SHAPING THE FUTURE HOW CHANGING DEMOGRAPHICS CAN POWER HUMAN DEVELOPMENT

134
Actual pension
coverage may be
less than that
promised by law
services, and where there are budgetary constraints.
Pensions with voluntary affiliation
mechanisms, which are more likely for self-,
part-time or informal employment, have lower
coverage. Globally, more than half of employees
are affiliated with a pension scheme, compared
with 16 percent of the self-employed. Men are
better covered than women. 65
Besides understanding coverage, it is important
to look at the adequacy of pension
systems, which indicates the degree to which
older people can rely financially on pensions.
The variety and complexity of national pension
systems, as well as the limited availability of
data, make it difficult to find a comparable
benchmark for measuring adequacy. Some indicators
can provide an estimate, however, 66
such as the replacement rate. It measures how
FIGURE 4.11:
In Asia-Pacific, pension coverage tends
to be higher in wealthier countries,
but many developing states have made
impressive progress
Source: ILO 2014a.
effectively a pension system replaces earnings
before retirement. The gross replacement rate
is defined as gross pension entitlement divided
by gross pre-retirement earnings, while the net
replacement rate uses net values taking into
account income taxes and social security contributions.
67 The minimum replacement rates
necessary to guarantee pension income above
the poverty line varies from country to country,
but is estimated to be between 50 percent and
90 percent for low-income earners. 68 As shown
in Figure 4.12, among countries where data are
available, many are below this threshold.
In Japan, for example, the pension coverage
rate of 95 percent is very high. But the gross
replacement rate of an average earner is only
36 percent, however, and 50 percent for a low
earner. 69 In China, the active coverage rate of 34
percent is lower, but the replacement rate for low
earners reaches 98 percent, and 78 percent for
people who receive an average income. In India,
only 6 percent of the working-age population
contributes to a pension scheme, yet replacement
rates of 76 percent for low earners and 56 percent
for average earners are quite high.
Maintaining a balance between the volume
of people covered and the level of benefits received
is a matter of public policy and involves
issues of sustainability. Implicit pension debt,
defined as the present value of future pension
promises minus prefunding, if any, is an indicator
of sustainability. In Asia-Pacific countries
with defined benefit pension systems, pension
promises are often at least partly funded, which
can lead to implicit pension debts larger than
the public debt of the country. This has sparked
concerns about maintaining pension systems over
the long term, for example, in the Philippines
and the Republic of Korea. 70
Worldwide, more than half of total public
pension expenditure, amounting to 3 percent
of global GDP, is allocated to income security
for older persons. 71 In 2010 to 2011, public nonhealth
social protection expenditure for older
people was highest in Western Europe at 11
percent of GDP, and lowest in Africa at 1 percent.
Asia-Pacific, at 2 percent, is significantly below
the global mean (Figure 4.13). If the proportion
of expenditure is compared with the share of
the older population, Asia-Pacific is worse off
than Africa. Among 36 Asia-Pacific countries