Introduction

The main objectives of any social security (or social protection) system¹ are consumption smoothening over a lifetime for individuals, insurance (particularly against longevity and inflation risks),² income redistribution for society as a whole, and poverty relief. However, these must be weighed against economic growth, labor market efficiency, and flexibility. As resources devoted to social protection have opportunity costs, the needs of groups other than the elderly in the society, (as well as for other needs such as health, education, and infrastructure) should be weighed against allocations for retirement. Individual, fiscal, and societal affordability should also be considered when constructing and reforming social security systems.

Such a complex objective function has three important policy implications (Barr and Diamond 2009). First, the analysis of effects of pension system on growth, labor markets, equity should consider pension system as a whole and not each component separately. Second, a “first-best”³ approach is not appropriate in designing pension policies or pension reform. Third, pension reform design recommendations must take into account a country's fiscal, institutional, and capital market capacities.

The need to strengthen social protection systems prevailing in Asia has been evident at least since the 1997–1998 financial crises. The initial efforts to strengthen social protection systems in its aftermath, however, were not sustained in many parts of Asia as economic recovery was swift and robust (Howell 2001).

The global financial and economic crisis that has occurred since 2008,⁴ whose origins are from industrial rather than developing countries, has, however, once again underscored the urgency of strengthening Asian social protection systems.⁵ This is due to the following three reasons:

First, the crisis is expected to reduce the medium-term growth rate of most Asian countries (Footnote 4). Since the single most important macroeconomic variable in potentially providing economic security for both the young and the old is the trend rate of economic growth, reduction of medium-term growth prospects will make the task of strengthening social security systems more difficult.

Second, lower medium-term growth could adversely impact the pace and quality of job creation in many Asian countries. This increases the need for social protection, but could reduce the capacity of society to meet this need.

Third, the global crisis has necessitated the use of aggressive fiscal stimulus packages in several Asian countries. These appear to be manageable if the crisis is not too prolonged. If it is, however, fiscal risks, and risks to balance of payments due to a combination of lower net exports, remittances, and investment flows, could rise. These, in turn, may lead to upward pressures on interest rates, raising the cost of managing public debt.⁶ It may also reduce fiscal flexibility required to allocate greater resources for social protection.⁷

The global crisis has considerably enhanced the poverty relief objective of social security systems. As poverty levels, on the one hand, and gross domestic product (GDP) and employment growth on the other are inversely related, sustaining growth and enhancing employment elasticity with respect to GDP should be an integral part of Asian social protection strategies.

It is in the above context that this paper analyzes the implications of the global economic crisis, and demographic and labor market trends for social protection systems in Asia, with primary focus on pensions or retirement financing.

The rest of the paper is organized as follows: Section 2 briefly discusses Asia's demographic and labor market trends and their implications. Section 3 discusses the current social security systems in Asia with particular emphasis on the extent of coverage. The three dimensions to pension coverage are the proportion of potential beneficiaries covered by the pension system, the risk contingencies covered, and the level of benefits (van Ginneken 2008). Section 4 discusses possible opportunities for improving social protection systems in Asia as it addresses challenges from the global crisis and responds to demographic and labor market trends. The final section provides concluding observations.

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