BRIEF

Rapid Aging in East Asia and Pacific Will Shrink Workforce and Increase Public Spending

December 9, 2015


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World Bank Report Says Region Already Home to More than 211 Million Older People

• East Asia and Pacific is aging faster than any other region, posing risks for public finances and healthcare delivery, and increasing the challenges to sustained economic growth.

• Managing aging requires womb-to-tomb policies addressing issues such as child care, education, employment practices, health care, and pensions.

• Effective responses require strong leadership, building social consensus, and politically challenging policy choices.

• Report calls for a paradigm shift in the ways that health, pensions and long-term health care are delivered and financed across the region.

 

East Asia and Pacific is aging faster – and on a larger scale – than any other region in history, which could lead to a steep drop in the size of its workforce and sharp  increases in public spending on pensions, health care and long-term care in the coming decades, according to a new World Bank report.

More than 211 million people aged 65 and older lived in East Asia and Pacific in 2010 – including 130 million in China alone – accounting for 36 percent of the global population in that age group. And the region is aging rapidly. Between 2015 and 2034, the older population will grow by about 22 percent every five years in East Asia. By 2060, one of five of the world’s oldest countries will be in East Asia, compared with just one in 25 in 2010, according to the report, Live Long and Prosper: Aging in East Asia and Pacific.

Much is at stake. An abundant and growing labor force was responsible for about one-third of per capita income growth in East Asia from the 1960s to the 1990s, but rapid aging has led to a dwindling labor force in an increasing number of countries. Between 2010 and 2040, the report says Korea is expected to lose more than 15 percent of its working age adults, while Thailand, Japan and China will lose more than 10 percent. That would mean around 90 million fewer workers in China alone.

The older population demands higher public spending. Without reforms, for example, pension spending is projected to increase by eight to 10 percent of gross domestic product by 2070.

“While it’s normal to spend more on public services as countries become richer and older, the rapid pace of aging in East Asia makes it especially urgent for structural reforms to make the process manageable and affordable,” says Axel van Trotsenburg, regional vice president of the World Bank’s East Asia and Pacific Region. “Policy makers should consider comprehensive, proactive policies that will increase labor force participation, encourage healthy behaviors, boost productivity, reform social security, and ensure that public services are affordable.”

Most Comprehensive Report on Aging in EAP

The report is a comprehensive analysis of aging in East Asia and Pacific, examining how aging affects households, economies and societies, and how they can manage the risks and realize the opportunities amid such fundamental social change.

Rapid aging is partly a result of the region’s economic development, higher life expectancy and sharp declines in fertility rates, with a growing number of countries now well below replacement levels, the report says.

Across the region, the pace of aging varies. The wealthiest countries, including Japan, South Korea, and Singapore, are “advanced agers,” with the older population making up 14 percent or more of their populations on average. Rapidly developing middle-income countries, such as China, Indonesia, Thailand, and Vietnam, are aging quickly. The third group, including Cambodia, Laos, Myanmar, the Philippines, Papua New Guinea, Pacific Island countries, and Timor-Leste, are still young, with an average of 4 percent of the population over 65, but rapid aging is in store in the coming decades. 

To be sure, the report says the region is better positioned than many parts of the world to achieve healthy and productive aging. East Asians already work longer than many other societies. They have high savings rates among all ages, have seen rapidly rising education achievements, and have social security systems with fewer costly legacy entitlements.

But developing East Asia and Pacific is aging at much lower per capita income levels than did member countries of the Organization of Economic Cooperation and Development.

“It’s unavoidable that most countries in the region will grow old before getting rich,” says Philip O’Keefe, lead author of the report.

Even though older people generally have benefited from the region’s economic growth and significant poverty reduction, poverty rates tend to increase more with age in countries such as China, Indonesia and Vietnam. Poverty is also more common among the less-educated elderly, and those with fewer adult children to depend upon or with limited social security benefits.

EAP at a Crossroads

The region is at a crossroads. Managing rapid societal aging while trying to sustain economic dynamism will require strong leadership, building social consensus on how to move forward, and politically challenging policy choices.

“Changes are hard, but to stay competitive, the region must address rapid aging with sensible policy choices that promote appropriate behavioral change by households and employers,” says Sudhir Shetty, Chief Economist for the East Asia and Pacific Region of the World Bank.

To boost labor force participation, the report recommends that countries such as Japan, Korea, Malaysia and Fiji encourage more women to join the workforce, especially after child birth. They can also do away with pension policies that have led to unnecessarily early retirement of urban workers in countries such as in China and Vietnam. This can be reinforced by promoting flexible work arrangements and adapting workplaces to the needs of older workers.

To compensate for low birth rates, countries such as Korea, Japan and China can take steps to attract younger immigrants. Finally, policy makers can improve the quality of the workforce through investments in education and lifelong learning.

Fiscal and Health Challenges

To address the increasing strains an aging population places on public services, the report calls for a paradigm shift in the way that health, pensions and long-term care are provided and financed across the region. This will be necessary to strike the balance between ensuring high coverage of services and benefits, adequate financial protection for older people, and fiscal sustainability.

Without reforms, public spending on pensions is projected to rise by eight to 12 percentage points of gross domestic product by 2070, but phased increases in official retirement ages and other reforms have the potential to control costs while ensuring adequate benefits. The report recommends that countries rely more on general revenues to fund benefits for the informal sector and achieve high pension coverage rates, the same way that the poor across the region have benefited from a rapid expansion of subsidized health insurance in the last decade.

Financing alone, however, won’t address East Asia’s healthcare challenges. A hospital-centric approach, currently common in East Asian countries, pushes up the rate of inpatient care, and weak primary care systems are ill-prepared to manage chronic illnesses of the population and particularly the elderly. That not only increases out-of-pocket costs, but undermines the sustainability of public health financing.

The report suggests that governments transform healthcare systems into a model focused on primary care, with improved care management across levels of the health system, efficient care delivery, and better prevention of non-communicable diseases.  Health systems will also need to address diseases of old age, such as dementia, and develop long-term care policies that combine traditional family support with strengthened community- and home-based care systems.

Shifting Aging Patterns

The tradition of relying on family support in old age is eroding in a number of countries. In Korea, fewer than 30 percent of older people live with their children. In China, 43 percent of those ages 65 to 70 live with their children, down from two-thirds in the early 1980s. Many elderly people are left in rural areas with young children to care for, as their adult children move to urban areas in search of better paid jobs.

Indeed, most older people in the region depend on their own work, instead of family and state support, as their primary source of income. A large share of people work well into their 70s, even in richer countries such as Japan and Korea, but working is especially a necessity for rural residents without pensions in developing East Asia. At the same time, some urban workers, especially women, often retire too early due to the incentives built into pension and taxation systems.

People of all ages in East Asia expect that the state will play a bigger role in supporting them in their old age by, for example, providing care for the frail and incapacitated, the report says. How the states meet that expectation will be a key social and political challenge in coming years.