AGE RELATED PENSION EXPENDITURE AND FISCAL SPACE

SPEAKERS

Prof. Mukul Asher Professorial Fellow, Lee Kuan Yew School of Public Policy

Dr. Fauziah Zen Economist, Economic Research Institute for ASEAN and East Asia

Overview

• This book explores the linkages between age-related pension expenditures and the fiscal space needed to fund them, and possible options for fiscal space.

• The book also discusses the different financing mixes used, and the risk-sharing arrangements in four Asian countries: China, India, Indonesia, and Japan who have large populations.

• This book has several additional distinguishing characteristics.

2

Distinguishing Characteristics– First, it provides a critical review of the existing modeling

techniques to project age-related expenditure. – Second, it explores the inter-linkages between age-related

expenditure, fiscal space, and financing methods. – Third, the case studies of four large Asian economies are

instructive for other economies, as they need to design and implement context specific policies to find requisite fiscal space and corresponding financing methods.

– Fourth, the book also contains a chapter by the Finance Minister of Indonesia that analyses challenges in implementing social security reform.

– Fifth, the book explains funding vs financing distinctions, limitations of demographic projections used in pension modeling and population policies and the concept of fiscal space.

– The book thus links modeling techniques, analysis of age-related expenditures, and the challenges of policymakers in an integrated manner. This is perhaps the first book to do so.

3

Modelling Pension Expenditure:Inadequacies of cross-country models

Table-2 Decomposition of pension spending growth, 2010-2030 (% of GDP)

Table-1 Public pension expenditure of three Asian countries (% of GDP)

4

Modelling Pension Expenditure:Inadequacies of cross-country models

Table-3 Total age-related spending (including public pension, health care, long-term care, and unemployment benefits of three Asian economies (% of GDP)

Table-4 Total age-related spending (including public pension, health care, long-term care and unemployment benefits) of three Asian economies (% of GDP)

5

Methodology Used in The Book

• The methodology used in the book is country-context specific, and uses disaggregated pension component based estimates rather than an aggregate macroeconomic model.

• This methodology also has its limitation as judgmental factors play a role, and only a range of estimates rather than point estimates are used.

• The methodology, however, does permit institutional and other characteristics, including the administrative and compliance sufficiencies to be taken into account in the estimates.

6

Selected Results: China

7

• Table 3.5 (pg. 53) typifies the projections of public pension expenditure for rapidly-aging China.

Selected Results: China

• China chapter identifies the parametric reforms, drawing on national social security fund, dividends from SOEs, investment returns from foreign exchange reserves and improving productivity, as among combination of options to help generate the fiscal space.

8

Selected Results: India

• Table 4.2 (pg. 82)

9

Selected Results: India

• The India chapter examines the projection of pension expenditures by various components, such as for civil service, military personnel, by private sector employees and the national social assistance programs.

• It also stresses the contingent liabilities inherent in many of the programs.

• In contrast to stagnant pension spending on pensions, and total age-related spending of around 1% of GDP projected by international agencies, the India chapter estimates that by 2030 between 2-4 percent of GDP will be needed for pension expenditure alone.

• It identifies greater professionalism among provident and pension fund organizations, using state assets more productively, and parametric reforms will be needed to generate the required fiscal space and sustaining high broad-base growth.

10

Selected Results: Indonesia

• The chapter provides the projection of the pension expenditures in Indonesia amidst the undergoing reform on social security sector triggered by new Law of SJSN where many of the arrangements are yet to be clearly spelled.

• One of the mandated new program by the Law is universal pension–the study assumes several scenarios, i.e. that the government will either extend a public pension for poor, for all informal sector, or for all members of population. The study finds that the government will have to spend 1-4.5% of GDP annually for basic public pension expenditures depending on scenarios assumed.

• Fiscal space-relieving measures can be achieved by increasing tax revenue, regularly increasing contribution, maximizing investment return, and sharing civil servant pension burden between Central and Local Government which could change the incentive structure of Local Government in their employment policies.

11

Selected Results: Indonesia

• Brodjonegoro et al. gives a rare view from the government’s side, where the government has anticipated the rising aspirations of Indonesian middle class by implementing a comprehensive approach of institutional transformations from existing fragmented social security system. The establishment of two separate and independent BPJS on Healthcare and Labor is the example of such transformations.

• The government also emphasizes the importance of accurate database for better social security spending, where it aims to improve the Unified Database for the poorest 40% of Indonesia population.

12

Selected Results: Japan• For Japan, the growth rates and the pension eligibility age were found to

be important factors in managing pension liabilities.

• Japan also aims to improve rate of return of assets in its government pension fund as an option for increasing the fiscal space.

13

Concluding Remarks• This book analyzes age related pension expenditure and

finding fiscal space for four large highly-populated Asian countries, but with uneven ageing trends.

• The lack of good quality relevant data and actuarial studies and demographic projections, was particularly evident in the studied countries other than Japan.

• A rich research agenda, specialized as well as interdisciplinary, can be derived from the contents of this book.

14

Way Forward

• It is hoped that the book will contribute to moving empirical evidence-based and professionally-managed pension systems to the forefront of public policy agenda in Asia.

• ERIA’s further work in social protection focuses on Social Protection Floor (SPF) and finding fiscal pace for the Sustainable Development Goals (SDGs) adopted in 2015. The incoming book on SPF covering eight countries in East Asia, along with a chapter on modelling SPF expenditure, will help carry forward the research in this area. The Book is expected to be published in the first half of 2017. It provides further analyses on the Social Security System.

15