Growing old before growing rich

by **Cals** Sun 24 Nov 2013, 22:46

Published: Saturday November 23, 2013 MYT 12:00:00 AM
Updated: Saturday November 23, 2013 MYT 7:02:46 AM
Growing old before growing rich
BY TAN SRI ANDREW SHENG
Old-age dependency ratio to rise rapidly in Asia
THE recent relaxation of the one-child policy in China recognises that demographics play a major role in a country’s economic fortunes.
Asian fast growth was built on favourable demographics, growing labour supply at relatively cheap rates and open economies. But in many parts of Asia, as the population begins to age rapidly, there is genuine concern that Asians may grow old before they become rich.
Last year nearly 450 million or 11% of Asia’s population were 60 years and over. By 2050, these numbers will more than double to 1.2 billion persons or 24% of the population, not far behind projections of 27% in North America and 34% in Europe. Old-age dependency ratio will rise rapidly in Japan, South Korea, Greater China, Singapore and India.
There is, however, a major difference between being old in Asia and being old in the advanced countries. In 2011, private pension funds in nine Asian economies had assets of US$663bil or only 5.3% of GDP in 2011, way below the OECD average of 70% of GDP.
In the past, when families were large, the young were the “pensions” of the old, because it was taken for granted that the young will take care of the old. Today, when many urban families have only one or two children, this dream is no longer possible.
In fact, the reverse is happening. In Japan, single children in their twenties who still live with their parents are called Parasite single (parasaito shinguru). A single Chinese child today is showered with gifts and love from six adults (four grandparents and two parents). But when he or she becomes an adult, one cannot take care of at least four to six old ones.
The old-age dependency ratio (the number of elderly people aged 65 and above against the number of people in the working age group of 15-64 years) is getting impossible in some countries. Currently, two Japanese workers support one retiree. By 2050, there will be two retirees for each worker. By 2050, China’s ratio will be one retiree supported by one and a half workers.
The lack of pension coverage or under-funding of pensions is a serious problem in Asia.
Even in rich countries like Japan, where the average wealth per capita is US$216,694, low interest means that many pensioners face a problem of lack of income from their financial assets for adequate retirement purposes. A 2% annual yield on such wealth gives only US$4,300 a year, not much to live on comfortably.
There are several good reasons why governments should reform pensions as a matter of priority. Firstly, there is a question of adequacy of retirement income. Secondly, to be fair, more people should have pension coverage. Third, pension funding should be sustainable, because as Greece found out, there was simply not enough money to cover the generous pensions for civil servants.
There is, however, a further reason why pension funds play a major role. Pension funds can contribute significantly to capital market development, more efficient long-term resource allocation and national financial stability. It is no coincidence that during the May/June 2013 market shocks arising from fear of tapering or reversal of quantitative easing, the markets that had the least volatilities in exchange rate and interest rates were the markets with deep pension or provident funds. The domestic pension funds could easily buy up local bonds and foreign exchange sold by the foreigners when there is capital outflow. Countries without such large institutional funds, such as Indonesia, had to rely on the central bank to be the major defender of exchange rate and interest rate stability.
Because pension funds take the long-view, they can contribute to long-term strategic investments in growth sectors such as infrastructure, green technology, SME financing and social enterprises. This will reduce over-reliance on short-term bank financing or foreign financing that is inherently subject to liquidity risks and market volatility. Furthermore, effective pension management also play a major role in improving corporate governance, because active pension funds can vote against bad management and also exercise discipline against short-termism.
The lack of development of long-term institutional investors, such as pension, insurance and long-equity investors, means that Asian financial systems are overly dependent on the short-term banking system.
Indeed, the current global financial structure is essentially “long debt and short equity”, meaning that it is biased towards increasing debt and not capital.
There are several reasons why leverage in the world is getting worse, not better.
First, the higher the leverage, the greater the return on equity (ROE), but at higher risks. Corporate owners and managers with share options can easily increase ROE by borrowing from banks, rather than raising capital, since it is neither cheap nor easy to raise capital from the stock market. Only the large companies tend to get public listings. There are only 2,500 listed companies in the A share market in China, compared with 40 million (mostly small) companies registered in China.
Second, interest on debt and write-offs on bad debt is tax deductible. However, neither investments in equity nor equity losses are tax deductible.
The leverage game, especially through financial derivatives with embedded leverage, is the main reason why the advanced markets got into trouble. It is also the reason why I am not convinced that quantitative easing (QE) is a solution to the global crisis. QE fundamentally tries to solve an excess debt problem with more debt. Furthermore, the global financial reforms try to regulate an already complex financial system with more complex regulations. Unfortunately, pensioners and savers are the ones who suffer from near zero interest rates and potential bursting of asset bubbles as QE reverses.
A stable, more equitable Asian financial architecture needs to “long equity and short debt”. More pensions for more people will make for a more equitable society, which means that long-term pension funds can take long-term equity positions that invest in future green growth.
As Tennessee Williams said, “you can be young without money, but you can’t be old without it.”

Tan Sri Andrew Sheng is president of the Fung Global Institute.