workers out of regular employment will be reformed in ways that accommodate this generational shift.

Until recently, governments in East Asian countries could assume that the great majority of workers who reached old age without a pension or adequate personal savings would be supported by their grown children. But as the survey reveals, this assumption can no longer be taken for granted. To be sure, all of the countries surveyed now offer at least some kind of tax-financed, means-tested support to the indigent elderly. But the benefits are generally meager, and in some countries, notably China and Malaysia, the reach of the programs is limited. It is imperative that governments put in place adequate noncontributory old-age safety nets, or what are sometimes called “social pensions.” Policymakers should bear in mind that providing for a robust floor of old-age poverty protection is not just a matter of ensuring social adequacy. In rapidly aging societies, the failure to do so could potentially lead to social unrest and political crisis.

Income Replacement

In addition to a noncontributory old-age safety net, every emerging market also needs a broad-based contributory pension system that ensures adequate income replacement for the majority of the elderly. The preference of the public in most East Asian countries for individual savings-based responsibility for retirement income should be welcome news to policymakers as they consider how best to ensure the adequacy and sustainability of their pension systems in the face of dramatic population aging.

The higher the rate of return on contributions to a pension system, the greater are the benefits that the system can pay at any given contribution rate—or, conversely, the lower is the contribution rate that is required to pay any given level of benefits. In eras of rapid workforce and productivity growth, the rate of return to a PAYG system, which is equal to the growth rate in worker payroll, typically exceeds the rate of return to a funded system, which, in principle, is equal to the global rate of return to capital. Up to now, the economic advantage in East Asia has clearly lain with the PAYG model of retirement financing. But as workforces in East Asia grow more slowly or contract, and as wage growth converges with rates in the advanced economies, the advantage may increasingly shift to the funded model of retirement financing.

To be sure, support for individual savings-based responsibility for retirement income is far from universal in East Asia. A significant minority of the public in all of the countries surveyed believe that government should have primary responsibility for providing retirement income—and in China, a large majority believes this. But just because respondents may favor primary government responsibility does not mean that they oppose a greater role for individual retirement savings. When asked for their opinion about possible government responses to the challenge of supporting a growing elderly population, overwhelming majorities of respondents in every country, including China, said that government should “require workers to save more for their own future retirement.” In every country, moreover, the share saying this exceeded the share saying that government should “require workers to contribute more to pay for government retirement benefits.” In some countries, the margin in favor of additional mandatory savings was enormous: 45 percentage points in Korea, 51 percentage points in Singapore, and 58 percentage points in Malaysia (Figure 6.9).

Figure 6.9“As the Population Grows Older and There Are More Retired People to Support, Please Tell Me Whether You Think The Government Should or Should Not Do Each of the Following”

(Percent)

Unlike most Western countries, where the cost of financing mature PAYG national pension systems can be an obstacle to expanding or transitioning to funded alternatives, most East Asian countries are institutionally well positioned to do so. Hong Kong SAR, Malaysia, and Singapore already have savings-based national pension systems—and Taiwan Province of China, with the recent introduction of its fully funded “New Labor Pension,” is moving in this direction. Korea’s National Pension System is financed on a PAYG basis, but the system is not yet mature and the government has accumulated a large trust fund reserve that, potentially, could help finance a transition to a fully funded system. Expanding funded retirement provision may be more difficult in China, where the Basic Pension System is not only financed on a PAYG basis, but, like national pension systems in most Western countries, has also accumulated large unfunded liabilities. Yet even in China, there are obvious potential vehicles for increasing funded retirement savings—most notably, the Basic Pension System’s second-tier notional personal accounts and China’s new employer-based system of Enterprise Annuities. 7

Although reliance on funded retirement provision offers a potential economic advantage to East Asia’s rapidly aging societies, it also poses significant policy challenges. To begin with, the economic advantage may not be realized at all to the extent that government (or financial industry) policies prevent pension system contributors from earning a market rate of return on their savings. Policies of “financial repression” can take many forms, including setting below-market interest rates, restricting investment in foreign securities, and channeling contributions into government social investment projects. The need for reform is undoubtedly greatest in China, where the financial markets are still subject to pervasive government control. Yet even in a country such as Singapore, which has among the freest financial markets in the world, contributors to its government-managed Central Provident Fund earn far less than a market rate of return (Iglesias and Palacios, 2000; Park, 2011). The good news is that public intolerance for policies that impose an implicit tax on thrift is likely to grow as younger cohorts with higher levels of educational attainment and financial literacy climb the age ladder.

Then there is the challenge of managing market risk. PAYG pension systems are, of course, not without their own risks—in particular, the political risk that government will reduce promised benefits. The Korean government has already slashed replacement rates twice since its National Pension System was established in 1988, and China’s 1997 reform of its Basic Pension System greatly reduced its generosity for future generations of retirees. Still, managing market risk in a funded pension system can involve daunting policy choices. Ensuring that contributors earn a market rate of return on their savings need not and should not mean allowing them free investment choice. In any national pension system, whether it is financed on a funded or a PAYG basis, government has a compelling interest in maximizing the welfare of participants. To this end, a well-designed system might require that all contributions be invested in a globally diversified life-cycle index fund. Unfortunately, this is an instance in which public opinion in East Asia, which overwhelmingly supports individual control over the investment of retirement savings, may run counter to sound policy.

Finally, there is the challenge of preserving retirement savings. Here, the survey suggests that public opinion is more closely aligned with sound policy than might be expected. Despite the long tradition of lump-sum severance pay in most East Asian countries, the survey reveals a surprisingly high level of support for converting retirement savings into a monthly income stream. In every country except Singapore, the share of respondents saying that, if given the choice, they would prefer to receive all of their retirement benefits in monthly payments exceeds the share saying that they would prefer to receive all of it in a single lump-sum payment—and in most countries, it does so by a wide margin (Figure 6.10). People in East Asia appear to understand intuitively that lump-sum payouts are an atavistic relic of paternalistic employment systems and are inadequate in societies in which people retire so early and live so long.

Figure 6.10“If You Could Choose How Retirement Benefits Will Be Paid to You When You Retire, Please Indicate Which of the Following Ways You Would Prefer to Receive the Benefits”

(Percent)

Retirement Age

There are many reasons to abolish the early mandatory retirement ages that are enforced in the formal sectors of most countries in emerging East Asia. As life expectancy rises, early retirement is becoming increasingly expensive to finance, whether on a PAYG or a funded basis. As workforces grow more slowly and begin to contract, economies may also face growing labor shortages. At the same time, the higher educational attainment and productivity of today’s working generations renders later retirement ages feasible. In rapidly developing economies, it may make economic sense for firms to compel unskilled older workers to retire to make room for more skilled younger ones. But as more highly educated and productive younger cohorts climb the age ladder, such practices are becoming a costly anachronism.

As already noted, majorities of current workers in most of the countries surveyed anticipate working longer than today’s retirees did. In most countries, moreover, there is substantial public support for raising the retirement age. In the West, proposals to raise the retirement age typically meet with widespread opposition from unions, senior benefit lobbies, and the public at large. In a Eurobarometer survey of 15 European countries, at least 70 percent of the public opposed it in every country except Ireland (Christensen, 2006). The public in East Asia has a markedly different view. When asked whether government should raise the retirement age, more than 40 percent of respondents said yes in China and Malaysia, more than 50 percent said yes in Hong Kong SAR and Singapore, and a stunning 85 percent said yes in Korea. Only in Taiwan Province of China did a large majority of respondents give the negative response that is typical in Western countries (Figure 6.11).

Figure 6.11“As the Population Grows Older and There Are More Retired People to Support, Please Tell Me Whether You Think the Government Should or Should Not Do Each of the Following”

(Percent)

During the past few years, several East Asian countries, including Singapore, Korea, and Taiwan Province of China, have recognized the new economic realities and begun to schedule gradual increases in their retirement ages. These reforms are a step in the right direction—and one upon which policymakers should hasten to build.

Concluding Remarks

Too often, policymakers assume that the retirement needs and preferences of tomorrow’s retirees will be much the same as those of today’s. This assumption is questionable in all societies because new generations always bring with them new expectations shaped by their unique life experiences. But the assumption is especially dubious in emerging East Asia, where the generation gap between 30-year-olds and 60-year-olds now yawns wider than anywhere else in the world. During the next several decades, retirement in East Asia will be utterly transformed. The role of informal family support networks will recede and the role of formal government or market substitutes will grow. Unless policymakers understand the public’s evolving preferences, they will struggle to develop effective policy responses. Although the survey discussed in this chapter by no means provides all the answers, it may help to point the way.

References

For convenience, the term “country” is used in this chapter to refer to all of the distinct territorial and economic entities in which the survey was conducted. This includes Hong Kong SAR, which is a Special Administrative Region of the People’s Republic of China, and Taiwan Province of China. Use of the term country is not meant to imply any judgment about the sovereignty or status of any of these entities in international law or practice.

For a fuller discussion of both the survey methodology and findings, see Jackson, Howe, and Peter (2012). The “top-line” results for the survey’s normative questions, together with crosstabs by age, gender, educational attainment, and household income, are available at gapindex.csis.org.

In this chapter, the elderly are defined as adults ages 60 and older, midlife adults as those ages 40–59, and young adults as those ages 20–39. The division of respondents into retirees and current workers is based on self-identification by the respondents. Respondents were told that retirement means “no longer working or working less than when you were younger and having no plans to work full-time again.” They were then asked whether they are “currently retired.”

The shares for the United Kingdom were: “government” (49 percent), “former employers” (13 percent), and “retirees themselves through their own savings” (35 percent). Although comparable data are not available for other Western countries, the results of a Eurobarometer survey that asked about preferences in pension provision are suggestive (Christensen, 2006). On average across 15 Western European countries, 65 percent of respondents said that pensions should be provided “mainly by state or public schemes,” 27 percent said that they should be provided “mainly by occupational schemes,” and just 8 percent said that they should be provided “mainly by private arrangements.”

For an overview of East Asian pension systems, see Holzmann, MacArthur, and Sin (2000), OECD (2012), and Park (2011).

Except for Malaysia and Hong Kong SAR, the six countries surveyed generally rank high on most standard measures of entrepreneurial activity. According to the Global Entrepreneurship Monitor (Bosma and others, 2012), the share of adults ages 18 to 44 who expect to open a business within the next three years averaged 21 percent across all six countries between 2001 and 2008, compared with an average of 15 percent in the Organization for Economic Cooperation and Development countries. In China, the share was an astonishing 44 percent.

For a discussion of transition issues in South Korea and China, see Howe, Jackson, and Nakashima (2007) and Jackson, Nakashima, and Howe (2008).

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