Strengthening Social Protection in East Asia

Mukul G. Asher, Fukunari Kimura, Mukul G. Asher, Fukunari Kimura

• Publisher: Taylor & Francis
• Year: 2015
• Print ISBN: 9781138817142
• eBook ISBN: 9781317510666
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This book focuses on relatively unexplored areas in pension and health care arrangements, including financing, in East Asia. The book aims to fill the literature gap on social protection in East Asia by covering issues such as pension and health care arrangements in the depopulating high income countries of Japan and Korea; the challenges of the pay-out phase in Defined Contribution (DC) arrangements in Australia, New Zealand, and Singapore; and the extension of coverage of social protection schemes in China, India, and Indonesia. It also reviews social protection from a much wider perspective and extends coverage of social protection in terms of both the proportion of the population with access to the social protection scheme and the types of risks faced by the households and by society as a whole. The book also gives attention to reforms of civil service pensions.

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Selected issues in Strengthening Social Protection in East Asia

An overview

Mukul G. Asher and Fukunari Kimura

1. Introduction

The importance of addressing the challenges of ageing populations in a coherent, competent, sustainable, and fair manner is increasingly recognized globally, including in Asia. Demographic trends portending rapid ageing, decreases in medium-term growth prospects in the aftermath of the 2008 global crisis, the increasing importance of sound public financial management, and changing labour market dynamics impacting on the generation of jobs, along with relative stagnation in real wages, are some of the major factors which have contributed to this recognition.

It is in the above context that this volume, comprising specially commissioned papers on addressing selected challenges of ageing populations in East Asia, is conceived. The issues covered include pension and healthcare arrangements in the depopulating high-income countries of Japan and Korea; the challenges of the pay-out phase in Defined Contribution (DC) arrangements in Australia, New Zealand, and Singapore; civil service pension arrangements in India, Thailand, and the Philippines; and extension of the coverage of social protection schemes in China, India, and Indonesia, three countries with large populations but low coverage by formal social protection.

This volume represents a second phase of the ERIA (Economic Research Institute for ASEAN [the Association of Southeast Asian Nations] and East Asia) project on social protection. The first phase was completed in March 2010 and was published as an ERIA report entitled “Social Protection in East Asia: Current State and Challenges”. The 2010 report comprised 13 country chapters (covering Japan, Korea, Singapore, Brunei, China, Indonesia, India, the Philippines, Thailand, Vietnam, Cambodia, and Laos) and an overview chapter (Asher et al., 2010).

The first ERIA report focused on providing an overview of social protection systems in individual countries. Recent contributions on Asian pension systems (Park, 2011) have also focused on the overall pension systems in individual countries. The limitations of such an approach are that an issue-specific comparative analysis involving similarly situated countries, and a more detailed policy-relevant analysis of how specific issues have been addressed in different Asian countries, cannot be fully developed.

The main distinguishing characteristic of this volume is that it analyses specific issues in social protection which have been relatively neglected, using a comparative context of countries with similar levels of income, demographic status, financial sector development, and other relevant characteristics. Thus, it avoids over-generalizations about social protection systems in Asia and permits a detailed policy-relevant analysis of specific issues designed to meet the challenges of ageing populations. The above characteristics are evident in the selection of specific issues and in the sub-groups of similar countries chosen for the analysis.

The chapters on Japan and Korea, by Noriyuki Takayama and Hyungpyo Moon respectively (Chapters 2 and 3), focus on pension and healthcare management in affluent ageing depopulating countries. The dynamics of the two sectors are different, and the health challenges, particularly the funding of healthcare in an effective and fair manner, may prove to be even more difficult than finding societal resources for pensions. The challenges of the two depopulating countries are qualitatively different than those of the other Asian countries.

The chapters on Japan and Korea highlight the need to consider pension and healthcare costs in an integrated manner, with policy and organizational coherence within the pension and healthcare sectors, as well as between these two sectors.¹ The experience of these two countries would have implications for public policies towards ageing in other East Asian economies, especially Singapore, Australia, and New Zealand. Policymakers in the middle-income countries of Asia – particularly countries with large populations, such as China, India, and Indonesia – may also find the experiences of Japan and Korea useful in coordinating pension and healthcare policies.

As relatively greater emphasis is placed on the DC method for pensions, the phase of paying out the balances accumulated during the working years becomes of greater significance. The chapter by Hazel Bateman on Australia and New Zealand (Chapter 4), and that by Ngee-Choon Chia and Albert K. Tsui on Singapore (Chapter 5) focus on the challenges in the pay-out phase of pension systems using DC methods. All three countries are comparable as a sub-group. The chapters have implications for other East Asian countries, such as Malaysia and India, in whose pension systems DC method plays a significant role.

In many countries, there have been separate pension arrangements for civil servants. In Chapter 6, Mukul G. Asher and Friska Parulian analyse recent civil service reforms in India, the Philippines, and Thailand. India’s shift from the Defined Benefit (DB) to the DC method of providing pensions to civil servants, and setting up of a pension regulator for a modern pension architecture, may have policy implications for other countries planning civil service pension reform. As demands for fairness in pension arrangements become more pressing, and as fiscal constraints become more acute, the re-examination of civil service pension arrangements will acquire greater urgency.

2. Selected issues: chapter summaries

The following two chapters in the volume focus on the management of pension and healthcare costs in the rapidly ageing depopulating countries of Japan (Chapter 2) and South Korea (Chapter 3) respectively. Just as Japan led the Asian countries in rapid industrialization and progress towards high-income-country status during the second half of the 20th century, it has been leading the rest of Asia in the rapid ageing of its population. Similarly, South Korea has followed Japan in the rapid ageing process. As a result, both countries are expected to exhibit a decline in population.² The decline in absolute population, in conjunction with uncertain longevity trends, has significant implications for both pensions and healthcare costs. How these two countries manage these costs could offer significant lessons for other Asian countries that are also experiencing ageing of the population.

2.1. Pensions and healthcare in depopulating countries

The main findings of the chapter on Japan, by Noriyuki Takayama, may be summarized as follows. In the past, families and occupational schemes were the major old-age safety net in Japan. The principal social security pension program was introduced during World War II. It had developed gradually, during the period of rapid economic growth, and the growth of pension and healthcare programs appeared as a dividend of economic growth. An enormous shift of the population from farmers to salaried employees took place during the rapid growth period, along with increases in life expectancy. The household size became smaller on average. The rise and fall of private enterprises was very common in this period. These factors forced a major source of old-age income to shift from families and occupational schemes to social security pension programs. The future demographic and economic situations of Japan will, however, make the current generous social security pensions hard to sustain.

One of the major objectives of the 2004 pension reforms was to eventually eliminate the huge excess liabilities of JPY 500 trillion on the balance sheet of the Kosei-Nenekin-Hoken. The plan is to generate a surplus equal to this amount by (1) hiking contributions, (2) increasing payments from the national treasury, and (3) reducing benefits. But the combination of higher contributions and lower benefits will mean the future participants will end up getting back less than they pay into the system. It is estimated that their benefits will amount to only about 80 percent of their contributions. This is hardly likely to encourage people to participate. Higher contributions will further alienate younger workers from the pension system and deepen their distrust of politics.

The decision to keep the model income replacement ratio at 50 percent at the point when pension benefit payments commence represents, in effect, the adoption of a DB formula. Maintaining both fixed contributions on the one hand and defined benefit levels on the other is not an easy task, for there is no room to deal flexibly with unforeseen developments. If the government is to keep its promise regarding an upper limit for contributions and a lower limit for benefits, the only policy option it will have in the event of a financial shortfall will be to raise the age at which people begin receiving benefits. The 2004 reform package makes no mention of such a possibility; the drafters of the bills no doubt chose to simply put off this task until a future date.

There are several unique features in the current Japanese healthcare system. First, the coverage is virtually 100 percent, with four major programs for different sectors of the population. Second, at retirement, employees are usually obliged to move to a municipal-based scheme. Third, a revenue-sharing scheme has been established for those aged 75 and over. The “old-old” pay a lower share of medical costs (co-payments and 10 percent of remaining costs), the major part of which are financed by transfers from social insurance contributions to the remaining programs and from the general revenue of both central and local governments.

Fourth, the social security coverage of medical care services and its reimbursement to providers are the same for all the programs. The social insurance coverage of medical care services (including co-payments) is still very high (around 90 percent in terms of the aggregate cost). Reimbursement to healthcare providers is principally based on a fee-for-service schedule that is uniform across different regions. Each patient in Japan enjoys free access to any medical service providers at any time, purchasing most available medical treatments at a publicly determined price through social insurance programs for healthcare. Fifth, in contrast to the benefit side, each program for healthcare adopts a different financing method.

Older people are heavy users of medical care services, and the medical cost per person per annum for those aged 75 and over was about 8.2 times the cost for those between 15 and 44 years old. Consequently, in 2008, 55 percent of aggregate medical expenses were incurred by people aged 65 and above, while their share of the total population was 22 percent. Social security programs for healthcare are becoming very similar to those for pensions, in that the basic feature of the program is income redistribution from younger and middle-aged people to older people.

The annual healthcare expenditure in 2007 in Japan was 7.3 percent of the gross domestic product (GDP), which was relatively low among Organisation for Economic Co-operation and Development (OECD) countries. Owing to the rapidly ageing population, this will increase very sharply.

In reforming the healthcare payment schedule, a prospective payment system would be advisable. Insurers can evaluate the quality of providers, giving them strong incentives through rewards based on outcome, not on input. There should also be more competition among providers and among insurers. Many people propose that the programs should be divided up on a prefectural basis. In addition, many people advocate introduction of gatekeepers, which would place some restrictions on free access to service providers.

Socio-economic conditions will change very rapidly. The changes that take place will often be beyond previous expectations. Never-ending reforms of social security are therefore inevitable in Japan as it copes with the trends of depopulation. The need for greater coordination and coherence in the pension and in healthcare systems, and in both systems taken together, also emerges from the chapter on Japan.

Hyungpo Moon in Chapter 3 analyses the policies being adopted by Korea to manage depopulating trends. He notes that the drastic decrease in the birth rate as well as the lengthened life expectancy will bring enormous demographic changes in Korea. The population aged 65 years or older is expected to reach 16.2 million in 2050, 3.7 times larger than the 4.4 million in 2005, while the working-age population aged from 15 to 64 will drop a record 35 percent during the same period.

Although the rapid demographic change affects various sectors of an economy, the most direct and significant impact will fall on age-related public programs, including public pension and healthcare systems. The biggest challenge facing social insurance systems in Korea is to contain growing public expenditures driven by population ageing and to secure adequate financial resources to maintain a sustainable social protection system for the elderly.

At the same time as a rapidly ageing population will make social protection of the elderly more important, Korea needs to strengthen its public pension and healthcare systems, which are still immature in terms of both their coverage and their benefit provisions, without sacrificing its financial stability.

It is in the above context that Moon examines the impact of population ageing on public pension and healthcare systems in Korea and discusses the policy issues for providing more sustainable and adequate risk protection for the elderly (as in the case of Japan, a need for greater coordination and coherence in the pension and healthcare systems, taken individually and jointly, is also evident in Korea).

Expanding coverage of the National Pension

Despite the nominal framework of a universal pension system that covers the whole nation, more than a third of the target individuals of the National Pension currently fail to pay contributions, including those who are exempted from contributions and delinquents. Considering that the majority of non-participants are the poor or those with low incomes, such low participation in the National Pension is likely to increase the potential risk of pulling them into old-age poverty. The empirical analysis in the chapter shows that participation behaviour is highly sensitive to variables such income, age, and gender and that the participation probability of non-regular workers is less than half that of regular workers or the self-employed. It was also shown that participation rates are lower particularly for workplaces with 10 or fewer employees in the construction and wholesale and retail trade industries.

These empirical results clearly imply that the primary target group for coverage expansion should be non-regular workers in small businesses. To prevent the spread of old-age poverty in advance by promptly enhancing the participation rate, it is necessary to devise active measures that aim to improve the participation of non-regular workers, such as provision of matching-contribution subsidies to non-regular workers or the poor self-employed, as well as to strengthen the administrative capability to manage the insured.

Enhancing the long-term financial sustainability of the National Pension

The National Pension scheme in Korea has had a serious structural problem, specifically, the imbalance between generous benefits and low contribution rates, since its introduction in 1988. This internal structural imbalance, combined with the external factor of a rapidly ageing population, seriously threatens its long-term financial sustainability. To respond to this situation, the Korean government made a parametric reform in 2008 containing measures to decrease the benefit level by one-third by 2028. Despite a huge decrease in benefit expenditures in the long term, however, it is estimated that the financial stabilization measures do not seem to be sufficient for achieving the actuarial balance of the pension fund.

Moon discusses policy directions for enhancing financial sustainability that should be pursued in the future, as follows: first, with the extremely low fertility and rapidly increasing longevity, the prefunding method needs to be strengthened for financial stability and intergenerational equity; second, a considerable increase in the contribution rate will be inevitable if the partially funded system is to be maintained; and, third, increasing the profitability of the National Pension Fund will not only improve the pension finance but also lower the contribution burden of future generations.

Containing the growth of healthcare expenditure

The biggest challenge facing Korea’s healthcare system is the rapid increase in health expenditure, mainly driven by population ageing and by increasing medical costs per elderly person. Unless measures are taken to contain the expenditure hike...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• Acknowledgments
• 1 Selected issues in Strengthening Social Protection in East Asia: an overview
• 2 Managing pension and healthcare costs in rapidly aging depopulating countries: the case of Japan
• 3 Managing pension and healthcare costs in rapidly aging depopulating countries: the case of Korea
• 4 Structuring the payout phase in a defined contribution scheme in high income countries: experiences of Australia and New Zealand
• 5 Structuring the payout phase in a defined contribution scheme in high income countries: experiences of Singapore
• 6 Civil service pension arrangements in India, the Philippines, and Thailand: an assessment
• 7 Strengthening sustainability and extending the pension coverage in China
• 8 Extending the coverage of social protection among informal workers in India
• 9 Extending social protection for informal sector workers in Indonesia
• Index