No Golden Handshake? : Work Till You Live

“All countries should begin planning now.”
– Averting the Old-Age Crisis,World Bank, 1994

Pension expenditures across Asia will be up from 1% to 3.6% of GDP by 2030. It was never meant to be this expensive. A century ago, most people did not live long enough to worry about retirement. When Otto von Bismarck introduced the first state funded pension in 1889, it was designed for those over 70 at a time when Germany’s average life expectancy was just 39. The goal of the scheme was to keep workers loyal, socialists at bay, and not to help the elderly. Few people lived long enough to withdraw them, so it worked back then. This was picked up by other countries during industrialisation, for similar reasons, so as to maintain stability against labour movements.

Fast forward to Asia in the 21st century, and the math no longer adds up. People are living longer, but pension systems are either incomplete, underfunded, or outright broken. Many countries introduced pensions while still moving from agrarian to industrial economies. Formal employment was not widespread. Social safety nets were weak. Governments assumed economic growth would take care of future pensions. It didn’t.

Asian countries never built the kind of welfare state seen in post-war Europe. The region’s approach to pension was shaped by economic pragmatism more than social security. Esping-Andersen’s classic welfare state typology, liberal, conservative, and social-democratic, struggles to fit Asian economies. Instead, academics like Ian Holliday have argued that Asia is closer to a “productivist welfare model,” in which economic expansion is prioritised and social security is intended to meet the demands of the labour market rather than social redistribution. This is evident in how pensions are structured. Unlike Europe, where universal pension schemes provide a baseline income for all, most Asian countries have fragmented systems that tie benefits to employment status. Civil servants and formal sector workers receive generous pensions, while informal workers, migrants, and rural populations are left with little to no safety net. In China, for instance, retired government workers receive pensions nearly four times higher than those from the private sector.

Towards Demographic Burden

A demographic explosion drove Asia’s economic rise. The “Asian Economic Miracle,” a term associated with World Bank economist Andrew Mason, described how certain countries took advantage of their demographic dividend, a period when the working-age population far outnumbered the dependents6. The paper challenged the prevalent neoclassical economic theory of the day by highlighting how government intervention, trade policies, and labour-intensive industries let nations maximise this advantage.

Overpopulation was the main concern at the time. Asia was at the center of it. Too many people, not enough resources. Governments responded with aggressive birth control policies: China’s one-child policy, India’s sterilisation drives. For decades, the Malthusian concern about unbridled population increased shaped social and economic development. But the real “population bomb” of the 21st century is not too many people, it’s too few young workers supporting too many elderly. “Longevity and lower fertility are turning the classic population pyramid into a rectangle,” demographers Dr. Deboosere and Dr. Vandenheede note.

And the problem is bigger than just aging, many Asian economies are hitting the ‘middle-income cliff’. Initially coined by economist Oizumi Keiichiro from Japan Research Institute, the term captures a more extreme form of the middle-income trap whereby countries experience population ageing before attaining high-income status causing economic stagnation. Unlike the typical growth slowdown in middle-income economies, these countries face a shrinking workforce and rising dependency ratios before they fully develop. China, Thailand, Vietnam, Malaysia, and the very nations riding a young workforce to wealth are suddenly ageing before their economies develop. Although many middle-income countries peaked in working-age share between 2010 and 2020, their GDP growth is now slowing. The working-age population of China fell for the first time in 2012 and is expected to fall by 200 million by 2025. Thailand’s labour force peaked in 2017 and is in freefall going forward. Additionally, Vietnam peaked in 2011 and South Korea in 2019. By 2040, the same pattern will also strike Indonesia, Bangladesh, India, and Singapore.

Countries by when total fertility is expected or observed to fall below 2.1 births per woman

This decrease in the working population is the direct result of a historic fall in fertility rates. Fertility rates have nosedived in countries across Asia. With fertility rates much below the replacement level of 2.1, Japan (1.2) and South Korea (0.7) have some of the lowest birth rates worldwide. South Asian and Central nations such as Yemen (4.6) still have high fertility rates, thus their populations will remain younger for longer. Though younger, India (2.0) is following this path as urban fertility rates drop drastically.

Part of the explanation is also the growing dependency ratio. From 6% in Central Asia and Western Asia to 17% in East Asia, the share of people aged 65 and above is also progressively rising. With a shockingly 29% elderly population, Japan leads; followed by South Korea at 19%; Taiwan at 18%; and China at 15%. By contrast, areas like South Asia and Central Asia still have rather young populations; just 7% and 6% respectively are 65+ years old. Except for western Asia, most Asian countries are expected to fall below the replacement rate 2.1 by 2025, though.
This slow change marks the end of demographic dividend, which drove the Asian miracle and toward demographic onus, burdening the economy from aging population. Oizumi points out that “if the demographic divided can be considered as a tailwind for economic growth, population ageing could be considered as a headwind.” The headwind brought on by population ageing is clearly showing now.

Social Safety Net for the Aged in Asia:

One of the most visible effects of demographic onus is in our safety nets. These systems, designed for a time when workers outnumbered retirees, are now struggling to keep up with shrinking workforces and an ageing population.

Table 1- Membership of mandatory pension schemes by population and labour force

Pension coverage across Asia is rather unequal. With Hong Kong leading at 90.8% of the working-age population registered in a pension scheme, China and Japan have some of the highest pension coverage percentages. South Asia lags far behind. At just 6.6%, Pakistan has the lowest coverage; India, with its large economy, covers just 27.2% of made worse by the way labour markets are set up. Workers in the sizable informal sectors of many Asian economies never make pension contributions. In India, 90% of the workforce works without the protections of the pension system, even though formal employees are covered by it. Southeast Asia, where there is still a significant amount of informal employment, faces the same issue. As a result, many retirees rely on insufficient personal savings or family support instead of receiving any official pension at all. In nations like the Vietnam, where only 25% of the working-age population has pension coverage, the situation is especially dire. These systems tend to exclude or marginalise women, as they often fail to consider the challenges faced by them. Although countries do provide targeted pension to the most vulnerable (destitutes, or widows), these tend to be quite little.

For those who do have pensions, the differences are rather striking. Retirees of China’s government get four times the pension paid in the private sector. Public-sector workers in Malaysia, Japan, and Korea have far more generous benefits than those in the private sector. This two-tier system has increased disparity and left many workers without protection. Among those who qualify, replacement rates, that is, pension as a percentage of pre-retirement income are low relative to OECD benchmarks. At 72%, the Philippines boasts the highest replacement rate; India, Malaysia, and Sri Lanka all fall below 40%. Moreover, net pension replacement rates, what retirees take home after taxes, also vary greatly. China leads at 88%; Pakistan comes in lowest at 41%. The inequalities do not stop there either. China boasts the highest pension wealth, that is, the whole lifetime value of retirement benefits, 15.7 times annual earnings for men, 15.5 for women, while Pakistan and Sri Lanka have just 6.1 times annual earnings.

The real crisis, though, is with pension funding. Most Asian nations rely on Pay-As- You-Go (PAYG) systems, in which current workers support current retirees. This comes under Defined Benefit (DB) system, where employers and government bear the cost of pension. These models collapse when the worker-to-retiree ratio declines. By 2035 China’s urban worker pension fund is expected to be in deficit; South Korea’s reserves will run out by 2055. Already spending 10% of its GDP on pensions, Japan is seeing rising expenses. China’s ageing population is expected to rise to some 26% by 2050, giving rise to the 4-2-1 problem, meaning one child would have to bear the responsibility of two parents and sometimes four grandparents, a result of the one-child policy era. With a declining current replacement rate of 1.16 compared to, the necessary 2.1 for a stable population. America, for instance, has a declining yet more stable replacement rate of 1.62, supported by its open immigration policies, a stance opposed by many East Asian countries. Governments across Asia will be compelled to cut benefits, increase taxes, or borrow without intervention, so burdening the financial load to next generations.

Some nations have switched to Defined Contribution (DC) systems, whereby employees fund their own retirement. Moving towards funded defined contribution (FDC) models, which lighten the state’s load, Malaysia, Singapore, and Sri Lanka Combining pensions with housing savings and healthcare savings, Singapore’s Central Provident Fund (CPF) distributes risk across several needs. These systems do, however, come with certain dangers. Today, financial markets and wages define retirement security. Workers save less if wages remain unchanged. Retirement funds disappear if markets collapse. With some of the lowest accrual rates (below 0.5%), speed at which pensions grow, India and Hong Kong practically make it impossible for low-income workers to save enough.

Governments are already confronting difficult decisions. The financial pressure is growing. China’s workforce is declining while its pension expenditure is set to triple by 2030. Among the fastest-growing dependence ratios worldwide are those of Thailand (44 per 100) and South Korea (41 per 100). By 2054, China’s old-age dependency ratio is also expected to reach 64.2 per 100 working-age persons; in Hong Kong, it will soar to 117.1. By 2040, once young economies like Indonesia, India, and Bangladesh will face demographic pressure. Governments expected economic development to support pension funds, but GDP by itself cannot help to solve the crisis. Particularly in low-tax countries, the pension load is rising more quickly than tax collections.

Many Asian governments maintained low tax rates to remain competitive, unlike Europe, where strong taxes support social security. This is now backfiring. Economist Peter Morgan from ADB, estimates that public pension spending in emerging Asian economies will increase by up to 3.6 percentage points of GDP by 2030. For some countries, this will be a gradual shift. For others, it will be a fiscal shock. But unlike Japan, many Asian economies have not yet reached high-income status. They will have to bear this burden with weaker fiscal reserves.

Pension Expenditure as percentage of GDP, 2010-2050

To escape this, some governments are experimenting with hybrid pension plans. PAYG is mixed in China with personal savings accounts. The CPF system in Singapore distributes risk among several uses. All of these strategies, however, call for more labour contributions and lowering take-home pay. To increase pension coverage, other governments might be compelled to levy social security taxes on unregistered income. Without reform, millions of retirees will be left without support.

The ‘Workforce’ Squeeze

The actual burden of an ageing population is not just on pension systems but on the labour force. Not only are retirees supported by the declining 24–65 age group; they also bear the financial weight of whole economies. Less workers today have to support more pensioners, but that is only one aspect of the issue. They are also paying for their own growing needs including childcare, housing, healthcare, and savings for their own ultimate retirement. The outcome is a generation being financially stretched in both directions.

Many of this workforce are aware they are funding a system that might not be able to help them down road. While they pay more to support pensions for others, they have little assurance those pensions will last when it comes time for their own retirement. Unlike the generation of their parents, they cannot depend on government safety nets or extended families to give financial stability. Rather, they have to negotiate a volatile job market and growing expenses with less public benefits.

Often the answer is delaying retirement. More countries are opting to increase the retirement age. This, however, assumes that people can and want to work into their late sixties and seventies. For many in physically taxing professions, this is impractical. Currently, women can still retire five years earlier than men in countries including China, Pakistan, and Sri Lanka; but this policy is probably going to be changed, adding more pressure. Others, including Australia and Japan, have already raised retirement ages above 65, so defining longer working life as the norm. Longer careers do not always translate into steady employment, though. Many older employees struggle to keep up in sectors that are fast changing or suffer with age discrimination.

Another approach countries are trying to experiment with is improving fertility. Some governments have begun to set up matchmaking for their young labour force, by making fertility a state issue. Meanwhile, civil society and market are stepping up to fill these gaps. For example, Emoha in Bangalore, India, has a vertical called Emoha’s Daughters who are assigned to elderly for remote caregiving. But that is far from enough.

As economist Andrew Mason noted, countries with a “workforce bulge,” see more economic growth and productivity. That bulge is now changing into a workforce squeeze. This is more than just pension crisis, it’s an economic one. Younger generations will inherit a system that no longer fits them, disposable incomes will drop, and tax loads will grow. Governments must make impossible decisions between raising payroll taxes, cutting benefits, pushing more risk onto individuals, or raising retirement ages. While every decision has political and financial consequences, doing nothing is the most expensive one of all.

The pension crisis facing Asia is not a future one. There are already signs of the squeeze. Whether governments act now or later will decide whether retirement stays a right or turns into a privilege only the few can afford.