Public Pension Programs in Southeast Asia: An Assessment

• Author: Mukul Asher,Azad S. Bali
• Date: 01 July 2015
• Published date: 01 July 2015
• DOI: http://doi.org/10.1111/aepr.12100

Public Pension Programs in Southeast Asia:

An Assessment

Mukul ASHER1† and Azad S. BALI2

1LKY School of Public Policy, National University of Singapore, 2School of Management & Governance,

Murdoch University

This paper assesses public pension programs in select Southeast Asian economies (Indonesia,

Malaysia, the Philippines, Singapore, Thailand,and Vietnam – henceforth referred to as the SEA6)

and the key issues facing them. The criteria used in assessing pension systems are the philosophy of

pension design, the extent of coverage, investment policies and performance, and administrative

and compliance costs. The paper argues that three broad reform directions to strengthen public

pensions merit consideration. The first direction is to enhance the professionalism of the existing

provident and pension fund organizations, including their governance practices.The second direc-

tion is to strengthen the role of noncontributory budget-financed pensions (e.g. social pensions).

The third is to adopt a systemic perspective to pension reform that includes reforms in comple-

mentary areas (labor markets, public financial management practices, and the civil service); devel-

oping a financing-mix of pensions; and lastly, improving effective coverage by exploring

complementarities between health care and pension programs.

Key words: pension reform, public pensions, retirement income policy,social protection, social

security, Southeast Asia

JEL codes: H55, H75, J26

1. Introduction

Current demographic trends suggest that most economies in Southeast Asia will age at

relatively low incomes, and at a pace that will allow a small window of opportunity for

adjustments in the design of pension programs and reforming institutions that support

social protection systems. Pension systems will have to finance retirement expenditure

for an ageing population for a longer duration, and will therefore have to increase the

share of society’s resources to devote to the elderly. Additional funding will also require

changes in the financing-mix used to provide pensions in these countries.1

While there is significant heterogeneity among pension systems in Southeast Asia in

terms of their social protection philosophy, institutional features, macroeconomic

sustainability, and coverage rates,a common theme that emerges is that the contribution

of the public or government-organized pension programs in ensuring old-age income

security is relatively small. This stems from many reasons.

First, most of these countries have large shares of the labor force that are employed in

the informal sector, and extendingsocial secur ity coverageand ensur ing a high density of

†Correspondence: Mukul Asher, LKY School of Public Policy, National University of Singapore,

469c Bukit Timah Road, Singapore 259772. Email: sppasher@nus.edu.sg

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doi: 10.1111/aepr.12100 Asian Economic Policy Review (2015) 10, 225–245

© 2015 Japan Center for Economic Research 225

contributions is challenging.2Second, there are many governance challenges that have

weakened professionalism and organizational effectiveness of provident and pension

fund organizations in developing economies. Third, social protection reflects in some

measure a contract between the state and its people. The terms of reference that guide

this contract vary across economies and stem from differing philosophies, ideological

preferences, and collective opinion on the role of the state in provision and financing of

social policy.

Diminished growth prospects in the aftermath of the economic crisis have accentu-

ated the economic and political need for strengthening social safety nets and in particu-

lar expanding publicly financed and organized programs. Many developing economies in

Asia (including China, India, Indonesia, Thailand, and Vietnam) are at the precipice of

implementing or have implemented wide-ranging social protection reforms that outline

a greater role of the state in administering and financing social policy, particularly health

care and pension programs (Ramesh, 2009).

While public pension programs (contributory and noncontributory) have an impor-

tant role in managing old-age income security (smoothening consumption, mitigating

poverty, and insuring longevity, inflation, and survivors’ risks), they also have an impor-

tant macroeconomic function in supporting economic growth (Barr & Diamond, 2008).

Over the past decade, the importance of noncontributory retirement income transfers

financed from the state has also been part of policy debate in social security reform.

In the above context, this paper assesses public pension programs in the SEA6 econo-

mies, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam, and the

key issues facing them. The characteristics used in assessing pension systems are philoso-

phy of pension design, the extent of coverage, investment policies and performance, and

how these economies manage pension-related administrative and compliance costs.

The next section reviews demography trends in the SEA6 countries which suggest

that there is an urgent need for pension reform. This is followed by a comparative assess-

ment of pension programs on the basis of the aforementioned criteria. The paper con-

cludes with suggestions for broad directions of reforms for public pensions.

2. Demographic Trends: Key Characteristics

Advances in longevity at all ages through the life cycle is historically unprecedented and

has implications for ensuring old-age income security. Assuming constant retirement

age, a higher longevity implies that an increasing proportion of the average life span is

spent in retirement. One of the main drivers of longevity is the compression of mortality

at advanced ages, resulting in an increasing share of the old-old (people aged above 85)

in the population (Eggleston & Fuchs, 2012). Not only do health care and pension pro-

grams need to be financed for a longer period, but also for a growing number of indi-

viduals. While aggregate pension spending in real terms (adjusting for prices) is largely a

function of time spent in retirement by a cohort of retirees, health-care spending on the

other hand increases disproportionately with age. Successive cohorts of retirees are there-

fore spending relatively more on health care in real terms as they live longer. This implies

Public Pension Programs in Southeast Asia Mukul Asher and Azad S. Bali

© 2015 Japan Center for Economic Research226