Asset rich, income poor? Key components of retirement income security for aging Asia

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1 Asset rich, income poor? Key components of retirement income security for aging Asia empowered investment teams strengthened by global resources April 2013

2 Table of contents Foreword... 3 Overview... 4 The savings lifecycle: Income, saving and spending patterns in retirement life... 5 The key components of retirement income security in Asia... 7 US household income & wealth: A benchmark for comparison Retirement income security profiles: Hong Kong Japan Singapore South Korea Taiwan The outlook Appendix Glossary of terms Demographic dividend Financial wealth Financial wealth to income ratio Government social spending Household wealth Longevity risk Old age dependency Retirement income glide path Retirement income security When a population bulge transitions through working age up to retirement, generating income levels in excess of consumption, increased savings and investment and generally higher economic activity. Includes individual household bank accounts, pension reserves, life insurance reserves, mutual fund assets, individual holdings of other securities and other financial assets held by households. A measure of an economy s household financial wealth to gross domestic product (GDP). The portion of a country or territory s GDP allocated to social security, healthcare and welfare expenses. Includes financial wealth plus the value of physical assets such as real estate. The risk that a retiree will outlive his or her sources of income. The number of elderly individuals for every 100 working age adults. A progressive lowering of household income as the average age of the household increases. Having sufficient income to sustain a comfortable standard of living throughout an individual s retirement years, regardless of how long that period may last. 2

3 Foreword by Michael Dommermuth, President, International Asset Management, Manulife Asset Management When people talk about preparing financially for retirement, the emphasis is usually on the accumulation of wealth in the decades leading up to the golden years. However, we believe that it is just as important to focus on the de-cumulation phase by carefully planning a strategy for generating income during retirement. In this report, the third in Manulife Asset Management s Aging Asia series, we examine retirement income security for households in Asia. We define retirement income security as having sufficient income to sustain a comfortable standard of living throughout an individual s retirement years, regardless of how long that period may last. Michael Dommermuth In our first Aging Asia report, Saving up: The changing shape of retirement funding in a greying ASEAN, we highlighted the fact that, contrary to popular belief, even the relatively youthful ASEAN region is aging rapidly, and assessed the implications of this finding for governments, individuals and investors. In our second report in the series, Funding the golden years: The financial and economic factors shaping pension provision for Asia s rapidly aging populations, we focused on the complex interplay of wealth, pension regimes, demographics and macroeconomic trends that influence the ability of Asian countries and territories to provide retirement funding for their aging populations. These reports can be downloaded at In this report, we explore the key constituents of income from an Asian perspective to assess the levels of retirement income security within the region s wealthiest economies: Hong Kong, Japan, Singapore, South Korea and Taiwan. We reveal that household wealth and how efficiently it is mobilised to generate income is a critical component of retirement income security. However, we also highlight the contribution of other income sources such as salary and wages, government social spending, pension benefits and familial support. The Aging Asia series has been a labour of love for us. The Manulife group has been helping individuals and families across Asia prepare for their financial futures for more than 100 years. During this time we have become increasingly aware of the need for forward-thinking income solutions that help alleviate financial stress during periods of upheaval or through times of change such as the shift from the workforce to retirement. With a long history as an active manager of fixed income, equity and asset allocation investment solutions, Manulife Asset Management is committed to helping households prepare for their retirement years by both maximising the growth potential of invested savings and prudently managing asset drawdown during the golden years. 3

4 Overview Asia is generally noted for its high savings rates, as measured by gross national savings and household savings rates. However, as Manulife Asset Management s analysis shows, the mere accumulation of wealth is insufficient to ensure income security in retirement. This is crucially important as our second Aging Asia report concluded that Asia is likely to experience an increased shift in responsibility for retirement funding from the state to the individual. While most governments in the region have established formal pension systems, many of these schemes provide relatively modest lump-sum payments at retirement rather than lifetime annuities. The absence of a lifetime annuity exposes retirees to longevity risk the risk that they outlive their sources of income. This accentuates the importance of individuals mobilising their accumulated household wealth to generate consistent income throughout their retirement. In addition to our analysis of the composition of household income, especially for the elderly, we take a close look at household balance sheets in an effort to determine why income arising from household wealth is comparatively low in most of Asia. Low property related income and the preponderance of low-yield bank deposits leads us to a conclusion that defies intuition and expectations: elderly households in the five countries and territories we examined are, for the most part, asset rich, but income poor. This surprising fact is the central challenge facing the aging demographics in these countries and territories and complicating the pursuit of retirement income security in the region. Our conclusion is that Asia needs to undergo a transformation in the way that household wealth is deployed and that it must do so in a relatively short time span as economies in the region are aging much more rapidly than developed western economies before them. The slower pace of aging in western societies allowed them the luxury of gradually adjusting their financial markets and government and financial institutions to meet the needs of increasingly aged populations while also allowing households to adjust the deployment of their personal wealth. Asia will not be accorded the same luxury. 4

5 The savings lifecycle: Income, saving and spending patterns in retirement life Most economies are characterised by a savings lifecycle that is strongly affected by the presence of a demographic dividend, which is when a population bulge transitions through working age up to retirement. When members of a population bulge are in their prime working years, aggregate income levels exceed consumption. This translates into increased savings and investment and generally higher economic activity. The five economies we examine in this report Hong Kong, Japan, Singapore, South Korea and Taiwan are all in the advanced stages of their demographic dividends and have accumulated considerable levels of household wealth. We chose these countries and territories because we would ordinarily assume that these levels of accumulated wealth would enable constituent households to smoothly transition from their working years into retirement with a high degree of income security. The finding, that wealthy households in these relatively advanced Asian economies are retiring with comparatively low levels of income security, comes as a great surprise and raises many questions about the relationship between household wealth and retirement income security. In our view, the US is the natural choice as a yard stick by which to evaluate the interplay between household wealth and income security. Reliable data about US income, saving and spending habits is available and the nation has developed a sophisticated system for mobilising accumulated household wealth to provide a relatively high degree of retirement income security. The comparability is further enhanced by the fact that several of our subject economies have financial wealth to income ratios similar to, or even higher than, that of the US. Our research reveals that Taiwan is the wealthiest economy in the region, with a financial wealth to income ratio of 4.7, which exceeds the US ratio of 3.0. Hong Kong and Japan s ratios are similar to that of the US. Meanwhile, Singapore and South Korea trail the US although South Korea trails significantly, its relatively high level of household wealth warrants its inclusion in this report. Figure 1: Household financial wealth to income ratio 466% 320% 299% 228% Source: Manulife Asset Management calculations derived from flow of funds and household balance sheet data from the Central Bank of the Republic of China (Taiwan), OECD, Bank of Korea, Statistics Singapore, Hong Kong Investment Funds Association, Hong Kong Office of Commissioner of Insurance, Cerulli, Hong Kong Monetary Authority. Data is for 2011, except for Taiwan, which is 2010 data. The retirement income glide path 186% 297% Taiwan Japan Hong Kong Singapore South Korea US However, it is not a household s level of accumulated wealth that solely determines its financial wellbeing in retirement rather, it is the level of recurring income that a household generates on that wealth to supplement other sources of household income. Retirees in most economies follow an income glide path: as age increases, household income declines. Specifically, household income levels tend to be significantly lower for the most aged than for those who are just entering retirement. The speed and severity of income decline for an elderly household is an indicator of the level of financial strain within that household. Figure 2: US household income glide path US$61,471 US$50,681 Source: US Census Bureau, 2012 US$45,872 US$36,613 US$26, Age of household head 5

6 Indeed, it is the durability and consistency of income into old age that is the foundation of our evaluation of the retirement income security of individual economies. As we discuss below, although the US has a highly developed retirement framework, even elderly households within the US undergo a substantial drop in income that intensifies with age. Economies without such a developed framework run the risk of even more dramatic declines. Perhaps as importantly, we examine threats to the durability of income in retirement such as the diminishing reliance by the elderly on familial financial support, once a bulwark of retirement income security in Asia. Retirement income resources at a glance The retirement income security profiles that comprise the body of this report analyse the income security conditions that affect elderly households in our five subject economies. Each profile includes a radar chart that indicates the relative level of income resources that retired households in that economy have at their disposal in five categories: 1) salary and wages; 2) government social spending; 3) pension benefits; 4) familial support; and 5) household wealth. The radar charts illustrate how significant the levels of these five income resources are in each country and territory relative to its peers (ie, the five economies studied in this report). It is important to note that the charts do not indicate the actual level of income that is generated by a given resource. Rather, they indicate the relative amount of each resource that is available to households in that economy thus, a high level indicates relatively higher potential to generate income on that resource if it is efficiently mobilised. Household wealth Salary & wages Government social spending Familial support Pensions Of note, the radar charts measure the level of income resources that are available to households in each economy relative to the five Asian countries and territories studied in this report the income resources at the disposal of US households are not reflected in this comparison. 6

7 The key components of retirement income security in Asia Our analysis reveals five components of retirement income that are common across wealthy Asian economies: salary and wages government social spending pension benefits familial support income arising from household wealth. It is important to understand these sources of income before we can evaluate an individual country or territory s level of retirement income security. Salary and wages The very notion of retirement is largely a construct of the world s most advanced and wealthy economies while remaining a distant aspiration in countries and territories with low levels of wealth. As a result and as a broad generalisation elderly labour participation rates are typically much higher in developing economies than in developed economies. Elderly labour participation rates tend to be substantially higher in Asia than in the US, which we attribute to the developing nature of many of the economies in the region and to the fact that pension regimes in the region tend to be less developed and not as well funded as in major developed economies. Significant variations in labour participation rates explain much of the variability in household income among elderly households in the region. That being said, some of the most developed and wealthiest economies in the world maintain elevated levels of elderly labour force participation for reasons beyond financial necessity, such as culture and lifestyle. For example, Japan has elevated elderly labour force participation rates despite relatively high levels of household wealth. These high participation rates have remained remarkably stable over time, leading us to believe that this pattern arises as much from cultural considerations as economic necessity. We also note that labour participation rates are sometimes artificially impacted by government-stipulated mandatory retirement ages and the age at which pension benefits are made available. In Malaysia, for example, until recently the official pension age was 55 and, consequently, that nation has the most youthful population of retirees in the region. Taiwan and Hong Kong have the lowest elderly labour participation rates among the countries and territories we examined, but we suspect that they are low for different reasons. Taiwan s elderly population can afford to retire at relatively young ages as they have accumulated more financial wealth, relative to income, than any other advanced Asian economy. Meanwhile, our research suggests that the sharp fall off in elderly labour participation in Hong Kong, especially among females, is linked to the relatively low retirement age established by the civil service 1. Figure 3: Elderly labour participation 31% 22% 19% South Korea Japan Singapore Taiwan Hong Kong US Note: Elderly refers to individuals 65 years or older. Source: International Labour Organization 2012 estimates, National Statistics, Republic of China (Taiwan). 8% Government social spending As a general rule, social welfare spending is lower in Asian countries and territories than in the US. This may be due to government concern over the fiscal sustainability of programs once they are introduced, and concern that these initiatives could undercut the vitality of their labour forces through increased dependency. 6% 18% 1. Ng, Winnie. Rethinking Elderly Retirement. China Daily, 17 August

8 Against this backdrop, one proxy for the level of social spending provided by Asian and western governments is the portion of GDP allocated to social security, healthcare and welfare expenses, excluding expenditures on education. Though the inclusion of government healthcare expenses is debatable, we believe that its inclusion is appropriate given the sometimes very large healthcare expenses attached to aging. Of the five Asian economies we analysed, Taiwan and Japan s social spending approaches the US level, but spending in Singapore, Hong Kong and South Korea is a fraction of that in the US. Asian government spending on social welfare as a portion of GDP is generally rising parallel to the trend of population aging 2. Against this backdrop, two tiers of government social welfare spending, including support for the elderly, have emerged in the region. Japan and Taiwan have embraced a western model of social welfare spending. Taiwan, in particular, seems to be moving aggressively in this direction: its pace of social welfare spending growth has been nearly double its GDP growth rate over the past decade. In Hong Kong, Singapore and South Korea, on the other hand, government involvement has traditionally been far lower, indicating that responsibility for retirement income security falls more on the individual than the state in these three economies. Figure 4: Government spending on social security, healthcare & welfare (% of GDP) 15% 13% 19% Pensions Our second Aging Asia reports found that governmentprovided pensions in Asia generally cover less of a country or territory s population than in the US. It also identified challenges related to the provision of lump-sum payments rather than lifetime annuities. An important factor to consider with regard to lumpsum pension benefits is longevity risk, as the average number of years in retirement is growing in the countries and territories we analysed due to relatively low official retirement ages and increasing longevity. While annuities are increasingly available as an option for certain retirees, the majority of pension benefit recipients continue to choose lump-sum payouts meaning that pension benefits generally feature within a household s balance sheet, but not necessarily as a recurring income stream. We identified a few other key challenges surrounding pension provision in Asia. Of particular note is the comparatively low level of reserves in Asia versus the US. While this is partly due to the relative youth of the pension regimes we analysed, it also reflects lower levels of population coverage. Singapore is the only economy in the region with a level of pension reserves that rivals that of the US its Central Provident Fund (CPF) holds aggregate reserves equivalent to more than 67% of GDP while aggregate US pension reserves are equivalent to 78% of GDP. However, we believe that Singapore s reserves overstate their value in generating retirement income as CPF moneys can be withdrawn to finance property purchases or cover healthcare costs. 5% 3% 2% Thus, elderly households in all of the Asian countries and territories we examined have significant incentive to mobilise their accumulated household wealth to generate alternative sources of retirement income. Japan Taiwan Hong Kong South Korea Singapore US Source: Asia Development Bank Key Indicators South Korea and the US are 2011 data; Hong Kong, Japan, Singapore and Taiwan are 2010 data. 2. Based upon Manulife Asset Management analysis of the Asian Development Bank Key Indicators

9 Figure 5: Pension reserves (% of GDP) 68% 43% 33% 13% 5% 78% However, this network of familial support is under severe duress owing to fundamental changes in family demographics and shifting cultural norms. Declining fertility rates across Asia mean that households are becoming smaller and urbanisation and rapidly increasing divorce rates have fragmented families 6. Similarly, familial financial support has declined alongside falling coresidency, especially in North Asia 7. This trend is evident in the increasing number of aging adults reporting lower levels of confidence that they can count on familial support as a prominent feature of their retirement years 8. Singapore Japan Hong Kong Taiwan South Korea US Source: Manulife Asset Management calculations derived from flow of funds and household balance sheet data from the Central Bank of the Republic of China (Taiwan), OECD, Bank of Korea, Statistics Singapore, Hong Kong Investment Funds Association, Hong Kong Office of Commissioner of Insurance, Cerulli, Hong Kong Monetary Authority. Data is for 2011, except for Taiwan and South Korea, which are 2010 data. Familial support A critical feature of Asia s elderly landscape has traditionally been familial support or intergenerational transfer payments, which basically refers to the practice of adult children providing financial support to their aging parents. This is a complex component of retirement income security due to the wide variety of support mechanisms it encompasses, including care-giving and intergenerational transfers (which can flow to and from elderly parents), and because it is not well documented. What we do know is that familial financial support is significant in some economies. For example, 40-45% of all elderly households in South Korea receive such transfers 3, private transfers account for 18% of elderly income in Taiwan 4 and 77% of elderly parents in Singapore receive financial support from their children 5. The National Transfer Accounts database, an information source designed to track inter-generational transfers with respect to member countries and territories, suggests that elderly US households provide more transfer payments to their children than they receive a sharp contrast to most Asian households 9. We believe that this is as much a result of cultural differences and changing household structure as of the fact that most retired households in the US simply do not require familial support as the nation s robust retirement framework obviates the need for such transfers. Figure 6: Familial support for elderly households (% of household consumption) 50% 40% 40% 13% Singapore Hong Kong Taiwan South Korea Japan US Note: Elderly refers to individuals 65 years or older. Source: National Transfer Accounts database, Asian Development Bank: The Economic Life Cycle and Support Systems in Asia, Manulife Asset Management estimates. 1% -7% 3. Kim, Hisam. Intergenerational Transfers and Old-Age Security in Korea. The Economic Consequences of Demographic Change in East Asia. Eds: Takatoshi Ito and Andrew K Rose. National Bureau of Economic Research, Vol. 19, Manulife Asset Management calculation based on the Taiwan Survey of Household Income and Expenditures, Government of Singapore. State of the Elderly in Singapore Release 2: Employment and Incomes and Assets, 2008/ Menon, Jayant and Melendez Nakamura, Anna. Aging in Asia: Trends, Impacts and Responses. Asia Development Bank Working Paper Series on Regional Economic Integration, No. 25, Ogawa, Naohiro. Changing Intergenerational Transfers and Rapid Population Aging in Japan. Population Research Institute, Nibon University, Kim, Hisam. Intergenerational Transfers and Old-Age Security in Korea. The Economic Consequences of Demographic Change in East Asia. Eds: Takatoshi Ito and Andrew K Rose. National Bureau of Economic Research. Vol. 19, Kwon, Huck-ju. Income Transfers to the Elderly in East Asia: Testing Asian Values. CASE/27. Centre for Analysis of Social Exclusion, London School of Economics, National Transfer Accounts database, accessed July

10 Household wealth Our examination of household balance sheets in Asia versus the US reveals that low investment income is largely a result of how household wealth is deployed. Household balance sheets in the US suggest a great many households are do-it-yourselfers who compile private portfolios of debentures, bonds, certificates of deposit and equities in addition to their pension, life insurance and bank deposit assets. These financial holdings are not just designed to produce capital gains, but in many cases generate substantial levels of income, which is particularly important to retired households. By contrast, we found that Asian household balance sheets are heavily skewed towards property investment and bank deposits. In Singapore, for example, owner-occupied and rental housing as well as bank deposits account for about 69% of overall household wealth versus only 36% in the US 10. In Japan, we estimate that non-financial assets (a significant portion of which is property) and bank deposits account for 74% of household wealth more than double the US level. While there is no comparable public information available for Hong Kong, our estimates suggest that real estate and bank deposits account for at least 78% of overall household wealth in the territory. Thus, property investment has a significant impact on retirement income security in the region. The main challenge arises from the fact that Asian households derive far lower levels of income from their property investments than their US counterparts. Similarly, heavy investment in bank deposits is common across much of the region allocation to deposits is often double or even triple the level seen for US households. While these substantial holdings of bank deposits reduce volatility over the course of the global financial cycle, they have placed particular strain on Asian households since the global financial crisis, as deposit rates across the region have fallen significantly due to high liquidity conditions arising from accommodative fiscal policies. This strain is increasing at a time when the region is aging very rapidly and is most in need of income. Figure 7: Financial wealth to total household wealth Figure 8: Composition of household financial wealth 64% 58% 55% 50% 68% 100% 80% 60% 40% 23% 20% Taiwan Japan Hong Kong Singapore South Korea US 0% Hong Kong Japan South Korea Taiwan Singapore US Bank deposits Life insurance reserves Pension reserves Mutual funds Others Source: South Korea from the Credit Suisse Global Wealth Databook, Singapore, US and Taiwan from central bank flow of funds household balance sheet statistics, Hong Kong statistics are Manulife Asset Management estimates based upon Hong Kong property valuations and housing stocks together with central bank data, and Japan is derived from Japan Statistics Bureau. Data is for 2011, except for Taiwan, which is 2010 data. Source: Manulife Asset Management calculations derived from flow of funds and household balance sheet data from the Central Bank of the Republic of China (Taiwan), OECD, Bank of Korea, Statistics Singapore, Hong Kong Investment Funds Association, Hong Kong Office of Commissioner of Insurance, Cerulli, Hong Kong Monetary Authority. Data is for 2011, except for South Korea pension and insurance and Taiwan, which is 2010 data. 10. Manulife Asset Management calculations based upon Singapore Household Balance Sheet data provided by The Monetary Authority of Singapore and US Household Balance Sheet data provided by the US Federal Reserve. 10

11 US household income & wealth: A benchmark for comparison We begin our analysis of retirement income security by examining the composition of US household income and balance sheets as a benchmark for comparison with Asian households. The US is not a perfect benchmark, particularly because the nation s sophisticated capital markets have afforded households retirement financial planning opportunities that are generally not available in Asia. However, the US is a prime example of how household wealth can be efficiently mobilised to provide retirement income security, According to the US Bureau of Economic Analysis, which looks at aggregate individual income for the nation, US household income is derived from five primary sources: formal employment (63%); transfer payments (11%), financial assets (13%); selfemployment (9%); and rental income (4%, adjusted down to reflect capital depreciation) 11. Figure 9: Composition of US household financial assets Income on invested assets 13% Rental income 4% Self-employment 9% Net gov't transfer payment 11% Formal employment 63% Source: United States Department of Commerce, Bureau of Economic Analysis, Personal Income and its Disposition, This breakdown indicates that US households are generally less dependent on formal employment income than their counterparts in the five Asian countries and territories we examined. This highly aggregated view of US household income represents an average profile across age groups. When considering elderly households in particular, the composition of income is be more heavily skewed toward income from assets and government transfer payments. The bottom line, however, is that the large portion of income US households derive from non-employment sources significantly enhances their retirement income security by and large, elderly households in the US have reasonably high income levels relative to their pre-retirement levels 12. While the formal retirement age for social security purposes is 65, employment levels in the US begin to fall off steeply above the age of 60. Median household income for households where the head is aged is about 82% of those where the household head is aged While it drops off sharply as the age of the household head increases from this point, this is in part because the household size also declines as age rises. When adjusted for the number of persons per household, median income per person per household drops off far less rapidly owing simply to the fact that average elderly household size declines with advancing age due to mortality 13. Social programs and accumulated wealth support US retirees These figures indicate that, overall, US households have achieved a high level of retirement income security. This is partly due to the foundation provided by social security and Medicare and Medicaid benefits, but is also a function of the how US households have mobilised their accumulated wealth. While some economies within Asia, and North Asia in particular, have achieved levels of wealth (measured against income) similar to or higher than that of US households, their levels of non-employment income are generally far lower. Thus, we conclude that while high levels of accumulated wealth are the foundation of the generally high level of retirement income security enjoyed by US households, the critical contributing factor is how that wealth is deployed specifically, how wealth is invested to generate retirement income. As of 2012, US households had aggregate assets of about US$76 trillion, only 32% of which arose from non-financial assets such as property. The remaining 68% of assets was invested in financial instruments, a large percentage of which generate income. Quite distinct from their Asian counterparts, only 12% of US household wealth is held in bank deposits. Rather, over a quarter of household wealth is invested in stocks, bonds and mutual funds, with much of the remainder taking the form of pension reserves Data as at November Based upon Manulife Asset Management analysis of United States Department of Commerce, Bureau of Economic Analysis, Personal Income and its Disposition, Ibid 14. Based upon Manulife Asset Management analysis of US Federal Reserve data for US household balance sheets. 11

12 Hong Kong s Retirement Income Security Profile Age profile Financial wealth to income ratio E Median age % population 65+ years 12.0% 32.7% Old age dependency We estimate that Hong Kong s households have aggregate financial wealth of three times GDP, about the same as for US households Retirement Preparedness Indicator Salaries & wages Most favourable Low and declining elderly labour force participation severely undercuts elderly income Government social spending Low level of government expenses relative to GDP; social security is only designed to provide subsistence living Retirement income security Pensions Familial support Pension reserves of 32.6% of GDP are modest, average account balances are small and pension benefits are paid as a lump sum Familial financial support deteriorating due to significant changes in family structure Household wealth Household balance sheets are heavily skewed toward real estate and low-yielding bank deposits Note: See appendix for details of Manulife Asset Management s Retirement Preparedness Indicator By most measures, Hong Kong households are very wealthy. With a financial assets to income ratio of 3.0, Hong Kong is roughly as wealthy as the US. Despite this relative wealth, however, the average income of elderly households in Hong Kong is only about 22% of the average for all households in the territory 15. This is in part due to the generally low level of income derived from household wealth in Hong Kong. Hong Kong s 2011 census indicates that 85.7% of aggregate household income is derived from formal employment (compared to 63.8% in the US), with the remaining 14.3% arising from other cash income (including government transfer payments and income from household assets). While this represents improvement over prior years the 2001 census showed 88.1% of household income arising from formal employment this improvement could arise from the simple fact that Hong Kong is aging rapidly and its base of retirees is expanding Manulife Asset Management calculations based on Census and Statistics Department, Hong Kong, Household Income Distribution in Hong Kong, Census and Statistics Department, Hong Kong Special Administrative Region. Household Income Distribution in Hong Kong,

13 Lump-sum pensions leave elderly income poor Perhaps more startling is the fact that households relying primarily on other cash income, which includes government transfer payments and income from assets, are disproportionately in the bottom deciles of income attainment. As individuals that rely primarily on non-wage sources of income are typically elderly, the Hong Kong census strongly suggests that despite their high level of accumulated wealth, a large portion of its households are retiring income poor. Hong Kong s median elderly household income is at about 47% of all households and has steadily dropped from 51% since Numerous factors have contributed to this surprising development, in particular the fact that labour participation rates in Hong Kong fall off a cliff at the fairly young age of 50. According to the International Labour Organization, only 21% of Hong Kong men participate in the labour force between the ages of 65 and 69 and only 5% over the age of While there are certainly developed economies with lower labour participation rates, Hong Kong s situation is surprising as average elderly household incomes are low. One of the key reasons elderly households in Hong Kong face low retirement income is the fact that the primary pension schemes the Mandatory Provident Fund (MPF) and Occupational Retirement Schemes Ordinance (ORSO) provide a lump-sum payment at retirement rather than a lifetime annuity. Moreover, average MPF account balances are relatively small at about US$20,000. As a result, elderly incomes are often not supported by regular pension payments. In addition, social security for the elderly is fairly modest in Hong Kong, disbursing about HK$1,100 per month per recipient (about US$136). Household balance sheets skewed to deposits Hong Kong does not produce a household balance sheet or announce household bank deposit statistics. However, we compiled a balance sheet estimate based on: total bank deposits of HK$7.6 trillion as at end-2011 (various deposit-taking institutions have indicated to us that retail deposits account for 45-50% of this amount), pension Figure 10: Hong Kong s retirement income resources at a glance Household wealth Familial support Salary & wages Pensions Government social spending Note: This radar chart measures the level of income resources that are available to households in each economy relative to the five Asian countries and territories studied in this report it does not indicate the actual level of income that is generated by a given resource. data (ie, pension reserves), household stock market activity and estimated mutual fund holdings. Our balance sheet estimate suggests that demand and time deposits account for about 60% of Hong Kong s financial wealth, dwarfing other assets such as MPF accounts, mutual funds and insurance reserves. Although Hong Kong households often hold their deposits in foreign currencies, mostly US dollars, deposit rates have fallen significantly since the global financial crisis and these assets yield little for elderly households. With regard to pensions reserves, MPF and ORSO holdings amount to just 32.6% of Hong Kong s GDP. While this is low by OECD standards, it is complemented by high life insurance reserves, which amount to 44% of GDP. Overall, our estimated household balance sheet indicates that household wealth in Hong Kong is not efficiently mobilised to optimise retirement income. As a result, many elderly households rely on deficit spending funded by drawing down deposits. The danger of this approach to retirement income is that individuals could outlive their savings, especially considering Hong Kong s low level of elderly labour participation and increasing longevity of retired life. 17. Manulife Asset Management calculations based on Census and Statistics Department, Hong Kong, Household Income Distribution in Hong Kong, International Labour Organisation. Labour force participation rate by sex and age. 13

14 Japan s Retirement Income Security Profile Age profile Financial wealth to income ratio E Median age % population 65+ years 19.8% 37.7% Old age dependency Japanese households have aggregate financial wealth of 3.2 times GDP Retirement Preparedness Indicator Salaries & wages Government social spending Most favourable Persistently high elderly labour participation rate especially among males, supports income in the early retirement years, but trails off in advanced age Government spending on social security, healthcare and welfare approaches US levels Retirement income security Pensions Familial support Japan has one of the most developed pension regimes in the region, but payments are often lump sum rather than lifetime annuities Elderly Japanese households provide nearly as much support to their children as they receive Household wealth Extremely challenging as most wealth is invested in real estate and bank deposits in a zero interest rate environment Note: See appendix for details of Manulife Asset Management s Retirement Preparedness Indicator Japan is one of the oldest countries in the world in terms of demographics and, in many ways, is already in the advanced stages of an aging revolution that most other Asian economies are racing toward. Japan is wealthy by any measure, having the highest absolute level of household wealth and highest per capita wealth in the region and ranking second only to Taiwan in terms of financial wealth to income. Japan also has a deep pension regime that holds aggregate pension reserves that are second only to the level held in the US. Japan has one of the highest levels of retirement income security among Asian economies we studied and one of the more durable retirement income glide paths of the five economies, though income drops off very quickly for the elderly even in Japan. High elderly labour force participation One of the key income sources for elderly households in Japan is continued labour force participation: 50% of men in their late sixties and about 30% of men in their early seventies continue to work 19. High elderly male labour market participation in part reflects historical cultural norms, but is also driven by economic necessity, as the nation s active labour force has been in decline for some time. Japanese females have much longer life expectancies than men, but the latter are the primary breadwinners in aging households. 19. Manulife Asset Management calculations based on Government of Japan statistics. 14

15 The income glide path for elderly households in Japan is among the strongest in the region and compares well to that of elderly households in the US. Japanese individuals who remain active in the labour force in their sixties and seventies have incomes equivalent to about 80% and 62% of pre-retirement levels (ie, households aged 50-59), respectively 20. These income levels are sufficiently high that many elderly households in Japan continue to save at elevated levels. However, the situation is somewhat less rosy when looking at elderly households overall, whether or not they are working. In aggregate, elderly households aged have wages equivalent to only 68% of the pre-retirement median income level and this falls to 51% for those aged 70 and above. Public pension transfers account for 70% of elderly household income, with only 6% being derived from household wealth far below US levels 21. Familial support has declined Another factor that affects retirement income security in Japan is the long-standing tradition of co-residence of older and younger generations co-residence in Japan is heavily skewed toward elderly females in need of financial support after their husbands pass on. However, this important component of retirement income security is rapidly diminishing. In 1989, 54% of elderly females lived with their married children, but by 2004 this had dropped to 28% 22. Japan s elderly widows increasingly live alone and thus experience the heaviest financial strain. Familial financial support for the elderly remains an important part of retirement income security in Japan but, like co-residence with children, has diminished over the past few decades. Government-sponsored studies indicate that 35% of elderly households received financial support from their adult children in However, this had declined to only 11% by 2005 still high compared to US households, but clearly a diminishing source of income security 23. Taken together, these changes mean that the elderly in Japan are increasingly on their own in terms of providing financially for their retirement. Figure 11: Japan s retirement income resources at a glance Household wealth Familial support Salary & wages Note: This radar chart measures the level of income resources that are available to households in each economy relative to the five Asian countries and territories studied in this report it does not indicate the actual level of income that is generated by a given resource. Low income on household wealth Pensions Government social spending The paradox facing Japan s elderly is that so little income is earned on their vast savings. In general, working households in Japan derive less than 2.3% of their household income from household wealth and that figure remains low at only 6% for elderly households 24. The typical balance sheet of Japan s households explains much. Our research indicates that more than 70% of household wealth is in the form of deposits and real estate, in particular non-income producing owner-occupied housing 25. This doesn t change much for the elderly, who maintain a considerable portion of their overall financial wealth in the form of demand and time deposits with financial institutions. Mutual funds and shares and securities account for a considerably lower portion of household financial wealth in Japan than in other developed Asian economies, and a much lower portion than in the US. This heavy skew toward holding financial wealth in deposits is especially challenging in the context of Japan s longstanding zero-interest-rate environment. 20. Ibid 21. Manulife Asset Management calculations based on Ministry of Health, Labour and Welfare, Japan. Annual Health, Labour and Welfare Report Murozumi, Masako and Shikata, Masato. The Structure of Income in Elderly Households and Relative Poverty Rates in Japan from the Viewpoint of International Comparisons. Luxembourg Income Study Working Paper Series. Working Paper No. 483, June Ogawa, Naohiro. Changing Intergenerational Transfers and Rapid Population Aging in Japan. Population Research Institute, Nihon University, Manulife Asset Management calculations based on Ministry of Health, Labour and Welfare, Japan. Annual Health, Labour and Welfare Report Ministry of Finance, Japan. 15

16 Singapore s Retirement Income Security Profile Age profile Financial wealth to income ratio E Median age % population 65+ years 8.5% 32.8% Old age dependency Singapore s households have aggregate financial wealth of 2.3 times GDP, lower than the US, but much of household wealth is locked-up in residential real estate Retirement Preparedness Indicator Salaries & wages Favourable At 18.5%, Singapore s elderly labour participation rate is very similar to that of the US Government social spending Singapore s spending on social security, healthcare and welfare and is among the lowest in the region Retirement income security Pensions Familial support Household wealth Singapore s CPF is a well-developed and sophisticated system. At 68% of GDP, pension reserves provide a solid foundation for retirement security. However, this is undercut by the use of pension reserves for healthcare expenses and housing Only about 8% of the elderly live alone and another 17% that live only with their spouse. Singapore has one of the highest incidences of multi-generational co-residency in the region and familial financial support is a crucial aspect of elderly income security Low levels of income attainment on household wealth owing to how wealth is deployed Note: See appendix for details of Manulife Asset Management s Retirement Preparedness Indicator Singapore has the oldest population within the ASEAN region and continues to age rapidly. According to a government white paper published in January 2013, its citizen labour force will begin to decline as early as 2020 and its population will begin to shrink in While Singaporeans are generally wealthy, with per capita household wealth of about US$205,000 27, this level of wealth does not automatically translate into high retirement income security. In fact, only a small minority of Singaporeans derive a meaningful level of income from their accumulated wealth in old age 28. This speaks in part to the concentration of the nation s wealth, but also to the fact that the vast majority of household wealth is deployed toward nonincome-producing real estate and much of the remainder is invested in low-yielding bank deposits. 26. Government of Singapore. A Sustainable Population for a Dynamic Singapore, January Monetary Authority of Singapore. 28. Government of Singapore. A Sustainable Population for a Dynamic Singapore, January

17 Government attempting to mobilise property wealth About 60% of Singapore s total household wealth is tied up in property related investments 29. Foreign workers residing in Singapore have, to some extent, propped up the value of real estate and the nation s highly constrained developable land area adds a speculative element to housing, rendering real estate relatively expensive. Singapore s government recognises that much of the population s wealth is illiquid and has been attempting to help citizen s monetise their real estate holdings by encouraging the development of a reverse mortgage market. However, we find little evidence that Singaporeans have embraced this new retirement funding technique. This low level of income attainment on household wealth is crucial as Singaporeans, much like their peers in Hong Kong, are increasingly assuming responsibility for their financial security in retirement. Government spending on social security, healthcare and welfare in Singapore amounts to only about 1.7% of GDP a tenth of that in the US and has changed little over the past decade. In point of fact, this level of spending is even lower than that of Hong Kong, which spends a meagre 4.6% of GDP on social welfare. CPF LIFE scheme provides lifetime annuity Singapore s CPF pension system appears to be well endowed relative to the rest of the region, with total pension reserves of about 67.5% of GDP - double that of Hong Kong. However, as these reserves can also be used for health care expenses and to purchase housing, the actual amount available to fund retirement income is considerably less than the headline numbers suggest. While pensions across most of Asia are generally paid out as lump sums, Singapore introduced the CPF Minimum Sum Scheme in Members have since been required to set aside a specified amount in their CPF Retirement Account (RA), called the Minimum Sum, from which to draw down monthly payouts from their draw-down age onwards. Withdrawal rules have also been tightened over the years to help members set aside adequate savings for their retirement. Today, members turning 55 are required to set aside the Minimum Sum in their RA, using their Ordinary Account and Special Account savings, before they can withdraw amounts in excess. The amount set aside in a member s RA is used to purchase a policy in the national annuity scheme called CPF LIFE, which provides participants Figure 12: Singapore s retirement income resources at a glance Household wealth Familial support Salary & wages Note: This radar chart measures the level of income resources that are available to households in each economy relative to the five Asian countries and territories studied in this report it does not indicate the actual level of income that is generated by a given resource. with a lifelong income. This helps to address increasing longevity and mitigate the risk of outliving one s retirement savings. From January 2013, all members turning 55 with at least S$40,000 in their RA are automatically included in CPF LIFE. Other CPF members can also opt into the scheme. Familial support a pillar of income security Pensions Government social spending Our research indicates that retirement income security for elderly Singaporeans relies heavily on familial financial support. This is in part because Singapore has one of the highest incidences of multi-generational co-residency of any developed economy only about 8% of the elderly in Singapore live alone and another 17% that live only with their spouse 30. Similarly, nearly 80% of elderly Singaporeans receive financial support from their children, also among the highest rates in the region. Moreover, as age increases and elderly individuals progress along the retirement income glide path, the portion receiving financial support from their children rises. For example, 55% of those between the ages of 65 and 74 report receiving such financial support, rising to 64% for those 75 and above (as of 2005) 31. However, this vital form of support is under threat owing to declining household size, rising elderly dependency ratios and declining fertility. In 1995, 84% of the elderly reported receiving financial support from their children, but this had dropped to 77% by This very significant drop in familial support comes at a time when Singapore s aging trends are accelerating and record numbers of new retirees are being added to the population each year Manulife Asset Management calculation based on Government of Singapore statistics. 30. Government of Singapore. State of the Elderly in Singapore Release 3: Social Well-being Going Forward, 2008/ Government of Singapore. State of the Elderly in Singapore Release 2: Employment and Incomes and Assets, 2008/ Ibid 17

18 South Korea s Retirement Income Security Profile Age profile Financial wealth to income ratio E Median age % population 65+ years 9.4% 35.1% Old age dependency South Korean households have aggregate financial wealth equal to 1.9 times GDP, but this is severely undercut by high levels of household indebtedness Retirement Preparedness Indicator Salaries & wages Challenging South Korea s elderly labour participation rate is the highest of the five economies studied Government social spending Low levels of government spending on social security, healthcare and welfare Retirement income security Pensions Familial support Household wealth Pension reserves are very small relative to GDP and stringent eligibility considerations undercut the value of pension benefits While still important, reliance on private income transfers from adult children to their elderly parents has been in a period of long decline Only one-half of one percent of household income arises from household wealth Note: See appendix for details of Manulife Asset Management s Retirement Preparedness Indicator Of the five developed Asian economies covered in this report, South Korea is perhaps the most challenged in terms of retirement income security for its elderly population. In fact, according to a 2009 study, 32% of South Koreans aged 60 and older live in poverty, which is one of the highest rates among OECD nations 33. We see a combination of factors affecting income security for elderly South Koreans. The most important item to note is that government policy assumes that individual households contribute to their retirement income security, but the general population has not yet amassed the levels of household wealth required to do so. For example, South Korean government spending on social security, healthcare and welfare amounts to about 2.5% of GDP roughly a quarter of the US level. Similar to Singapore and Hong Kong, this level of spending implies that the support provided is primarily destined for the neediest in those economies. 33. Lee, J. and Lee, Y. Old-age Income Security and Private Transfers in Korea, Journal of Population Aging and Social Policy,

19 High debt levels undermine household wealth While Singapore and Hong Kong households have responded to government policy by accumulating substantial levels of household wealth, South Korea has attained the lowest level of household financial wealth among the five economies: its financial wealth to GDP ratio is just 186%. Low interest rates and speculation on housing has contributed to high levels of household indebtedness, which now amounts to about 50% of financial wealth. This indebtedness undercuts savings and increases household sensitivity to interest rates while halving the value of household financial assets. Though low by developed country standards, South Korea does have a level of wealth in excess of developing Asian economies. Despite this, the amount of household income derived from assets is about half of one percent dramatically lower than in the US and most other developed economies 34. Figure 13: South Korea s retirement income resources at a glance Household wealth Familial support Salary & wages Pensions Government social spending Note: This radar chart measures the level of income resources that are available to households in each economy relative to the five Asian countries and territories studied in this report it does not indicate the actual level of income that is generated by a given resource. Rising support ratio and slowing economic growth These challenges come at a difficult time for South Korea. The nation s lifecycle suggests that it is nearing the end of its demographic dividend. Old age dependency ratios in South Korea are set to increase from 13 elderly individuals for every 100 workers in 2005 to 64.5 in In line with these demographic trends, economic growth within South Korea is slowing from its headier days and the ability of households to accumulate wealth is increasingly constrained. While pensions are the most common foundation for retirement income security, South Korea s pension reserves are among the lowest of the five economies we studied and the strict eligibility criteria for its national pension system mean that most elderly households do not derive full benefits. High elderly labour force participation In response to these headwinds, South Koreans tend to remain in the labour force far longer than their counterparts in the other four economies studied. South Korea s elderly labour participation rate is close to 30%, about five times higher than that of Hong Kong and even higher than that of Japan. We expect South Korea s elderly labour participation rate to remain high, but do not see this being sufficient to address the retirement income security challenges its population faces. Against this backdrop, rapid growth in old age dependency ratios and a shrinking working age population are impeding the government s ability to fund higher spending on elderly benefits. Historically, South Korea has relied heavily on familial support as a primary means of offsetting low pension benefits and government entitlement spending for the aged. However, this social model is under severe stress. According to a RAND study of elderly poverty in South Korea, 76% of South Koreans aged 60 and above relied upon familial financial support as the main source of income in 1980, but that had dropped to 31% by Manulife Asset Management calculations derived from Statistics Korea Survey of Household Income and Expenditures. 35. Lee, Jinkook and Phillips, Drystan. Income and Poverty among Older Koreans: Relative Contributions of and Relationship between Public and Family Transfers. RAND Labor and Population Working Paper Series. April

20 Taiwan s Retirement Income Security Profile Age profile Financial wealth to income ratio E Median age % population 65+ years 9.7% 36.5% Old age dependency Taiwan s households have aggregate financial wealth of 4.7 times GDP, the highest in Asia Retirement Preparedness Indicator Salaries & wages Most favourable Low and declining elderly labour participation, partially offset by self-employment income Retirement income security Government social spending Pensions Familial support Household wealth Among the highest levels of government spending on social security, healthcare and welfare in Asia relative to GDP, similar to US levels of spending Modest pension reserves offset by high levels of household wealth Private transfer payments equal 40% of elderly household consumption expenditures according to National Transfer Account database Increasingly sophisticated household balance sheets and the highest level of income on assets among the five economies, but still far short of US levels of income on assets Note: See appendix for details of Manulife Asset Management s Retirement Preparedness Indicator In some ways, Taiwan s aging demographic profile mirrors that of Japan. Taiwan s population will begin to decline within the next 12 years, with its male population starting to decline slightly earlier than its female population. Like Japan, Taiwan accumulated vast household wealth during the economic boom generated by its demographic dividend in fact, its financial wealth to income ratio is the highest in the region. Also similar to Japan, Taiwan faces a sizable increase in the portion of its population that is elderly at a time when severely low interest rates limit the scope for aging households to mobilise their accumulated wealth. Income levels for elderly households in Taiwan are about 50% of their pre-retirement levels, but only about 40% if familial support is excluded 36. Low and declining elderly workforce participation Roughly a third of Taiwan s elderly households derive retirement income from continued formal employment or self-employment, with a pronounced skew to the latter. However, there is evidence that elderly male labour force participation has been in secular decline National Statistics, Republic of China (Taiwan). Report on The Survey of Family Income and Expenditures in Taiwan Area. 37. Hung, Wen Shai. Probit Estimates of Labour Force Participation for the Middle Aged and Elderly in Taiwan. Web Journal of Chinese Management Review. Vol. 6, No. 2, April