Asia grapples with pension system strain as population ages

Emerging markets face a pension savings shortfall of $74t.

Asia’s rapidly ageing population imposes a challenge to the overall pension system, with people over the age of 60 will represent a quarter of the region’s population (from 14%) by 2050.

Many Asian countries have set the retirement age at 60 or younger, leaving retirees with the challenge of securing 20 to 30 years of post-retirement income. 

Emerging markets in the region, in particular, face a pension savings shortfall of $74t, or $50,000 per worker, exacerbating the issue. 

Countries such as India and Indonesia are especially vulnerable, with only 8% of the population receiving pensions, raising concerns over the sustainability of public support systems as populations continue to age. 

To alleviate the strain, governments are exploring several solutions, including increasing retirement ages, incentivizing longer work lives, and encouraging private savings through tax benefits. 

Australia, for example, is considering aged care insurance and potential funding models like a Medicare levy to address the lack of private long-term care insurance.

However, most retirement products currently offered in Asia are inflexible and have delivered unattractive returns, according to McKinsey’s insight titled “How insurers can serve Asia’s ageing population”. 

Annuities, for instance, tend to have low returns, high fees, and lack the flexibility that retirees need in terms of income streams and asset allocation. 

This is compounded by inflation, which further erodes the purchasing power of these products. Additionally, products such as long-term care insurance and life insurance with healthcare components remain prohibitively expensive for most people in Asia. 

In China, for example, the commercial long-term care insurance market accounts for only 1% of total health insurance premiums, and high-end retirement community options are out of reach for the average worker.