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Demographic and Labor Market Trends

Demographic and labor market trends are the context within which the social protection responses of Asian countries to the global economic crisis will need to be structured. There are three demographic trends which are evident globally. First, fertility rates are dropping nearly everywhere. Second, life expectancy is rising in many, though not all, parts of the world. Third, developed countries are well advanced with respect to the above two trends as reflected in their declining share in world population. The combined impact of the above three trends has led to a rapid ageing of the world's population.

Non-developed countries are further behind in the demographic transition though variations among them are large. In some countries, such as Malaysia and Egypt, the fertility rate is at near or above replacement rates, but life expectancy is rising rapidly, contributing to the ageing of the population.

Tables 1a, 1b, and 1c provide demographic indicators for select Asian and African countries. On the basis of the data in these tables, the following observations may be made:

The rapid ageing of Asia is a result of reduction in fertility rates and increased life expectancy at birth and at age 60. As is well known, increased longevity raises pension costs disproportionately. Uncertainty about longevity trends (due to the impact of medical technology and other factors) is increasing the complexity of designing pension programs.

Even during the 2005–2010 period, only the Philippines and India are projected to exhibit fertility rates above the global average; in contrast, 6 of the 11 sample countries exhibit fertility rates significantly below the replacement rate.

The statutory pensionable age, however, remains relatively low, ranging from 55 to 65 years for men and 50 years to 65 years for women. Some of the high-income countries such as Japan, Republic of Korea (hereafter Korea), and Singapore are taking measures to increase the retirement age, or the age at which full pension rights accrue.

As women live longer, and on average have less exposure to the labor force, their lower retirement age gives them, on average, fewer resources to finance old-age needs, including health care. Addressing gender issues should therefore be an integral part of programs in all branches of social security.

The median age in the sample countries (with the exception of the Philippines) will be well above average for the world in 2050 (Table 1a [ PDF 23.2KB | 1 page ]). In Japan, Korea, and Singapore, the median age will be nearly 55 years. Similarly, only in the Philippines and India will the percentage of total population aged 60 and above be less than the global average (Table 1b [ PDF 19.5KB | 1 page ]).

Many Asian countries will need to address challenges arising from sharply increasing median age, rising old-age dependency rations (Table 1c [ PDF 19.5KB | 1 page ]), and concomitant reduction in the share of working-age population.

Based on the above demographic trends suggesting varying level and pace of ageing among Asian countries, three major implications may be noted. First, rapid population ageing signified by rising old-age dependency ratios, and increasing life expectancy at age 60, suggests that greater resources will need to be devoted to the elderly. A substantial share of the increase in resources will be through the government budget. Finding more budgetary resources, particularly when the medium-term growth rates are likely to be moderate, will be a challenge as there will be other demands on the budget. Better management and governance by the social security organizations, and the need to undertake parametric reforms in the design of various provident and pension fund schemes to ensure their medium-term financial sustainability, have therefore become even more urgent in Asian countries.8

As discussed earlier, aggressive fiscal stimulus packages by Asian countries to sustain growth during the current global crisis may also constrain future fiscal flexibility as the resulting future budget deficits will need to be financed. Thus, in Australia, the IMF projects the budget deficit to be 2.3% of GDP in 2009 and 3.5% of GDP in 2010; this is in sharp contrast to an average annual surplus of 1.7% of GDP during the 2003–2008 period (IMF 2009). Similarly, the IMF projects that in 2009 and in 2010, Japan's budgetary deficit will be close to 10% of GDP, as compared to 5.2% of GDP during the 2003–2008 period. Even oil-rich Saudi Arabia's 2009 budget projects a deficit equivalent to 3.5% of GDP, the first deficit since 2004. If the slowdown in global economic growth continues, the fiscal situation in most Asian countries will become even more constrained. In some countries, such as the PRC's, there is however considerable fiscal capacity to expand government expenditure, including on social security and safety nets (The Economist 2009).

Second, the social security needs of foreign workers will need to be addressed by Asian countries. There are many countries in the region, such as Singapore, Malaysia, and Korea, which are large and persistent recipients of foreign labor, much of which is supplied from countries from within the region, such as Philippines, Thailand, Viet Nam, Bangladesh, Myanmar, Sri Lanka, and India.

Totalization agreements,9 as well as agreements involving the working and living conditions of foreign workers will need to be encouraged in the Asian countries to which they apply. Recent agreements by Japan with the Philippines and with Indonesia for special temporary employment arrangements for workers from these two countries draws attention to the social security needs of foreign workers and is an example of taking advantage of demographic complementarities.10

Third, the global demographic trends suggest that more than three-fifths of the potential livelihood generation between 2005 and 2020 will be in the Asian region (Table 2). India alone would need to generate a quarter of the potential global livelihoods, while The PRC and Indonesia's share will be 8.5 and 3.8% respectively (Table 2 [ PDF 17.9KB | 1 page ]). In sharp contrast, Europe's working-age population will exhibit a decline, while share of North America in potential livelihoods generation will be only 2.8%. Africa, with a share of 27.5% will also face significant challenges in livelihoods generation.

The above analysis suggests that the Asian region, particularly its developing countries, will need to create a better balance between job creation and livelihoods on one hand, and preserving existing, but unsustainable jobs on the other.

The share of formal sector employment varies from 84.3% in the developed economies to only 20.8% in South Asia. While the corresponding share is higher in Southeast Asia and Pacific (38.8%) and in East Asia (42.6%), even these proportions are lower than the global average of 46.9%. There are also variations according to gender, with the share of women in formal employment being considerably lower than that of men, particularly in South Asia (Hagemejer 2009).

In the developed economies, the expansion of formal sector, with identifiable and relatively stable employer-employee relationships contributed to earnings-related, social insurance-based social security programs.

The prospects for increasing the share of formal sector employment are, however, not promising in many Asian countries. The current global economic crisis is expected to diminish the medium-term trend rate of economic growth, and hence the rate of increase in per capita income over the next several years. As there is a positive correlation between per capita and coverage, some Asian countries will find it challenging to increase coverage through formal sector employment growth.11

The above suggests that there is an urgent need for Asian economies to construct multitiered social security systems, involving a mix of risk-sharing arrangements among the stakeholders–beneficiaries, the employers, the state, the family and the community, and not-for-profit organizations (both domestic and foreign). There is therefore increasing recognition that retirement income (pensions) cannot solely be based on earnings or contributions. These would need to be supplemented by other types of retirement income transfers.

Retirement income transfers may be approached through ex-ante (during working life) and ex-post (after retirement) interventions. In the former, the main challenge is to design matching contributions by the state to ensure an adequate benefit, but without adversely impacting contribution density, retirement decisions, and incentives to participate in the formal systems, while ensuring fiscal sustainability. Ex-post interventions can be in the form of social pensions or minimum guarantees under the formal sector pension systems. The social pensions can be universal, i.e. provided to eligible individuals as a right, or resource-tested. In each case, there are considerable challenges with respect to design, implementation, and linkages with the rest of the pensions system.

Retirement income transfers should be distinguished from social assistance, whether universal or resource-tested. The latter is available to all who qualify regardless of their age. The retirement transfers, on the other hand, are targeted at the retirees. For general poverty mitigation through transfers, and when other-than-retirement objectives are also policy priority, social assistance programs are more effective than retirement income transfers. However, when correlation between old age and poverty is very high, and fiscal budgets are severely constrained, retirement income transfers may merit serious policy consideration.

In countries with prolonged low fertility, labor market practices that facilitate productive economic activity by older workers may also become essential. As an example, from July 2005, Australia has permitted its citizens that have reached the entitlement age to access superannuation benefits by drawing a portion of their benefits without having to retire permanently from the workforce. Indeed, a recent special report on ageing in The Economist (27 June–3 July 2009 issue) has suggested that in high income countries, there is a case for abolishing the retirement age, while simultaneously implementing labor market policies that make hiring of older workers more affordable and acceptable by the employers. The survey on ageing in The Economist favorably comments on the labor market practices in Japan, which encourage elderly to be in the labor force for a longer period. However, even in Japan, an increasing proportion of the work force is contractual, with constrained benefits for pensions and healthcare.

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