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MPFD POLICY BRIEFS

No. 81, May 2018

Mobilize finance for social protection in ageing societies

The region is undergoing profound and rapid population changes. In 2017, an estimated 572 million persons aged 60 years or older lived in the Asia-Pacific region, accounting for 60% of the world’s older population. The number is predicted to increase to 1.3 billion in 2050, which means that one out of four persons in the region will be aged 60 years or above.

Population ageing affects sustainable development in all its dimensions. Addressing population ageing is aligned with the 2030 Agenda for Sustainable Development particularly in ending poverty (see figure 1), ensuring healthy lives and promote well-being, achieving gender equality, and promoting sustained and inclusive economic growth.1

Countries have to prepare early with adequate social policies and financial resources to address the challenges of population ageing. Traditionally, families support their ageing parents, both financially and by providing care. However, with smaller families, there will be fewer family members in working age to shoulder this responsibility. In this context, mobilizing resources to finance social protection programmes are imperative to provide security of income and well-being during old age.

There is increasing political will to provide social protection to older persons, reflected by an increasing number of countries providing social pensions.2 However, in many cases, policies focus on some aspects of population ageing only.

Healthcare for older persons

Ageing societies require universal access to healthcare to

UNITED NATIONS ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

promote healthy living and increase healthy life expectancy. Healthcare services need to be reformed to respond to changing healthcare needs. In almost half of the countries in the Asia-Pacific region, more than 64% of the overall population (world average) have access to healthcare without suffering financial hardships (see figure 2). However, older persons are more likely to suffer financial hardships when seeking access to healthcare services because of their higher disease burden and lower incomes.

Due to low coverage of public health insurance, a great number of households fund their health expenditure out of their own pocket in the region. In Armenia, Azerbaijan, Bangladesh, Cambodia, Georgia, India, Myanmar, Pakistan, and Tajikistan, where health expenditure is below 10% of government spending, over 50% of healthcare expenditure comes out of the households’ income. Large share of out of pocket expenditure on health makes the poor population more vulnerable.

Since the incidence of illness and likelihood of disability grow with age, increasing financial resources, particularly government expenditures, are indispensable for providing health services. Nearly half of the countries in the region have seen an upward trend in their current health expenditure as a percentage of GDP since 20003 (although additional spending may not always ensure efficiencies). However, some countries’ fiscal support for healthcare remains modest. Latest data (in 2014) show that Armenia, Bangladesh, Bhutan, Brunei Darussalam, Fiji, India, Indonesia, Mongolia, Pakistan, Papua New Guinea, Timor-Leste, and Turkmenistan spend less than 5% of GDP (WHO benchmark) and 10% of government spending on health.

Income security for older persons

There is a large variation in the breadth and the depth of pension coverage, as well as in the design of pension systems in the Asia-Pacific region. Issues and challenges differ by schemes and policy contexts, but there are some common threads.

Coverage of contributory pension schemes measured by the percentage of people in working-age contributing to a pension system - is still modest in most countries of the Asia-Pacific region, albeit with subregional differences. While the coverage is relatively good in countries of North and Central Asia and East and North-East Asia, it is minimal in South-East Asia and even more so in South and South-West Asia and in many Pacific island countries (see figure 3). There also exist gender differences - pension coverage of women is below that of male. Some countries such as Sri Lanka have low pension coverage due to prevalence of informal employment.4

Figure 1. Older persons are at higher risk of falling into poverty

Source: OECD Data. Available from https://data.oecd.org/inequality/poverty-rate.htm (accessed 16 January 2018).

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Poverty rate by age groups, latest available year

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the pension beneficiaries are found in the highest income quintile. Thus, those who are already relatively marginalized are likely to be left without income security when they are old. In contrast, in Central Asia, but also, in Viet Nam, pension beneficiaries are relatively equally distributed among all income groups (see figure 4).

Many pension systems in the Asia-Pacific region are not financially sustainable. India’s pension scheme is estimated to be underfunded by as much as 57%.6 The Government Employees Pension Scheme in the Republic of Korea is predicted to run a cumulative deficit of KRW50 trillion (approx. US$46.8 billion) by 2030.7

One challenge that many pension systems face is the low level of benefit adequacy. In some countries, such as Japan and the Republic of Korea, replacement rates have become low because of the increasing number of pensioners, resulting from high life expectancy. In other countries, particularly those with provident funds, the design of the pension scheme does not necessarily foresee monthly pensions. Instead, beneficiaries receive a lump sum which is often depleted rapidly. In addition, pre-retirement withdrawals, for example for health expenditure, further deplete the pension funds.5

In the region, the current design of the pension schemes perpetuates existing inequalities. For example, in Bangladesh, Indonesia, Nepal, Philippines, and Thailand, almost half of

Universal Health Coverage (UHC) index, latest available yearFigure 2.

Source: ILO, World Social Protection Report 2017 - 19. Available from http://www.ilo.org/global/publications/books/WCMS_604882/lang--en/index.htm (accessed 26 December 2017)

Percentage of working-age population (aged 15–64 years) actively contributing into a pension schemes in the Asia-Pacific region, latest available year

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Source: WHO, Global Health Expenditure database. Available from http://apps.who.int/nha/database/Select/Indicators/en (accessed 20 January 2018); WHO and World Bank (2017).Note: The UHC services coverage index meansures people receiving the health services they need without suffering financial hardship, as a share of the total population, not only older persons. However, older persons are more likely to suffer financial hardships when seeking to access healthcare services.

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Policy recommendations

Universal social protection

The 2030 Agenda for Sustainable Development calls for universal social protection, which is central to ending poverty and boosting shared prosperity. Special attention should be given to older persons, particularly older women and those working in the informal sector, since they are more likely to be left behind. Some countries have made progress in reaching universal coverage. China, for example, streamlined its health insurance schemes for urban workers as well as urban and rural residents. The number of people covered has increased over 10 times since 2013, 8 and has maintained over 95% of the population in the past five years.

Such universal coverage of social protection can be affordable for many countries in the Asia-Pacific region, but in many cases it requires re-shifting of policy priorities and mobilizing additional financial resources.9 Maldives, for example, conducted a comprehensive reform of its system of income security for older persons. A two-pillar system was established including the non-contributory Old Age Basic Pension and the contributory Maldives Retirement Pension Scheme. The system covered public sector employees and subsequently extended coverage to the private sector (2011) and migrant workers (2014). In 2017, its pension’s coverage stood at almost 100%.10 Countries are encouraged to expand coverage rather earlier than later, as it usually takes years or decades to implement and have the schemes in function.11

One difficult issue in designing or reforming social protection schemes is how to balance coverage and benefit levels. Given no massive increase of government expenditures on universal social protection, coverage expansion could lead to a lower level of benefits. In terms of healthcare protection, critical decisions need to be made on which services are covered by the benefit package, and for whom. In terms of pension schemes, a low benefit level still helps empower older persons financially.12 A universal social pension scheme could provide basic income security to at least avoid absolute poverty of the older persons.13

To supplement the universal schemes, some countries have adopted policies to target specific vulnerable groups. In China, supplementary health benefits are paid to those with higher out-of-pocket payments or severe diseases.14 Republic of Korea allocates budget and use childcare policies to enable young working women to return to their jobs after having babies. This may consequently weaken the basis of old-age income security.15 India has included widows and widowers, orphans, children, and parents as survivor pensioners in its mandatory pension programmes.16

Mobilize finance for ageing societies

Countries in the region still have the potential to improve fiscal space to support social protection spending for the older persons.17 Stabilized macroeconomic conditions in the region provide a positive environment. Fiscal sustainability gap analysis by ESCAP would suggest that debt ratios will stabilize or decline in most countries under current economic growth and financing conditions.18 Moreover, the fiscal costs of providing basic social protection for the older persons are affordable. According to ESCAP’s calculation, many countries in the region could finance universal and non-contributory pensions at the national poverty line through general taxation.19

Many countries have creatively identified new sources of fiscal space to extend social protection coverage and benefits. For example, Indonesia extended social protection from a reform of energy subsidies. While a significant part of the extension of social protection in region is likely to result from contributions, governments could re-orient their national budgets to support social protection programmes for the older persons.

Some countries in the region have also successfully introduced earmarked (dedicated or hypothecated) taxes to finance social development. Earmarked taxes, especially for tobacco, have been an effective means to finance healthcare in Australia, India, Mongolia, the Philippines, Nepal, Republic of Korea and Thailand.20

Dedicated funds could be created to finance social protection for the older persons. For example, Mongolia

Source: World Bank ASPIRE database. Available from http://datatopics.worldbank.org/aspire/ (accessed 26 December 2017).

Beneficiary incidence by income quintile in select countries of the Asia-Pacific region, latest available yearFigure 4.

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The MPFD Policy Briefs aim at generating a forward-looking discussion among policymakers, researchers and other stakeholders to help forge political will and build a regional consensus on needed policy actions and pressing reforms. Policy Briefs are issued without formal editing. This issue was prepared by Zhenqian Huang and Vanessa Steinmayer, benefitting from inputs by Daniel Jeongdae Lee, under the guidance of Hamza Ali Malik and Nagesh Kumar. For further information on this issue, please contact Hamza Ali Malik, Director, Macroeconomic Policy and Financing for Development Division, ESCAP (escap-mpdd@un.org).

www.unescap.org

established a “Human Development Fund” to support the payment of old-age pensions through accumulating excess revenues from the mining sector. The country is also considering the establishment of a pension reserve fund, which will be used to invest a percentage of excess mining royalties.21

In addition to increasing investments in social protection for the ageing societies, improving government expenditure efficiency and ensuring equal access to social services for the old persons could translate into better development outcomes. Estimation of public expenditure efficiency would suggest that many countries in the region have ample room to improve on this front. For example, Pakistan could save about 17% of current health expenditures through efficiency gains while achieving the same level of health outcomes.22

Countries in the region have introduced various policies to improve cost effectiveness and to reduce social protection expenditure. In terms of health services, China introduced community-based and other local health services;23 Thailand installed a cap on provider payment.24 In terms of pension schemes, Republic of Korea will decrease the income replacement rate from 70% (set in 1988) to 40% by 2028; 25 Russian Federation has passed a law which incentivises voluntary late retirement.26

To sum up, there is no single right model of social protection or ways to finance it. All systems have their strengths and weaknesses. The challenge for the governments is to find a system that best matches their national conditions, needs, and preferences in the context of demographic ageing.27 But all systems should conform to certain basic principles. In particular, benefits should be secure and non-discriminatory. Schemes should be managed in a sound and transparent manner, and represent reasonable value for money for all the insured to have the best chance to participate. Public confidence (trust) in social protection systems should be created and maintained, which is critical to attain wide coverage and ensure the long-run health of the systems.28

1 More detailed analysis regarding population ageing and its re-lation with Sustainable Development Goals, please refer to ES-CAP’s publication Addressing the Challenges of Population Age-ing in Asia and Pacific (Sales No. E.17.II.F.17).2 ESCAP, Addressing the Challenges (see endnote 1).3 WHO, Global Health Expenditure database. Available from http://apps.who.int/nha/database/Select/Indicators/en.4 ESCAP, “Income security for older persons in Sri Lanka”, SPPS Project Working Papers Series, 2015 (Bangkok).5 ESCAP, Survey on the Third Review and Appraisal of the Ma-drid International Plan of Action on Ageing in Asia and the Pacific (Bangkok, 2016).

6 ESCAP, Income Security for Older Persons in India (Bangkok, 2015).7 ESCAP, Income Security for Older Persons in the Republic of Korea (Bangkok, 2015).8 A. Hu, “China: health care for all”, in Social Protection Floors, Volume 1, Universal Schemes, I. Ortiz, V. Schmitt and L. De, eds. (Genvea, ILO, 2016).9 ESCAP, “Providing income security for the elderly”, MPFD Policy Briefs (Bangkok, 2013).10 ILO, World Social Protection Report 2017-19 (Geneva, 2017); and World Bank, Maldives Pension and Social Protection Admin-istration (Washington, D.C., 2016).11 World Bank, Live Long and Prosper: Aging in East Asia and Pacific (Washington, D.C., 2015).12 ESCAP, Addressing the Challenges (see endnote 1).13 ESCAP, Income Security (see endnote 6).14 Hu, “China” (see endnote 8).15 ESCAP, Income Security (see endnote 7).16 ESCAP, Income Security (see endnote 6).17 For more discussion on fiscal space to support population age-ing in the region, please refer to MPFD Policy Brief “Population ageing and fiscal sustainability in East and North-East Asia”.18 ESCAP, Economic and Social Survey of Asia and the Pacific 2017: Year-end Update (ST/ESCAP/2808, 2017).19 ESCAP, “Providing income security for the elderly”, MPFD Poli-cy Briefs (Bangkok, 2013).20 ESCAP, “Financing social protection”, MPFD Policy Briefs, No. 49 (Bangkok, 2017).21 Ibid.22 ESCAP, Economic and Social Survey of Asia and the Pacific 2017 (Sales No. E.17.II.F.8).23 Hu, “China” (see endnote 8).24 T. Langenhove and L. Tissier, “Thailand: universal health-care coverage scheme”, in Social Protection Floors, Vol. 1, Universal Schemes (Genvea, ILO, 2016).25 ESCAP, Income Security for Older Persons in the Republic of Korea (see endnote 7).26 ESCAP, Addressing the Challenges (see endnote 1).27 ILO, International Labour Conference, Provisional Record, Eighty-ninth Session (Geneva, 2001).28 ILO, Social Security: A New Concensus (Geneva, 2001); and V. Steinmayer, “Gaps in pension systems in the Asia-Pacific region and lessons learnt”, ESCAP presentation, 2017.