Retiring in Asia: A Longevity Risk
SEOUL - May 20th, 2014 – The Asia Society Korea Center and Kyobo Life partnered up to present a panel discussion on “Retiring in Asia: A Longevity Risk”. The panelists were made up of three distinguished experts in the field; Jin Ho Park, Head of Corporate Pension in Kyobo Life, Shashi Maudgal, Chairman of the Indian Chamber of Commerce in Korea, and Takuya Sasayama, Minister of the Embassy of Japan. The panel discussion focused on the current situation of retirement in India, Japan and Asia as a whole, and talked about what both people and governments can do to help ensure a successful retirement.
Mr. Shashi Maudgal started the discussion by introducing the current situation of retirement in India, some of the issues that Indians are faced with, and how these problems are affecting not only the individual but also the Indian economy as a whole. Mr. Maudgal started by saying how India has one of the highest saving rates of all OECD countries at over 30% and the main reason for this is the fear of what may happen after retirement. People are worried about their income after retirement and if they are able to support themselves in the latter part of their life. The one issue the Indian people are ultimately concerned about is their potential future health costs that they may incur and this is a driving force behind their high saving rate.
Mr. Maudgal went on to say that although this heavy saving can have some positive effects, for example giving the individual more capital in which they can invest, generally this heavy saving will have a negative impact on the economy. As Mr. Maudgal explained, the most critical thing in improving the economy is consumption spending, something that is currently far too low in India. With more spending, GDP will inevitably grow and the country will therefore be in a much stronger position to look after its people after retirement. People need to save less and spend more was the underlying message from Mr. Maudgal and this is ultimately the best way to manage the longevity risk in India.
The second panelist to speak was Takuya Sasamaya from the Embassy of Japan and he broke down his talk into three main parts; the current situation in Japan and in what direction the aged society is moving, how the Japanese people and governemnet are dealing with the problems related to retirement, and finally examples of what the elderly are doing in their elderly life in Japan. According to Mr. Sasayama, Japan classifies someone over the age of 65 as being a senior citizen. This percentage of senior citizens is rapidly increasing and therefore putting a lot of pressure on both the government and productive generation. In Japan today, almost half of all households have a senior citizen living there, and the number of households that consist of only senior citizens is also on the rise. 25% of the Japanese population is currently over the age of 65 and by 2060 this figure will rise to 40%. As Mr. Sasayama explained, this is creating a huge burden to the younger generation. In 1965 there were 10 young people supporting one senior citizen meaning a ratio of 10:1. Right now the ratio is 3:1 and in the future it is going to be 1:1, something that Mr. Sasayama called the “piggyback system”. This burden will not only be felt not only by the productive generation but also by the Japanese government who will face an increasing in pension related spending etc.
Mr. Sasayama then went on to talk about what the government is doing to deal with the increasing number of senior citizens and the burden that the country is facing because of this. Following a long discussion between politicians about this increasingly aged society, last year it was finally decided to increase consumption tax from 5% to 10%. This comprehensive reform of the social security and tax system in Japan came about after 17 years of discussion and it is hoped to have a dramatic impact on the welfare system in Japan. It was explained that because of the current economical situation that a 2% increase in consumption tax was applied from April 1st this year and a further 3% increase will take effect from October 2015. This extra income in tax will be used to maintain the current social security system (4%) and to enrich and implement new policies (1%). A 1% increase in tax equates to 2.8 trillion Yen more that the government have to spend. These new policies that the government will implement focus on local community care rather than nationwide care and more emphasis is placed upon local community centers and systems.
In his conclusion, Mr. Sasayama talked about what the elderly in Japan are doing in their elderly life by giving 3 examples. The first example he gave was the Senior Citizens Club in which there are 110,000 nationwide and have 6.7 million senior citizens as members. These clubs get involved in family support centers and senior citizens can volunteer to take part in after school clubs or child minding. This will give the senior citizens more responsibility, keep them active and therefore a more comfortable retirement. The second example was the increase of the retirement age from 65 to 70 and the final example was the Senior Volunteer System. These are both similar as they encourage the ageing to use their working environment to enhance their retirement, either through training of the new productive generation or by starting new retirement roles earlier while still working. Mr. Sasayama’s final comments were that the issue of Japan’s ageing society is not something that we should be thinking about in the future but is actually ongoing with the need to build a resistant society.
The final speaker of the discussion was Mr. Jin Ho Park from Kyobo Life who shared his thoughts on life after retirement and longevity issues in both the US and Korea. Mr. Park started by stating that retirement and longevity is fundamentally the same regardless of country but is in fact fundamentally different because of timing and the generation issues. Longevity risk was a big issue in the US and Europe decades ago but is relatively new here in Asia. The main reason for this global longevity risk is that people are living longer with limited assets and therefore there is no one party who can fix this problem. It requires governments, private institutions and individuals working together to overcome the challenges that are faced. Mr. Park explains that a lot of government bonds are in fact strongly related to pension funds and this creates a supply and demand situation and as people are now living longer, this is creating more demand on the government. Another interesting issue that Mr. Park pointed out is that medical inflation is higher than general inflation despite people living longer. These two key points are important factors in why we are faced with an ever more challenging situation.
Before he went on to talk about the fundamental changes we face in retirement issues, Mr. Park described how it is important to understand the change in attitudes of the different generations in the US and Europe. The big increase in population can be associated to the “baby boomers” of 1948-1964 that were born after World War II. As children of a generation that had experienced the hardest time in history with the Great Depression and the two world wars, they had instilled in them tradition values. They provided good labor, were willing to invest, purchased houses, and thought about their futures. The next generation was called “baby busters” due to the period of decreasing birth rates. This generation tended to deny traditional values as life for them was good. They didn’t have to study hard to get a job, they saw huge economic growth and had a lot of disposable income. Mr. Park went on to explain the final generation, “generation Y” was brought up in an era of negotiation, and would study hard on the condition that they would get something out of it. These changes of attitudes are important to help understand retirement and longevity risks.
Mr. Park next talks about how the increasing in life expectancy combined with the lower birth rate meant that the “baby boomers” realized that the next generation would not be able to support them, nor willing to, and therefore they foresaw this problem and corporate pensions were introduced. Corporate pensions were good news for everyone as the government transferred the pension risk to the corporate sector, and the corporate sector was able to receive tax breaks, establish good welfare systems to attract good quality labor and effectively borrow employee’s money for investment. According to Mr. Park, this all changed after 2003 when the “baby boomers” started to retire and there was a shortfall in corporate pension schemes. Therefore companies started to change their employee’s pension from a Defined Benefit (DB) pension plan to a Defined Contribution (DC) pension plan which meant that employees were responsible for more risk relating to their pensions. Mr. Park summed up the situation in the US and Europe in 3 clear steps. First of all there was a shortage in Nation Pensions so governments transferred these risks to DB corporate pensions who in turn transferred the risks to employees in the form of DC corporate pensions.
At the end of his talk, Mr. Park spoke about retirement and longevity risk specifically in Asia. In Asia the life expectancy has jumped from 56 years in 1965 to 76 years in the current day. Whereas the US and Europe have been thinking about retirement risks for decades, this thinking is relatively new in Asia. The national pensions in Asia are far below the OECD average and corporate pensions were only implemented in Asia in the 1990’s and 2000’s with Korea implementing corporate pensions as late as 2005. Mr. Park said to understand longevity risks it is important to understand how each country is different and how they have different starting points. The US and Europe is relatively well prepared for retirement while Asia is not. Mr. Park concluded by saying that governments and companies but educate and raise awareness of the retirement and longevity risks to ensure that people are well prepared for their futures.