Information about Asia and the Pacific Asia y el Pacífico
Equitable and Sustainable Pensions

Chapter 14. Emerging Asia’s Public Pension Systems: Challenges and Reform Efforts

Benedict Clements, Frank Eich, and Sanjeev Gupta
Published Date:
March 2014
  • ShareShare
Information about Asia and the Pacific Asia y el Pacífico
Show Summary Details
Donghyun Park and Gemma Estrada 


Providing economic security for the elderly may well be the single biggest social and economic challenge facing developing Asia (henceforth Asia) in the 21st century. The growing importance of old-age income support is primarily due to a seismic demographic transition that is fundamentally reshaping Asia’s age profile. A young continent reaping the demographic dividend of a large youthful workforce is giving way to a graying continent where the ratio of retirees to workers is on the rise. In contrast to advanced economies, most Asian countries do not yet have mature, well-functioning pension systems. As a result, they are ill prepared to provide economic security for the large number of retirees who loom on the horizon. This chapter reviews the public pension systems of eight countries in East and Southeast Asia—China, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam—that encompass a wide range of income and development levels. The demographic transition toward older populations is much more advanced in these two sub-regions than in South Asia.

The demographic trends of the eight countries as a whole resoundingly confirm the conventional wisdom of a rapidly aging Asia. All eight countries are experiencing secular increases in the proportion of the elderly relative to the working-age population (Figure 14.1) and total population (Figure 14.2). It is evident that the entire region will have a drastically different, much grayer demographic profile by 2050. As in the advanced economies, Asia’s demographic transition is driven by falling fertility and rising life expectancy. A constellation of economic and social factors, such as improved female education and better medical care, is inducing Asians to have fewer children and enabling them to live longer. Other demographic indicators also point unequivocally toward a graying continent (Table 14.1). The median age of all the countries except Malaysia and the Philippines will exceed the world average by 2050. Furthermore, life expectancy at age 60 is already fairly high, and by 2050 fertility rates will fall below the levels required for a stable population.

Figure 14.1Ratio of Population Ages 65 and Older to Population Ages 15–64, 1950–2050


Figure 14.2Ratio of Population Ages 65 and Older to Total Population, 1950–2050

Table 14.1Demographic Indicators of Selected Asian Countries
CountryTotal Population (million)Average Annual Rate of Change of Population (percent)Total Fertility RateMedian Age
CountryLife Expectancy at BirthLife Expectancy at Birth (2005–10)Percentage of Population Ages 60 and OlderPopulation Ages 60 and Older (million)
Source: United Nations (2011).Note: Total fertility rate is in births per woman.
Source: United Nations (2011).Note: Total fertility rate is in births per woman.

In addition to population aging, a number of other factors also point to an urgent need to strengthen old-age support in Asia. In particular, the weakening of informal, family-based, old-age support mechanisms suggests the need for a greater role for formal pension systems throughout the region. Asians have traditionally relied upon their children to take care of their material needs in their old age. The family network was, in effect, Asia’s pension system, especially in rural environments where extended families of three generations often lived together under one roof and younger family members supported older family members. However, the far-reaching social changes that accompanied the region’s economic progress have given rise to smaller nuclear families that are less conducive to intrafamily support. Such changes include rapid urbanization (Figure 14.3) and the declining relative importance of agriculture in the economy. In short, urbanization, industrialization, and sociocultural changes are creating a vacuum in Asia’s old-age support, a vacuum that must be filled by formal pension systems.

Figure 14.3Urban Population as Share of Total Population, 1950–2050


Source: United Nations (2012).

Note: Singapore, as a city-state, is excluded.

Globalization and globalization-related labor market developments provide further rationale for strengthening Asia’s public pension systems. Although Asia has reaped enormous benefits from globalization, it is not immune from the structural dislocations it wreaks. Globalization produces both winners and losers, and increases the sense of economic and social insecurity. Well-functioning social protection systems, including pension systems, can ease such insecurity and thereby promote public support for globalization. The competitive pressures unleashed by globalization are forcing firms to reduce labor costs. As a result, workers are more likely to lose their jobs and move from one job to another. In Asia, workers’ loss of job security caused by globalization is compounded by large numbers of workers in the informal sector (Figure 14.4). Those workers are usually not protected by labor regulations and lack access to pensions and other benefits (Felipe and Hasan, 2006). Asia’s growing labor mobility and prevalence of informal employment call for improving pension coverage and portability in the region.

Figure 14.4Share of Informal Sector Employment in Urban Employment


This chapter is organized as follows: The next section examines the broad anatomy of the public pension systems in the eight countries. The subsequent section seeks to identify the main shortcomings of Asia’s existing pension systems and is followed by a section that reviews the main directions for pension reform that emerge from the diagnosis in this chapter.

Overview of Asian Public Pension Systems

Identifying the direction for pension reform in Asia requires an understanding of the current shortcomings of Asian pension systems, which, in turn, requires a basic understanding of Asian pension systems themselves. One key characteristic of any pension system is the age at which retirees begin to receive benefits. The pension age ranges from 55 in Indonesia, Malaysia, and Thailand, to 65 in Korea, the Philippines, and Singapore (Table 14.2). The difference between life expectancy and pension age is the number of years that a retiree has to depend on pension benefits for old-age support. All else equal, the larger this difference, the larger the liabilities of the pension system. The life expectancy–pension age gap ranges from 6.7 years in the Philippines to 19.2 years in Malaysia and for women in Vietnam. The pension age is expected to rise throughout Asia in response to rising life expectancy.

Table 14.2Pension Age and Basic Structure of Pension Systems, 2010
CountryPension Age (Years)Difference Between Life Expectancy and Pension Age (Years)Defined Benefit or Defined ContributionElement of Income Redistribution
China60 (55)13 (18)Defined Benefit, Defined Contribution, and Notional Defined ContributionYes
Indonesia55.015.7Defined ContributionNo
Korea65.013.6Defined BenefitYes
Malaysia55.019.2Defined ContributionNo
Philippines65.06.7Defined BenefitYes
Singapore65.015.0Defined ContributionNo
Thailand55.015.6Defined BenefitNo
Vietnam60 (55)14.2 (19.2)Defined BenefitNo
Sources: Park (2011, 2012).Note: The pension age in parentheses refers to the pension age for women if different from that for men. Life expectancy refers to life expectancy at birth. The pension age applies to private sector workers in Indonesia, Malaysia, Singapore, and Thailand, and to both public and private sector workers in China, Korea, the Philippines, and Vietnam. In Singapore, the retirement age of 65 refers to 2012.
Sources: Park (2011, 2012).Note: The pension age in parentheses refers to the pension age for women if different from that for men. Life expectancy refers to life expectancy at birth. The pension age applies to private sector workers in Indonesia, Malaysia, Singapore, and Thailand, and to both public and private sector workers in China, Korea, the Philippines, and Vietnam. In Singapore, the retirement age of 65 refers to 2012.

In some countries, including Australia, Chile, and Hong Kong SAR, the pension systems have been set up by the government but are run by the private sector. Individual pension members can choose from among different private sector pension fund managers. In contrast, the pension systems of all the eight countries are managed by the government. However, the basic structure of the pension systems for formal sector workers is far from uniform. The pension systems in China, Indonesia, Malaysia, and Singapore are defined contribution or notional defined contribution (DC) whereas those in Korea, the Philippines, Thailand, and Vietnam are defined benefit (DB). DC systems are generally funded while DB systems are not. China’s pension system combines a DB pillar with another pillar consisting of DC and notional DC schemes. The pension systems of only three of the eight countries explicitly redistribute income. The Philippines has a minimum pension that pays higher benefits to poor retirees. In China, the redistributive element takes the form of a DB basic pension. In both China and Korea, pension benefits are partly linked to average earnings.

The formula for computing pension benefits varies widely across the five countries with DB systems—China, Korea, the Philippines, Thailand, and Vietnam (see Box 14.1). Differences include the earnings measure used to compute benefits, indexation of benefits to wages and prices, and qualifying conditions for pension eligibility. For an individual who enters the labor market at age 20, the DB replaces 85 percent of income in Vietnam, 80 percent in the Philippines, 50 percent in Korea, 35 percent in Thailand, and 40 percent in China for that country’s redistributive basic pension. Under the DC and notional DC pension systems of China, Indonesia, Malaysia, and Singapore, the worker receives a lump sum consisting of accumulated contributions and interest income upon retirement.

The contribution rate for employees and employers differs substantially by country (see Figure 14.5). Employee contribution rates range from 2 percent of wages in Indonesia to 20 percent in Singapore. It should be pointed out that workers also make contributions under DB systems. Total contribution rates are the highest in Singapore and Malaysia and lowest in Indonesia and Thailand.

Figure 14.5Employee, Employer, and Total Contribution Rates of Pension Systems, 2007


Source: Asian Development Bank (2008).

Note: DB = defined benefit; DC = defined contribution.

Asian countries face a strategic choice between social risk pooling and individual risk taking in pension system design. A good example of individual risk bearing is DC pension plans that make the individual responsible for his or her own investment and longevity risks. In contrast to individual risk bearing, under social risk pooling, society pools together the risks of all individual members and bears the risks on their behalf. The pension systems of Singapore and Malaysia are unique in the region for their heavy tilt toward individual risk taking and relative absence of social risk pooling. Unlike the other countries of the region, these two countries explicitly reject the social insurance principle in old-age income support. Both countries have national provident funds, which are essentially mandatory savings schemes. Singapore set up its Central Provident Fund in 1955 and Malaysia established its Employees Provident Fund (EPF) in 1951. Employers and employees are required to make contributions to the funds, which are managed by government organizations on behalf of employees, each of who has an individual account. Although the primary purpose of the two funds is to encourage saving for retirement, both the Central Provident Fund and the Employees Provident Fund allow their members to use their balances for a variety of purposes, including housing, preretirement investments, and tertiary education. Furthermore, members can use part of the balances only for health expenditures. The mandatory saving nature of the funds has contributed to high national saving rates.

Box 14.1Benefit Rules of Asian Pension Systems

China: Both the defined-contribution and notional defined-contribution pensions pay lump sums consisting of accumulated contributions and interest income upon retirement. The redistributive basic pension is a defined-benefit pension and pays 1 percent of the average of citywide average earnings and individual earnings for each year of coverage subject to a minimum of 15 years of service. The earnings basis for benefits is city wide because pension systems are organized on a municipal basis. The basic pension is indexed to a mix of wages and prices.

Indonesia: The defined-contribution pension pays a lump sum consisting of accumulated contributions and interest income upon retirement.

Korea: For an individual with 40 years of contributions, pension benefits replaced 60 percent of earnings until 2007. After pension reform, the replacement was reduced to 50 percent in 2008 and will be reduced 0.5 percentage points every year until reaching 40 percent in 2028. The earnings measure used for computing benefits is a weighted average of individual lifetime earnings, adjusted for wage growth, and economy-wide earnings during the previous three years, adjusted for price inflation. Pension benefits are indexed to price inflation.

Malaysia: The defined-contribution pension pays a lump sum consisting of accumulated contributions and interest income upon retirement.

The Philippines: The monthly basic pension, which is independent of earnings, is 300 Philippine pesos. The earnings-related monthly pension is the greater of (1) 20 percent of a worker’s average monthly earnings plus 2 percent of average monthly earnings for each year of service exceeding 10 years; or (2) 40 percent of the worker’s average monthly earnings. The earnings basis is the greater of average earnings for the five years before pension claim or average earnings for the period during which contributions were made. Benefits are periodically adjusted for price inflation and wage growth on an ad hoc basis.

Singapore: The defined-contribution pension pays a lump sum consisting of accumulated contributions and interest income upon retirement.

Thailand: Workers accrue 1 percent of their earnings each year up to a maximum of 35 years. The base wage used to compute benefits is the average wage during the last five years before retirement. For example, an individual who worked for 20 years would be entitled to 20 percent of the base wage. Indexation of benefits to wage growth and price inflation is discretionary.

Vietnam: The pension benefit is the sum of three components: (1) a monthly benefit based on 45 percent of career average earnings for employees with at least 15 years of service; (2) a monthly payment equal to 2 percent of the average of earnings in the last five years before retirement for each year of credited service beyond 15 years; and (3) a lump sum equal to 50 percent of the five-year average monthly earnings before retirement for those with more than 30 years of contributions. Pension benefits are indexed to changes in the minimum wage.

Source: Authors’ compilation.

In contrast to Singapore and Malaysia, social risk pooling plays a greater role in the pension systems of the other countries. However, the six countries diverge widely in the economic, institutional, and technological capacity needed to apply the social insurance principle. For example, the Korean pension system is a comprehensive social security system comparable to those found in welfare states. At the other end, Indonesia is just beginning to lay the foundations of a new social insurance–based social security system. The main pension systems of Korea, the Philippines, Thailand, and Vietnam are DB systems that protect individual members from investment and longevity risks. In China, the redistributive basic pension is a DB scheme. The only country with a DC system—Indonesia—is moving toward a more mixed system with greater social assistance. In addition to the predominance of DB plans, the pension systems of the six countries are largely pay-as-you-go (PAYG). Only Korea’s DB system involves a significant amount of prefunding. The benefit payments of the other DB systems depend almost exclusively on the contributions of current workers.

Another noteworthy characteristic of many Asian pension systems is that they are relatively new and very much in a state of flux (Allianz Global Investors, 2007; Heller, 2006; Park 2011, 2012). The oldest systems are those in Malaysia, the Philippines, and Singapore, but even those are constantly evolving. The relatively advanced Korean system was created only in 1988 and is still undergoing reforms. Indonesia enacted a law designed to establish a comprehensive social security system in 2004 although it has yet to be fully implemented. Likewise, Thailand and Vietnam are revamping their pension systems to extend coverage and improve benefits. The ongoing evolution of China’s pension system reflects the extensive structural transformation of its economy and society. A milestone 1997 decree provides the basic structure of the new two-pillar pension system: (1) a PAYG DB basic pension and (2) funded DC and notional DC pensions. China is in the middle of a systemic transition from a highly fragmented system to the two-pillar system.

The total size of pension assets in a country is relevant from a macroeconomic viewpoint. For example, the assets of the provident funds in Singapore and Malaysia represent a large part of national savings. Total pension assets also influence the impact that liberalizing pension asset investment has on financial markets. Countries such as Korea, Malaysia, and Singapore have set up public funds to manage the contributions of funded or partially funded pension systems. The public funds of Thailand and the Philippines manage the contributions of pension schemes for civil servants. China established a dedicated reserve fund, the National Social Security Fund, in 2000 to help cover future pension liabilities arising from demographic trends. The assets controlled by Asia’s public pension and reserve funds are sizable but vary widely by country. Total pension assets in 2006 ranged from less than US$1 billion in Indonesia to more than US$180 billion in Korea. The ratio of pension assets to GDP is the highest in Singapore, Malaysia, and Korea (Figure 14.6). The overall trend in the investment portfolios of Asia’s pension funds is toward greater diversification of asset classes and rising shares of overseas investments.

Figure 14.6Total Pension Assets as a Percentage of GDP, 2006

Source: Park (2009).

Note: China’s assets refer to those of the National Social Security Fund. The assets of the Philippines and Thailand refer to those of the pension systems for government workers.

Public Pension Systems in Asia

The brief survey of Asian pension systems indicates a great deal of heterogeneity in design and structure. Pension reform requires a diagnosis of the main weaknesses of the pension system. Those weaknesses impede the ability of a pension system to fulfill its basic objectives, such as enabling consumption smoothing, providing insurance against longevity risks and other risks, and relieving poverty (Barr and Diamond, 2006). A diagnosis is essential for identifying the main areas of a pension system that need to be improved and strengthened, and hence for mapping out the strategic direction of reform. This entails looking at how each pension system performs with regard to its five core functions: (1) reliable collection of contributions, taxes, and other receipts, including any loan payments; (2) timely and accurate payment of benefits for each of the schemes; (3) skilled financial management and productive investment of pension assets; (4) maintenance of an effective communication network, including development of accurate data and record-keeping mechanisms; and (5) production of financial statements and reports that promote better governance, fiduciary responsibility, transparency, and accountability (Ross, 2004).

Undertaking the diagnosis also requires examining how the pension systems fare against their desirable properties. Ideally, a pension system should be broad based, that is, be adequate in both coverage and range of risks covered; affordable from individual, business, fiscal, and macroeconomic perspectives; actuarially and hence financially sound and sustainable over time; robust so as to withstand macroeconomic and other shocks; and able to provide reasonable levels of postretirement income coupled with a safety net for the elderly poor. Broadly speaking, Asian pension systems suffer from failures in (1) performing the five core functions of pension systems as well as (2) embodying the ideal properties of pension systems. Those failures suggest that Asian pension systems still have some way to go if they are to achieve their main objectives.

Developing countries and advanced economies have fundamental differences when considering pension reform. The institutional capacity of advanced economies lags considerably behind that of advanced economies. It is thus unproductive to frame pension design and reform issues in Asia in the same terms as in advanced economies that have more well-established pension systems. With the exception of Korea and Singapore, there is significant scope for reducing administrative and other transaction costs. The prevalence of such costs constrains the resources that can be made available to pensioners. More important, high administrative and transaction costs impede the ability of pension systems to perform the five core functions to varying degrees in China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. For example, administrative inefficiency interferes with the collection of contributions from and payment of benefits to hard-to-reach groups such as rural and informal sector workers. The current state of flux of many Asian pension systems further adds to their high administrative and transaction costs.

Compliance cost is a specific transaction cost that adversely affects the pension systems of many Asian countries. Compliance cost refers to the cost to employers and employees of complying with the provisions of pension systems. For example, employers have to collect contributions from employees and remit them to the relevant authorities, in addition to contributing their share. Compliance costs are high when the pensioner does not get benefits on time and has to make several trips to ensure that benefits are paid. Furthermore, in some countries, employees have to pay bribes to receive benefits to which they are statutorily entitled. If compliance costs are too high, employers and employees may choose not to participate in the pension system. In addition, if the government has only limited capacity to enforce compliance, employers may evade rather than contribute. Even in countries with superficially comprehensive pension systems, such as the Philippines, widespread noncompliance opens a gulf between nominal and effective old-age income support.

The generally weak governance and regulation of Asian pension systems can be attributed in large part to the lack of institutional capacity. Effective performance of the five core functions of pension systems requires efficient governance, management, and regulation. In funded pension systems, governance and regulation are especially important for the sound financial management and productive investment of pension assets. In well-developed financial markets such as the United States and the United Kingdom, pension funds are subject to explicit regulatory structures and laws. In contrast, in Asia, even though banks and insurance companies are regulated, regulatory bodies for pension funds are glaringly absent. Lack of strong governance and regulation also breeds lack of public confidence in pension systems, which, in turn, discourages compliance and participation. Political support for pension systems will remain fragile unless the general public is confident that the systems will honor their promises for the future.


At one level, Asian pension systems are failing because they do not effectively perform the five core functions of pension systems as the result of high transaction costs and lack of strong governance. At another level, they are failing because, to varying degrees, they are not well designed—that is, they are not adequate, affordable, robust, sustainable, and equitable. At this level, the biggest failure of Asian pension systems is that they cover only a limited part of the total population. The percentage of the population covered by pension systems differs from country to country, but no country has managed to achieve anywhere near universal coverage. The share of the covered labor force ranges from 13.5 percent to 62.9 percent (Figure 14.7). The coverage rate for the working-age population ranges from 10.8 percent to 45.3 percent. By way of comparison, in advanced economies such as Germany, Japan, and the United States, pension systems typically cover about 90 percent of the labor force and between 60 percent and 75 percent of the working-age population. Therefore, even in high-income Asian countries such as Korea, coverage falls well short of advanced economy levels.

Figure 14.7Share of Labor Force and Share of Working-Age Population Covered by Pension Systems, Latest Year Available


Source: OECD (2012).

Note: Data refer to 2002 for Indonesia; 2005 for China, Korea, Thailand, and Vietnam; and 2008 for Malaysia, the Philippines, and Singapore.

Another key performance indicator on which Asian countries perform poorly is the replacement rate, or the ratio of retirement income to preretirement income. The replacement rate is a widely used measure of the adequacy of pension benefit as a source of postretirement income. A higher replacement rate enables the pensioner to achieve a higher standard of living. Pension experts generally recommend a replacement rate of between 66 percent and 75 percent, adjusted for both longevity and inflation risks. A pension modeling study completed in 2008 by the Asian Development Bank (ADB, 2008) computes the replacement rate for Asian pension systems. According to the ADB study, the replacement rate ranges from 19 percent in Indonesia to 79 percent in the Philippines (Figure 14.8). The computed replacement rates are higher in China, Korea, the Philippines, and Vietnam than in Indonesia, Malaysia, Singapore, and Thailand. Among the eight countries, only the Philippines has replacement rates within the recommended range. This implies that, by and large, Asian pension systems are not providing adequate retirement income for retirees.

Figure 14.8Income Replacement Rate, 2007


China’s relatively high replacement rate is deceptive in light of its low coverage. If pension benefits are high but only a small share of the population receives those benefits, it is unclear whether the pension system is adequate. A useful index that gives a more accurate picture of the adequacy of a country’s pension system is the product of multiplying the coverage rate by the replacement rate. The proposed index thus incorporates both replacement rate and coverage. For China, the proposed adequacy index adjusts the high replacement rate for low coverage. Conversely, for countries with high coverage but low replacement rates, the index adjusts high coverage for the low replacement rate. The adequacy index is computed on the basis of coverage of the labor force. For the ADB study’s replacement rates, the index ranges from 3 percent in Indonesia to 24 percent in Korea (Figure 14.9). From the perspective of both indices, the most adequate pension systems seems to be those of Korea, Malaysia, and the Philippines while the least adequate pension systems seem to be those of Indonesia, Thailand, and Vietnam.

Figure 14.9Adequacy Index of Pension Systems, 2007

Source: Authors’ estimates based on data from the Asian Development Bank (2008) and OECD (2012).

Note: The coverage rate used in the calculation is the coverage rate of the labor force.

The apparent adequacy of the Philippine pension system brings the issues of sustainability and affordability to the fore. Sizable benefits for a high share of the population are not sustainable in the long term if the country cannot afford such a generous pension system. In this case, however, the adequacy of the pension system is more apparent than real. A widely used index of sustainability is implicit pension debt (Holzmann, MacArthur, and Sin, 2000; Holzmann, Palacios, and Zviniene, 2001; Gill, Packard, and Yermo, 2005; Barr and Diamond, 2006). The index can be broadly defined as the present value of future pension promises. As noted earlier, in Asian countries with DB pension systems, pension promises are unfunded or only partly funded. Studies by the World Bank found the implicit pension debt of China, Korea, and the Philippines to be substantially larger than the public debt of those countries (Holzmann, Palacios, and Zviniene, 2004; Sin, 2005). Therefore, relatively healthy fiscal positions should not be allowed to obscure the fiscal risks attributable to large future pension liabilities. Furthermore, in all three countries the relative size of the implicit pension debt is large enough to raise concerns about the pension system’s ability to honor its future promises. In Korea, such concerns spurred a reduction of benefits that began in 2008. The implicit pension debt is much higher in China and the Philippines than in Korea, which suggests that the need for sustainability-enhancing reform is even stronger in those countries.

Asian pension contribution rates are generally quite low and hence seemingly affordable for both employers and employees. However, widespread noncompliance in many lower-income Asian countries suggests that the true pension costs are higher and hence less affordable for individuals. However, pension costs do not seem to significantly distort the incentives of employees to work and employers to hire, even in countries with the highest contribution rates. Given that many Asian pension systems are still evolving and consolidating, it is too early to tell whether they are robust to macroeconomic and other shocks. However, the more established pension systems of the region came through the Asian crisis of the late 1990s unscathed. Finally, as mentioned earlier, only the pension systems of China, Korea, and the Philippines have safety nets designed to protect the elderly poor. However, those safety nets fail to provide enough income for even a minimum standard of living. For example, the basic monthly pension for the elderly poor in the Philippines is lower than the poverty threshold, and a recently introduced means-tested benefit for the Korean elderly is only about 5 percent of the average wage. The replacement rate for low-income workers substantially exceeds that of average-income workers in China, Korea, and the Philippines but not in the other countries.

A key issue with existing pension systems is inequity, or lack of fairness, between various segments of the population with regard to coverage, net benefits, and retirement age. For coverage, access to pension systems tends to be skewed toward urban areas and the formal sector. For example, in China it is estimated that fewer than 10 percent of rural workers have pension coverage. Low rural coverage, in combination with the large number of rural workers, helps to explain China’s low overall coverage rate of 20.5 percent of the labor force and 17.2 percent of the working-age population. Massive rural-to-urban migration is adding to the pool of informal sector workers in China, Vietnam, and other countries. The limited coverage of rural and informal sector workers reflects the high administrative costs of reaching them and the limited institutional capacity of Asian pension systems. Pension coverage is also higher for government workers than for private sector workers throughout the region. Although in general national pension systems cover almost all government workers, access to pension systems among private formal sector workers is much more limited, at less than 25 percent in Indonesia, about 50 percent in China and Malaysia, and 27 percent in Thailand. In fact, in many Asian countries, including Korea and Vietnam, pension systems initially covered only government workers.

Government workers’ better access to pension systems is part and parcel of the privileged position and stronger rights they enjoy relative to private sector workers. In addition to lower coverage, private sector workers also tend to receive lower pension benefits compared with public sector workers. A common structure among pension systems in the region is the presence of two national programs—one for civil servants and another for private formal sector workers—with the former offering more generous benefits than the latter. For example, the replacement rate for public sector workers in China is estimated to be 90 percent compared with 58 percent for urban private sector workers. In Thailand, the replacement rate is about 70 percent for government workers, compared with just about 30 percent for private sector workers. With regard to gender, women pensioners tend to receive lower pension benefits than do men owing to shorter contribution periods and lower average earnings. To illustrate, in Korea, the average pension for women is about 60–70 percent that of men. Disparity also exists in retirement ages between public sector and private sector pension systems, as well as between gender groups. In Singapore, for example, the normal retirement age for government workers is 55, compared with 65 for private sector workers.

With regard to gender differences, China’s urban private sector pension system has set 60 as the normal retirement age for males, compared with 55 for females. A similar gender disparity exists in Vietnam’s pension system (Guerard and others, 2012; Park, 2011, 2012).

The differences among members of the same generation are a form of horizontal or intragenerational disparity. However, inequity may also arise between members of different generations. When a pension system is at risk of being unsustainable, if no action is taken, the current generation is passing on to the future generation a heavier burden of the cost of supporting the pension system compared with what the current generation bears. Without far-reaching reforms, the financial burden on future generations may become politically unacceptable. Thus, for long-term financial stability, it is important to address inequity in the sharing of burdens across generations. Decisions regarding contribution rates and pension benefit ages affect how pension costs are allocated across generations. For example, faced with high pension costs, a country may raise contributions, but without reducing pension benefits, current workers bear a disproportionate burden of the costs, in addition to the risk of reduced benefits upon retirement as the pension system becomes increasingly unsustainable.

The above evidence strongly suggests the urgency of pension reform, but reform should be implemented carefully and anchored in a well-designed scheme. A major factor to consider in the design of any pension reform is the impact on fiscal costs, both immediate and long term (Barr, 2006). For example, when a country decides to move from the traditional DB PAYG system toward individual funded accounts, there are likely to be significant fiscal costs, including transition costs, given that pensioners continue to receive benefits under the old system, but contributions flow into the new system. To finance current pensions in the new system, governments may need to raise taxes or resort to borrowing. As exemplified in the Chilean pension system, the fiscal costs of reform can be high and persistent, so fiscal consolidation before reform is critical (Arenas de Mesa and Mesa-Lago, 2006; Melguizo and others, 2009). In general, owing to fiscal prudence over the years, East and Southeast Asian countries enjoy healthy fiscal positions that they are expected to maintain for some time. Endowed with strong fiscal balances, Asian countries may be well positioned to initiate the needed reforms and deal with their fiscal consequences. The next section discusses key policy options for strengthening Asia’s pension systems.

Next Steps

The diagnosis of the current state of Asian pension systems makes it clear that pension reform is urgently needed throughout the region. There is substantial scope for improving the effectiveness of the pension systems in performing their five core functions in many Asian countries. Asian countries are also still a long way from having well-designed pension systems that satisfy ideal systemic properties such as adequacy and sustainability. Because failures in both functional performance and system design stand in the way of good execution, addressing both types of failure is essential for pension reform. Asian countries vary greatly in their pension-related needs and capacities. There are thus no one-size-fits-all solutions when it comes to pension reform in Asia. However, a number of common region-wide themes emerge from the diagnosis of Asian pension systems. Those themes can help set the direction for pension reform throughout the region.

One common area of reform is to strengthen the institutional and administrative capacity of Asian pension systems for performing the five core functions. Strengthening institutional capacity is the point of departure for pension reform in Asia given that building a well-functioning pension system is simply not possible without adequate institutional capacity. The lack of capacity is more pronounced in poorer countries such as China, Indonesia, and Vietnam but affects the other countries as well. The mundane nature of core functions such as developing accurate data and record-keeping systems should not detract from their significance for Asian pension reform. In the sequencing of pension reform, the nitty-gritty work of capacity-enhancing organizational reform should be completed before broader systemic reform is undertaken.

A second common area of reform, related to the first, is the need to improve the governance and regulation of Asian pension systems. Strong governance and regulation are essential for the operational efficiency and transparency of any pension system. They are also essential for developing the institutional capacity to perform the five core functions. Examples of specific measures for promoting good governance include better accounting, more rigorous financial controls, human resource development, computerization, and greater disclosure to stakeholders. Current regulatory structures for pensions are weak in Asia. There is thus a strong case to be made for a dedicated regulator to ensure professionalism in performing core functions, to develop the pension fund industry, to promote financial education, and to help bring about a systemic perspective that integrates the different components of the pension system.

In light of low pension coverage throughout the region, a third area of reform is expanding coverage. Even in richer economies such as Korea and Malaysia, coverage is far from universal and substantial scope remains for further widening coverage. Administrative inefficiency hampers the ability of Asian pension systems to cover more than a limited segment of the population. Coverage expansion should first target the formal sector and only later extend into the informal sector. Because of the growing mobility of Asian workers, lack of pension portability is becoming a major deterrent to expanding coverage. One solution is to offer fiscal incentives for DC occupational pension plans based on individual accounts. A pure DC scheme may, however, impose greater risks on workers, such as varying rates of return on pension assets, which can greatly discourage them from participating in the scheme. To make the scheme more appealing to workers, it may be modified to allow for some risk sharing, say, through a guaranteed minimum pension as has been implemented in some countries. One major benefit of DC plans is their portability. In countries with fragmented pension systems, such as that of China, which is organized on the basis of cities, better coordination and possibly consolidation will also enhance portability.

There is a real danger that Asian countries’ pension systems, if left unreformed, will be unable to honor their pension promises. Therefore, enhancing financial sustainability is another critical area of pension reform, especially in countries with DB pension systems. Painful but necessary reforms that adjust the parameters of the pension system—retirement age, contribution rate, benefits—are required to promote sustainability. But as Barr points out (Chapter 3 of this volume), parametric reform is subject to certain caveats. Raising the retirement age can help ease pension costs, but people vary in their preferences about when to stop working, so applying a flexible retirement age can be a sound policy option in the absence of fiscal pressures. Increasing contribution rates can boost pension funds, but is not a viable option in countries in which contributions are already high, which can lead to low compliance. Furthermore, reducing pension benefits can lower pension costs, but may worsen poverty among the elderly. Asia’s population aging favors a larger role for fully funded DC pension systems, which are less vulnerable to demographic pressures. More generally, funding, which can also occur under DB systems through accumulation of reserves, renders the payment of benefits less dependent on the willingness and ability of future workers to support the elderly.

At least some funding is desirable in light of Asia’s rapid population aging, and Asian countries are already beginning to move in that direction. A prominent example is China’s establishment of the National Social Security Fund. With more assets to manage, it is imperative for Asian pension funds to improve the returns on the assets they manage. The experiences of the highly regarded Chilean pension system clearly illustrate that improving returns is possible even for developing countries. In the past, government interference has channeled much of the funds into low-return domestic assets, often for policy-based investments. However, Asian governments have now begun to deregulate and liberalize pension fund management. For example, the, share of foreign assets is growing in the pension funds of Korea, Malaysia, the Philippines, and Thailand. Maximizing the returns from pension funds requires the deepening and broadening of domestic financial and capital markets. In this sense, financial development is as much a precondition as a hoped-for by-product of pension reform. Higher returns from better asset management allow for more adequate benefits and strengthen financial sustainability.

Given their general failure to provide safety nets, Asian pension systems must strive to do a much better job of protecting the elderly poor. Old-age poverty is especially relevant for Asia, where large numbers of the lifetime poor will never participate in formal pension systems. Indeed, the lifetime poor may constitute as much as 30 percent of the labor force in some Asian countries. The best way to provide old-age income support for the elderly poor is to establish a universal social pension system that pays a small amount for basic sustenance to the entire population. However, running the program can be expensive and open to wide leakages to the nonpoor. An alternative to universal coverage is to limit beneficiaries through means testing. Either way, the basic social pension will be financed from general budgetary revenues rather than contributions. Setting up a separate social pension system with the explicit objective of poverty relief also helps prevent the ad hoc use of the main pension system’s funds. In poor countries that do not have sufficient resources to operate such a pension system, providing incentives to encourage and sustain informal arrangements of caring for the elderly can be a feasible option.

Asian policymakers could also be encouraged to think outside the box. There is no reason why the parameters facing the pension system should necessarily be constant. For example, government policies may help reverse or slow down the fall in fertility and encourage longer working lives, which would change the demographic and financial equations facing Asian pension systems. Better health enables people to work longer, and government policy can encourage firms to hire older workers. Korea, which has tried to limit population growth for decades, has reversed course and is now offering a wide range of fiscal incentives to encourage larger families. Policymakers may also provide tax breaks for adult children who support their parents. Filial piety cannot be legislated but it could be influenced by financial incentives. Outside-the-box policies entail fiscal costs of their own that will have to be weighed against their benefits.


After decades of growth-oriented policies and rapid economic growth, Asia is finally paying more attention to social protection. This shift has not happened merely because Asian countries have become richer and can now afford to devote more resources to protecting their citizens from various risks. It also reflects a growing recognition that the traditional narrow definition of growth is harmful for inclusive growth. In light of Asia’s rapid population aging, a particularly important component of social protection is to protect the old from not having adequate income to meet their needs. Economic growth in a society in which a large and growing segment of the population is poor and marginalized cannot possibly be inclusive. More fundamentally, Asia’s demographic trends mean that the social and political constraints to sustaining high growth may eventually become overwhelming in the absence of well-functioning pension systems. Therefore, the case for urgent pension reform in Asia is as much economic as social.


    Allianz Global Investors2007Asia-Pacific Pensions 2007: Systems and Markets” (Munich: Allianz Global Investors).

    Arenas de MesaA. and C.Mesa-Lago2006The Structural Pension Reform in Chile: Effects, Comparisons with Other Latin American Reforms, and LessonsOxford Review of Economic Policy Vol. 22 No. 1 pp. 14967.

    • Search Google Scholar
    • Export Citation

    Asian Development Bank (ADB)2008Pension Modeling Study for Eight East Asian Countries” (unpublished Manila: Asian Development Bank).

    • Search Google Scholar
    • Export Citation

    BarrN.2006Pensions: Overview of the IssuesOxford Review of Economic Policy Vol. 22 No. 1 pp. 1539.

    BarrN. and P.Diamond2006The Economics of PensionsOxford Review of Economic Policy Vol. 22 No. 1 pp. 1539.

    FelipeJ. and R.Hasan2006Labor Market Outcomes in Asia: An Overview” in Labor Markets in Asia: Issues and Perspectives ed. by J.Felipe and R.Hasan (London: Palgrave Macmillan).

    • Search Google Scholar
    • Export Citation

    GillI.T.Packard and J.Yermo2005Keeping the Promise of Social Security in Latin America (Washington: World Bank).

    GuerardY.M.AsherD.Park and G.Estrada2012Reducing Disparities and Enhancing Sustainability in Asian Pension SystemsEconomics Working Paper No. 313 (Manila: Asian Development Bank).

    • Search Google Scholar
    • Export Citation

    HellerP.2006Is Asia Prepared for an Aging Population?IMF Working Paper 06/272 (Washington: International Monetary Fund).

    HolzmannR.I.MacArthur and Y.Sin2000Pension Systems in East Asia and the Pacific: Challenges and OpportunitiesSocial Protection Discussion Paper No. 0403 (Washington: World Bank).

    • Search Google Scholar
    • Export Citation

    HolzmannR.R.Palacios and A.Zviniene2001On the Economics and Scope of Implicit Pension Debt: An International PerspectiveEmpirica Vol. 28 No. 1 pp. 97129.

    • Search Google Scholar
    • Export Citation

    HolzmannR.R.Palacios and A.Zviniene2004Implicit Pension Debt: Issues, Measurement and Scope in International PerspectiveSocial Protection Discussion Paper No. 0403 (Washington: World Bank).

    • Search Google Scholar
    • Export Citation

    MelguizoA.A.MuñozD.Tuesta and J.Vial2009Pension Reform and Fiscal Policy: Some Lessons from Chile” in Pension Reform Fiscal Policy and Economic Performance: Workshops and Conferences (Rome: Banca D’ Italia).

    • Search Google Scholar
    • Export Citation

    Organization for Economic Cooperation and Development (OECD)2012Pensions at a Glance: Asia/Pacific 2011 (Paris: Organization for Economic Cooperation and Development).

    • Search Google Scholar
    • Export Citation

    ParkD.2009Ageing Asia’s Looming Pension CrisisADB Economics Working Paper No. 165 (Manila: Asian Development Bank).

    ParkD. ed. 2011Pension Systems and Old-Age Income Support in East and Southeast Asia: Overview and Reform Directions (Manila: Asian Development Bank).

    • Search Google Scholar
    • Export Citation

    ParkD.2012Pension Systems in East and Southeast Asia: Promoting Fairness and Sustainability (Manila: Asian Development Bank).

    RossS.2004Collection of Social Contributions: Current Practice and Critical Issues” presented at the International Conference on “Changes in the Structure and Organization of Social Security AdministrationCracow, PolandJune3–4.

    • Search Google Scholar
    • Export Citation

    SinY.2005China Pension Liabilities and Reform Options for Old Age InsuranceWorking Paper No. 2005–1 (Washington: World Bank).

    • Search Google Scholar
    • Export Citation

    United Nations Department of Economic and Social Affairs Population Division2011World Population Prospects: The 2010 Revision.” Accessed February212012.

    • Search Google Scholar
    • Export Citation

    United Nations Department of Economic and Social Affairs Population Division2012World Urbanization Prospects: The 2011 RevisionCD-ROM edition. Accessed June32013.

    • Search Google Scholar
    • Export Citation

    Other Resources Citing This Publication