Social Security for Older Persons in Developing Countries

Aris Ananta

Institute of Southeast Asian Studies

Singapore

Presented at the  ”Eleventh ASEAN Gerontology Course”, jointly organized by INIA-SAGE ASEAN Centre on Aging (ISACA), the International Institute on Ageing, United Nations – Malta (INIA), and the Singapore Action Group of Elders (SAGE) in Singapore, 26 July – 3 August 2010

Outline

• Current systems• What Do People Want When They Are

Old?• Sources of Financial Support• Alternative Approaches• Concluding Remarks

Now,

What Do People Want

When They Are Old?

What Are They Doing?

Some older persons have to work very hard simply to survive

Some have to work because they want to be active and contributing to the society

Some do not work at all, “enjoying” their old age

Which one is “better”:

the older persons who do not do anything or the one who has to work to earn money to survive?

The deeper question is ……

In essence, what kind of life should the older persons have? Or, deeper, what kind of life do people want, not only during the old ages, but the whole life? What is the purpose of life?

SOURCES OF FINANCIAL SUPPORTS: REGARDLESS THE

AGE

Income, Accumulated Saving, and Transfer Payment

Income

Earning: wage, salary One must “work” to earn money—use their labour

RentInterestProfit

Accumulated Saving

“under the pillow” in financial institutions in “commodity” and/ or

property in “government”

Transfer Payment

from spouses from parents from children/ grand children from neighbours/ friends from society in general from government

EARNING - WORKThe only source of financial support that needs “work”

No Work, No Earning

“NOT WORKING” IS A LUXURY

Particularly in Poor Societies without Adequate Welfare System

Employment for Older Persons

After retirement age, people may have additional difficulties in labour market:

rigidity of the labour market, out of date skills, discrimination against older

persons, and norms for working older persons, in addition to deteriorating

health

Financial Support for Older Persons (1)

If the older persons cannot work, either because of their education/ health and/ or others, they must have financial support from non-earning.

They can have financial support from interest, rent, and profit if they are wealthy, having business.

Financial Support for Older Persons (2)

If they themselves are not wealthy, they should depend on their own accumulated saving and/ or transfer of payment

An example, Indonesia

Insurance and saving are not the source financing older persons.

Inflation is high, no use for saving. Labour force participation rate for

older persons is high

Current Pension Systems

Type of benefit Defined benefit Defined contribution

Financing mechanism PAYG (pay as you go) Individually funded account

Defined Benefit

The benefit is defined by a certain formula—not by the return on investment

For example, the pension is paid as a fraction of monthly salary in last several months of working.

The pension does not depend on the contribution made by the retirees when they were working.

Defined Contribution

Each individual pays to an individual account.

The money is invested by a third party, which can be the government or market.

The money paid to the retired individual will depend on the return from the investment

The contribution is known, but the benefit is not known

PAYG

The retirees receive money contributed by those who are currently working.

With the shrinking number and percentage of working population and rising number and percentage of older, not working, population,

the PAYG can be unsustainable, as one productive person must pay an increasingly larger number of unproductive persons

PAYG

Mostly done by the US, Australia, Western European countries, and Japan

However, Japan spends the least for welfare. Labour force participation rate among the older persons is the highest.

Individually Funded Account

The retirees receive what they saved when they were working.

Those who saved very little will receive very little too when they are old

This system does not guarantee income security for the older persons

East Asian Welfare Model

The government does not provide pension for the older persons

The older persons must save when they were working

The saving is compulsory and invested by the government. It is returned with interest when they are old, “retired”.

UN 3 Pillar System

A system that guarantees old-age income security for everyone and ensure that everyone is above the international poverty line or any other socially acceptable minimum standard

It is not easy, but it should be made a minimum target of development

First Pillar: universal coverage with

minimum benefit

This is important particularly for countries with large informal sectors

Mathematically, this scheme is affordable even for poor countries,

Politically, it may not be feasible because of the many internal conflict of interest

This is a defined benefit system

Second Pillar:Provision for Basic Pension in

Formal Sectors

This is targeted at a wage-replacement level for formal sectors

This is defined contribution and benefit system

Third Pillar:Market Oriented Scheme

This is intended for the relatively affluent groups of the society

They can choose their own market driven financial institutions to invest their money for retirement

This is a defined contribution system

In Southeast Asia

All countries in Southeast Asia have attempted to apply the Second and Third Pillars of the UN model

However, the second pillar has not included a target of wage replacement level.

They have not started the first pillar of the UN model, basic minimum for everyone, particularly for those in the informal sectors

Alternative Approaches to

Income Security

PROMOTE

Active Ageing

Promotive Programs are Cheaper than Curative Programs

Being Healthy and Independent Reduce Health Expenditure

Being Healthy and Independent Allow Older Persons to Contribute to the Society, regardless the monetary reward

Let Older Persons Work

No Compulsory Retirement Age

• People in poor economies have never retired

• Extend the tradition to non-poor economies

• As long as they can contribute, they should be allowed to work

• Abolish discrimination against age, young or old

CREATE OLDER-PERSONS INTENSIVE

INDUSTRIES

Recognize Voluntary Work

• Give non-monetary rewards to those who work for the society without money

• This is not only for older persons, but for everybody, regardless the ages

Government Intervention

Decide the Standard Minimum Welfare by Age

• If a person cannot reach that minimum, the state must help fill in the gap, regardless the age

• A person who is lazy to work cannot claim for subsidy

• (There should be a stricter examination before having a subsidy. This is stricter than receiving unemployment benefit in the US, for example)

Lower Inflation Rate, Raise Interest Rate

for Saving, particularly for the

Poor

•

Calculate Inflation Rates for Various Income Groups

Provide Higher Interest Rates for Saving from Lower Income Groups

Heavily Invest in Public

Infrastructure• Clean water, clean air• Affordable and safe public transportation• Availability of affordable and continuous supply of electricity• Availability of affordable communication systems

Older Persons Friendly

Infrastructure• This will make older persons more independent and

reduce the cost of taking care of the older persons• This benefit not only older persons, but also other

vulnerable groups, regardless the ages

Non-governmental Support

Encourage Philanthropic Contribution

• • This is not only for older persons, but

particularly for older persons• The monetary contribution should be

made tax-deductable• The tax deduction should be higher if it is

from children, grand-children, spouses, parents, and other relatives.

Invest the Saving in non-Earning Activities

• By doing this, the older persons do not have to work.

• They may put the money in commercial financial market, with all of the risks

• They can put the money into business and reap the devidend

• They may rent their properties

Promote Transfer of Payment from Families and Friends

• From Children, Grand-children• From Nephews• From Brothers and Sisters• From Friends• The contribution should be tax deductable,

with higher deduction from relatives.

Summary of Policies

• It is applicable to all ages, • Not only to older persons

Summary of Suggested Policies (1)

• Self-finance from Working– Promote Active Ageing and – Let People Work as Long as They can

• Self-finance from Rent, Interest, and Profit

Summary of Suggested Policies (2)

• Transfer Payment for those who cannot self-finance or the income is below what they “need’– From the government– From family (spouse, children, grand-children,

brothers, sisters, nephews etc..)– From society

Summary of Suggested Policies (3)

From the government– social assistance– macro-economic policies, including builing

age-friendly infrastructure

Conclusion:Beyond Social Security

Ageing Related Policies:

For all Ages

The Recommended Policy Package:

1. Market Mechanism

2. Government and Society

3. Government

Market Mechanism

Labour Market Financial Market

Labour Market

• Abolish age discrimination• Recruit, Pay, and Fire according the

performance, capability, not age – no more seniority and juniority systems

• Abolish compulsory retirement age• Let people choose to retire or work for

money.

Financial Market

• Lower interest rate, particularly for poor people

• Promote financial literacy• Criminalize bulking/ cheating by financial

industries• Reduce risk in financial market

Government and Society

Active Ageing

Active Ageing

• Use Life cycle approach• Enhance Social and intergenerational

solidarity• Promote and Acknowledge Working not for

money—social work• Promote and Acknowledge Philanthropic

Work• Create Health Promotion Program

Active Ageing: some expected results

1. Lower Cost and Higher Income for Older Persons

2. Smaller Burdens for the Younger Population and the Government

3. Happier Older Persons and the Whole Population

Government

• Create Older Persons Intensive Job Opportunities

• Create Older Persons/ Vulnerable Persons Friendly Infrastructure

• Create a Just and Sustainable Security System for the Whole Population, Regardless the Age, including the Older Persons

Sustainable and Just Social Security System

• Along with all mentioned policies• For those who are really sick and cannot afford,

the government must help• To lower the cost, use more generic medicine

and treatment• To lower the cost, strongly encourage health

promotion program• Create innovations such that this program is

attractive to business persons