Expanding Pension System Coverage

04/19/23 APFD Workshop 16-17 October 2007

Expanding Pension System Coverage

Developing Rural Pension SystemsAxel WeberAxel WeberSocial Protection SpecialistSocial Protection Specialist


Objectives of the Objectives of the PresentationPresentation

• To clarify:To clarify: Pensions in Asia – it is Pensions in Asia – it is possible!possible!

• To describe: To describe: Experiences of Experiences of othersothers

• To analyse:To analyse: Technical possibilities Technical possibilities of of rural pensionsrural pensions

• To alert:To alert: The political agenda The political agenda


StructureStructure

• Facts and DataFacts and Data• The need for more coverageThe need for more coverage• The possibilities for ExtensionThe possibilities for Extension• Examples of coverageExamples of coverage• How to Extend Coverage - How to Extend Coverage -

TechniquesTechniques• Policy issuesPolicy issues


Facts and DataFacts and Data



19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

Asia

India

Philippines

0

10

20

30

40

50

60

70

80

90

% o

f to

tal

Year

Rural Population in Asia

Asia

China

India

Indonesia

Philippines

Vietnam

Source: World Population Prospects, 2006 revision. UN 2007World Population Prospects, 2006 revision. UN 2007



0% 20% 40% 60% 80% 100% 120%

% of persons over 65

BhutanPNGLaos

CambodiaPakistan

TongaFiji

PhilippinesTuvalu

IndiaBangladesh

ChinaSri LankaMaldives

Nepal Vietnam

Malaysia Nauru

IndonesiaVanuatu

KoreaTajikistan

JapanKazahkstanAzerbaijan

CookKyrgyzstanUzbekistan

ArmeniaMarshallMongolia

Co

un

try

Persons over 65 with Pension Entitlement


The Need for CoverageThe Need for Coverage


The Need for CoverageThe Need for Coverage- need for pensions -- need for pensions -

• Changing family structures - migrationChanging family structures - migration• Large informal sectors without protectionLarge informal sectors without protection

– Traditional farmersTraditional farmers– Self-employed workers like small shopsSelf-employed workers like small shops– Employed people without securityEmployed people without security

• People have not enough savingsPeople have not enough savings• Jobs for elderly may diminishJobs for elderly may diminish• Governments may not be willing to payGovernments may not be willing to pay


The Need for CoverageThe Need for Coverage- Informal sector -- Informal sector -

IssuesIssues• Majority of people work in ISMajority of people work in IS• Absence of social securityAbsence of social security• Retirement, Pension and health insurance a Retirement, Pension and health insurance a

luxuryluxury• Most of the elderly are working (Most of the elderly are working (for example for example

Indonesia 81% of male and 41% of femaleIndonesia 81% of male and 41% of female))TargetsTargets• To build up entitlementsTo build up entitlements• To protect elderly workers and their familiesTo protect elderly workers and their families• To prevent widespread povertyTo prevent widespread poverty• To avoid social dumpingTo avoid social dumping


The Need for CoverageThe Need for Coverage- Pensions -- Pensions -

• Pensions are importantPensions are important– Smoothen consumptionSmoothen consumption– Prevent old age povertyPrevent old age poverty– Support economic stabilitySupport economic stability

• Pensions are possiblePensions are possible– More GDP means more fiscal spaceMore GDP means more fiscal space– Technological progress allows redistributionTechnological progress allows redistribution– Indirect instead of direct taxes broaden Indirect instead of direct taxes broaden

assessment base and avoid reduction in assessment base and avoid reduction in competitivenesscompetitiveness


Extension of CoverageExtension of Coverage


Extension of Coverage Extension of Coverage - Issues -- Issues -

• Is Social Protection Affordable?Is Social Protection Affordable?– ILO study proves: all countries can affordILO study proves: all countries can afford– Strong growth means fiscal spaceStrong growth means fiscal space

• Is Social Protection good for the Economy?Is Social Protection good for the Economy?– Stabilizes demandStabilizes demand– Allows individuals to take risksAllows individuals to take risks– Shifts responsibilities from families to risk communitiesShifts responsibilities from families to risk communities– Prevents povertyPrevents poverty– Money is not „lost“ and creates demand. If there are Money is not „lost“ and creates demand. If there are

pensions, just other people use it.pensions, just other people use it.– Effects on competitiveness depend on financing Effects on competitiveness depend on financing

mechanismsmechanisms


Extension of Coverage Extension of Coverage - ADB Social Protection Index -- ADB Social Protection Index -

Preliminary Results.Preliminary Results.Four Indicators:Four Indicators:• Social protection expenditure – as % of Social protection expenditure – as % of

GDP.GDP.• The total number of beneficiaries of Social The total number of beneficiaries of Social

Protection programs – SP coverage.Protection programs – SP coverage.• The number of poor beneficiaries of SP The number of poor beneficiaries of SP

programs – SP Distribution.programs – SP Distribution.• Social protection expenditure going to the Social protection expenditure going to the

poor – SP Impact.poor – SP Impact.


Extension of CoverageExtension of Coverage- ADB Social Protection Index -- ADB Social Protection Index -

0.00

1.00

0.74

0.63

0.56

0.55

0.53

0.52

0.49

0.47

0.44

0.42

0.41

0.35

0.34

0.32

0.32

0.30

0.30

0.24

0.21

0.20

0.20

0.19

0.19

0.15

0.08

0.07

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Afghanistan

Fiji

Marshall Islands

PNG

Solomon Islands

Vanuatu

Japan

Korea

Kyrgyzstan

Uzbekistan

Cook Islands

Kazahkstan

Mongolia

Sri Lanka

India

China

Nauru

Azerbaijan

Malaysia

Armenia

Indonesia

Tajikistan

Vietnam

Tuvalu

Maldives

Philippines

Bangladesh

Bhutan

Laos

Cambodia

Nepal

Tonga

Pakistan


Extension of CoverageExtension of Coverage- ADB Social Protection Index -- ADB Social Protection Index -

Correlation GPD per Capita and SPI

0

0.2

0.4

0.6

0.8

1

1.2

100 1000 10000 100000

GDP per Capita

SP

I va

lues


Examples of CoverageExamples of Coverage


Examples of CoverageExamples of Coverage- Pensions -- Pensions -

Source: Help Age International 2007Help Age International 2007


Examples of CoverageExamples of Coverage- Pensions -- Pensions -

Source: Help Age International 2007Help Age International 2007


How to Extend CoverageHow to Extend Coverage


How to Extend CoverageHow to Extend Coverage- problems -- problems -

• Rural sector less densly populatedRural sector less densly populated• Less infrastructureLess infrastructure• Less regular incomeLess regular income• Large informal sectorLarge informal sector• Low literarcy and low awarenessLow literarcy and low awareness• No identification and high mobilityNo identification and high mobility• Less access to capital marketsLess access to capital markets• Low pensions face high adminitration costsLow pensions face high adminitration costs• People do not trustPeople do not trust

More difficult to administer pensionsMore difficult to administer pensions


How to Extend Coverage How to Extend Coverage - alternatives -- alternatives -

• Universal non contributory flat rate Universal non contributory flat rate pension – means tested or notpension – means tested or not

• Volutary contributory funded Volutary contributory funded pensionpension

• Compulsory contributoryCompulsory contributory• PAYGPAYG• FundedFunded


How to Extend Coverage How to Extend Coverage - flat rate pensions -- flat rate pensions -

AdvantagesAdvantages• Everybody is Everybody is

coveredcovered• Easy to Easy to

administeradminister• Guarantees Guarantees

universal universal protectionprotection

DisadvantagesDisadvantages• No link to No link to

contributionscontributions• Gives a free Gives a free

pension also to pension also to those who do not those who do not need itneed it


How to Extend Coverage How to Extend Coverage - voluntary contributory -- voluntary contributory -

AdvantagesAdvantages• Link to Link to

contributionscontributions• Less budgetary Less budgetary

implicationsimplications

DisadvantagesDisadvantages• Poor cannot affordPoor cannot afford• High administrative High administrative

challengechallenge• Underestimation of Underestimation of

need by peopleneed by people• No solution to No solution to

povertypoverty


How to Extend Coverage How to Extend Coverage - compulsory contributory - compulsory contributory

--AdvantagesAdvantages

• Everybody is Everybody is coveredcovered

• More solidarity More solidarity effects possibleeffects possible

DisadvantagesDisadvantages• Difficult to Difficult to

enforceenforce• Political Political

resistanceresistance


How to Extend Coverage How to Extend Coverage - PAYG contributory -- PAYG contributory -

AdvantagesAdvantages• High surpluses in High surpluses in

building – up building – up phasephase

• No capital market No capital market neededneeded

• Easy to Easy to administeradminister

DisadvantagesDisadvantages• Higher Higher

contributions with contributions with agingaging

• Needs mechanism Needs mechanism to prevent erosionto prevent erosion

• Benefits not Benefits not defineddefined


How to Extend Coverage How to Extend Coverage - funde schemes -- funde schemes -

• AdvantagesAdvantages• Not sensible to Not sensible to

agingaging• Accumulates Accumulates

capitalcapital• Benefits are Benefits are

defined (within defined (within limits)limits)

• DisadvantagesDisadvantages• Needs capital Needs capital

marketmarket• Benefits depend Benefits depend

on fund on fund managementmanagement

• Higher Higher administration administration costscosts


How to Extend Coverage How to Extend Coverage - how to reach rural population -- how to reach rural population -

• To involve communities and To involve communities and extend to communitiesextend to communities

• To do social marketingTo do social marketing• To do low cost administrationTo do low cost administration• To create synergy effects with To create synergy effects with

other public administrationother public administration• To create synergy effects with To create synergy effects with

other products like microfinanceother products like microfinance


How to Extend Coverage How to Extend Coverage - risks -- risks -

• Mismanagement of fundsMismanagement of funds• FraudFraud• Policy risks and Government risksPolicy risks and Government risks• Loss of information and contact Loss of information and contact

riskrisk• Insolvency riskInsolvency risk• Discontinuation and drop out riskDiscontinuation and drop out risk


Policy IssuesPolicy Issues


Policy IssuesPolicy Issues

• „„Society for all AgesSociety for all Ages“ must be “ must be discovereddiscovered

• Awareness must be created that Awareness must be created that Social protection is Social protection is affordableaffordable!!

• Schemes must be Schemes must be built up and built up and reformedreformed

• To pay to every person over 65 in To pay to every person over 65 in China a pension of 2$ a day costs China a pension of 2$ a day costs 2% of GDP 2% of GDP


Thank YouThank You


SourcesSources

• World Population Prospects, 2006 World Population Prospects, 2006 revision. UN 2007revision. UN 2007

• The retirement project: Urban The retirement project: Urban Institute 2000Institute 2000

• Aging in Asia. The growing need Aging in Asia. The growing need for social protection. ILO 2000for social protection. ILO 2000

• Help Age International 2007Help Age International 2007• ADB Social Protection Index ProjectADB Social Protection Index Project

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Expanding Pension System Coverage