An Overview of Social Security Systems in Asia

Many Asian countries offer a wide range of social security programs: old age, sickness and maternity, work injury, unemployment, and family allowances (Table 3 [ PDF 45KB | 2 page ]). The broad range of programs offered in the Asian region suggest that there is a general acceptance of the role of social security in ensuring equitable growth and social stability. Because of space constraints, the discussion is therefore confined to the broad features and characteristics of social security systems.

Considerable heterogeneity in social security systems in Asia reflects a host of historical and other factors including the level of economic development and structure of the economy (Table 3). Some of these benefits, however, may be intermediated through social assistance or other public programs in some countries such as Sri Lanka and Indonesia. In Asia, publicly managed Defined Benefit (DB) and Defined Contribution (DC) schemes predominate. Only Hong Kong and Australia operate privately managed DC schemes (Organisation for Economic Cooperation and Development 2009.)

The availability of a social security program, however, does not necessarily imply that it is well designed, has wide coverage, or is financially sustainable. It also does not imply that the organization administering it is well governed; or that different components of the social security system complement each other to bring about systemic effectiveness and financial sustainability.

Figure 1 [ PDF 117.7KB | 1 page ] provides coverage of the labor force for the mandatory pension systems around the world. In most of the Asian low- and middle-income countries (LMICs) the coverage, only about a quarter of the labor force has been covered by the formal pension systems. This reflects relatively low formal sector employment in these countries (Table 3).

Asian countries have varied contribution rates to social security programs: old-age protection, employment, and healthcare (Table 4 [ PDF 141KB | 2 page ]). Variations in the contribution rate are usually motivated by the larger macroeconomic and political economy changes in a country. For instance, Thailand's social security fund, in view of the current global economic crisis, has reduced contribution rates from 5% to 3.5% for all employers and employees. The government's contribution to plans was reduced from 2.75% to 2.25% in 2009. Estimates suggest that the reduction in contribution rates will collectively save B22.6 billion for employers and employees; and B3.8 billion for the government.¹²

Singapore's Central Provident Fund reduced the contribution rate for those aged 55 and above from 33% (employee: 20%, employer: 13%) in 2003 to 27% (employee: 18%, employer: 9%) in 2006. This was done to enhance wage competitiveness of older workers and to make them more employable.

In some Asian countries, the total contribution rates are quite high. Thus, the PRC's total contribution rate is 40%; India, 36.1%; Singapore, 34.5%; Japan, 25.5%; and Viet Nam 25%. The social security contributions are statutory levies and therefore impact on the cost of hiring workers. They also adversely affect the disposable income available to workers, leading to liquidity constraints. These countries have little room to raise contribution rates to improve retirement benefits.

At the other end, the contribution rates are quite low for some countries like Indonesia and Australia (9%), Brunei Darussalam (10%), and Myanmar (4%) (Table 4). These countries therefore have greater flexibility in improving retirement benefits through higher contributions.

There are several Asian countries such as Malaysia and Sri Lanka that do not require civil servants to contribute to their pensions and finance pension liabilities out of current revenue. In several countries such as Indonesia and Thailand, contributions from civil servants cover some proportion of the pension costs, with the remaining being financed out of pocket.

While there is evidence of parametric reform in civil service pension schemes, fundamental systemic reform have not been widespread (Asher 2000). In 2004, however, India's central government introduced a New Pension Scheme (NPS) which shifted pensions of newly recruited civil servants from a DB to a DC method (Asher 2008) (Box 1 [ PDF 23.6KB | 2 page ]).

Pension Assets and Investments

For a variety of reasons, pension assets in Asia have been exhibiting rapid growth. The Asia-Pacific region's pension assets increased from US$1.251 trillion in 2003 to US$2.951 trillion by 2008, surpassing Europe, but still behind assets in North America totaling US$4.686 trillion in 2008 (Watson Wyatt 2009). Many of the largest pension funds in Asia, such as those in Japan, Singapore, Korea, and PRC are Sovereign Wealth Funds (SWFs). The SWFs are an integral part of what has come to be known as a “shadow banking system”, with hedge funds and private equity funds comprising other components.

In many Asian LMICs, the limitations of domestic financial and capital markets, and lack of capacity or unwillingness to engage in international diversification of pension fund assets, has meant that the investment risks have been concentrated in terms of geography (domestic assets), and allocation of assets. In countries such as India and Sri Lanka, much of provident and pension fund investments are in government securities; while in countries such as Indonesia, domestic bank deposits account for major share investments. Nearly all of the assets of Malaysia's Employees Provident Fund (EPF) are invested domestically. Some Asian economies notably Singapore; Korea; Japan; Thailand; Hong Kong, China; and PRC have, however, been engaging in international diversification of the pension assets to varying degrees.

As in other regions, the global economic crisis has added to the challenge of investing provident and pension fund assets of Asian countries in a manner which generate high rates of real return over a prolonged period (Watson Wyatt 2009).

Provident and Pension Fund Governance and Regulation

Governance and regulation of provident and pension funds involves managing principal-agent (or agency) relationships. These arise when principals (provident and pension fund beneficiaries, and tax payers when government funding is involved) need to rely on agents (provident and pension fund managers and trustees, government bureaucrats) to pursue interests of the principals. While there has been increasing recognition of the need for institutionalizing good governance practices involving clarity, accountability, transparency, and management of differing interests among stakeholders, the progress among the Asian countries has been relatively modest. The state domination of the provident and pension fund sponsorship and management in Asia has led to less receptivity to the role of an independent pension regulator who would enforce good governance practices.

There are, however, encouraging signs that governance and regulation issues are beginning to receive deserved attention of policy makers. It is in this context that establishment of India's interim PFRDA may be regarded as an encouraging sign. International organizations such as the International Social Security Association (ISSA), and the Organization for Economic Cooperation and Development (OECD) are also increasingly emphasizing good governance and regulatory practices by their members. Most Asian countries are members of at least one of these two organizations. The increasing role of private occupational pensions in Asian countries, and the pressures to generate better returns on pension assets are also likely to increase the importance of good governance and regulation.¹³

Pension Reform in the People's Republic of China

A case study of pension reform in the PRC illustrates many of the issues and challenges discussed in the previous sections.

The PRC has managed to establish a comprehensive system ranging from pensions, medical care, unemployment, employment injury and maternity. It appears that in recent years the PRC has expanded coverage of various branches of social protection in urban areas significantly (Figure 2 [ PDF 18.7KB | 1 page ]).

The PRC established its social security system in 1951, and has since witnessed considerable evolution. The 1951 regulations on labor insurance provided comprehensive benefits to urban workers, an overwhelming proportion of whom were state workers. It was a pay-as-you-go system, and was funded by a 3% contribution of total payroll by firms.

The All China Federation of Trade Unions (ACFTU) set up in 1954 administered the system, pooling risks across diverse regions. The above system was abandoned when the Cultural Revolution began in 1966 and lasted for a decade. During this period, social security responsibility shifted from the ACFTU to individual enterprises. The resulting system was quite generous as benefits included pensions, healthcare, children's education, and housing, while no contribution from employees were required.

From 1960 to 1970, responsibility for providing social security shifted from the ACFTU to individual firms. In 1986, employees were required to contribute 3% of wages, while enterprises contributed 15% of their payroll. A new agency, the Social Insurance Agency (SIA) was also set up to supervise pensions. The system was similar to a DB scheme run at an enterprise level. If the firm was unable to pay, the SIA covered the pension liability.

In 1991, Circular No. 33 State Council Resolution on Pension Reform for Enterprise Employees was promulgated. For the first time, the circular envisaged a three-tier system, with contributions from employer and employees (as Tier-2), and a savings account, with contributions from only employees (as Tier-3). However, only a negligible number of enterprises set up Tier-2 and Tier-3 in this period.

In 1995, Circular No. 6 State Council Resolution on Deepening Pension Reform for Enterprises made another attempt at setting up a multi-pillar pension system combining social risk pooling and individual retirement accounts. The implementation regularities led to the creation of many incompatible schemes across the PRC.

The PRC's modern milestone pension regulation was adopted in 1997. It is known as the State Council Development Circular No. 26 Establishment of a Unified Basic Pension System for Enterprise Employees.¹⁴ It mandates three-tier systems for all employees working in cities and towns, whether in public or private sectors. The intention was to broaden the coverage beyond state agencies. The mandatory pillar had a combined contribution rate of 28%, and the potential replacement rate is 58%.

While the first pillar is mandatory, the other two are voluntary. For the mandatory pillar, there were 116.5 million urban participants in 2003, equivalent to about 40% of urban workers (Hu 2006, Table 9). As pensioners numbered 38.6 million, the dependency ratio was 33.

The voluntary pillars 2 and 3 have been receiving increased attention from the PRC's policy makers. In 2004, the Ministry of Labor and Social Security issued provisional regulations on occupational pensions. This was followed by another regulation focusing on pension fund management and regulation. The second pillar has individual accounts and must be fully funded. The scheme, however, can be DC or DB depending on the choice by employer.

Under the provisions, employers can receive tax deduction of up to 4% of their total wage bill for pillar 2, but employees' contributions are not tax advantaged. The investment regime specifies quantitative restrictions on the investments, with maximum investment in equities of 20% (Hu 2006, p.17).

Separately, the PRC has a voluntary rural pension scheme implemented since 1991. It is financed by voluntary contributions and a collective subsidy. The coverage rate has been increasing steadily from 8.3% in 2003. By the end of 2008, a total of 55.95 million rural Chinese were covered under the scheme. Benefits amounting to CNY5.8 billion were distributed to around 5 million pensioners in 2008. Accumulated contributions amounted to CNY50 billion over 3 years, approximately 11% of which was paid out to pensioners in 2008.

As the rural working population is much larger than the urban working population, the overall coverage rate for the PRC in 2003 was 20.7%.

The age for pension eligibility is relatively low in the PRC. The central government guidelines are age 60 (for men and professional women), age 55 (nonprofessional salaried women), or age 50 (women in all other occupations). Those employed in arduous or unhealthy work are eligible for pension benefits at 55 (for men) and 45 (for women) respectively. Each retiree in the PRC will thus be eligible to receive a pension for a fairly long period, particularly as longevity is expected to increase.

The PRC first piloted corporate annuities as a second pillar in its social security system in 1990, and implemented it in 2004. The corporate annuities scheme covers 10.38 million people, over 30,000 enterprises and accumulated contributions exceeding CNY190 billion as of the end of 2008. (Zhu 2009).

Two broad themes emerge from the PRC's social security reform experiences. First, there has been rapid expansion in coverage of all five realms of social security protection (Table 3). This increase rests on unified planning for both rural and urban areas, and a committed effort to enhance social security protection and achieve universal coverage by 2020. Zhu (2009) mentions several special characteristics of the PRC's approach—the involvement of academics and social partners; piloting and gradual expansion; political will; inclusion of extension in national socioeconomic development plans; special campaigns for targeted groups; employment-promotion measures for less privileged groups; and several other proactive policies that merit attention and adaptation by other Asia-Pacific countries.

The second broad theme that emerges is the increasing role of the state in delivering social security protection in the PRC. Advances in health status indicators were achieved in the 3-decade period (1950–1980) where social security was largely a public provision. The PRC's social security system was substantially weakened by the economic reforms in the last few decades of the 20th century. Recent experiences with the PRC's social security reform have underscored the state's ability to provide social security protection to an increasing number of people.

However, there are key challenges and policy options that the Chinese social security system must contend with.

First, the pension system is urban and state-sector oriented. As a result, the majority of the population in rural areas, where only voluntary pension schemes are in operation, have very low coverage. In addition, urban-rural migration resulted in significant proportion of migrants losing part or all of their pension benefits.

Low fertility rates and rapid ageing will limit the extent to which traditional family (or community) support can be relied upon in financing old age in the PRC.¹⁵

Second, in urban areas, high contribution rates, unrealistically low retirement age, and continuation of rules favoring the state-sector are hampering increased coverage, and provision of adequate pensions.

The third challenge is to improve investment policies and the performance of urban, rural and the National Social Security Fund (NSSF) funds. A substantial proportion of the pension assets are in bank deposits and government bonds. Thus, in 2004, 82% of NSSF assets and 56% of rural pension fund assets in 2003 were in these two asset classes (Hu 2006, Tables 19 and 20). The average real return for the 1993–2004 period on deposits was -0.6% and on government bonds 1.0%, and on equities 4.5% (Hu 2006).

The above suggest that there is scope for improving investment policies and performance of pension assets in the PRC. Addressing this will require substantive capital and financial market reforms.

The PRC historically has adopted different social security systems for its rural and urban population. Recent rural-to-urban migration in the PRC has caused major social security compliance challenges. While the urban system has a mandatory component, the rural pension system is on a voluntary basis. The rural pension system is covered under the Provisional Rural Pension System regulations of 1992. The details such as contributions are left to local governments.

Finally, the PRC system exhibits considerable variation and fragmentation between regions, sectors, and classes of employees. Pensions for civil servants (administered by the Ministry of Personnel) are entirely funded from the budget. Some of the variation is due to differing demographic structures in various provinces. There is a need to consider passage of a national law on social security.

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