Asian populations will grow old at a faster pace than any other region in the coming decades, giving rise to concerns that emerging economies such as China and Thailand could see growth stall before they transition into high-income status, economists said.
Such a development, if it materializes, will strain public finances and limit governments’ ability to put in place the necessary systems, such as pensions, to cater to the growing number of seniors, experts told CNBC.
Standard Chartered economists wrote in a note that Asia’s rapid aging will hit the growth of China, Hong Kong, South Korea and Thailand by 2020, and Singapore by 2025. That would be before China’s projected transition into a high-income economy in 2026 and Thailand’s “well after 2040.”
“Getting old before getting rich is one the biggest medium-term structural challenges in developing Asia and (Latin America). The main reason why middle-income countries are concerned about this is that it might inhibit their ability to join the group of high-income developed countries,” the Standard Chartered report said.
“Unfavorable demographics could lower potential GDP growth rates and hamper development… Aging affects a population’s productive capacity, consumption patterns and investment.”
The double whammy of higher social spending and declining tax income faced by aging economies has increased the urgency for countries to strengthen their fiscal positions, noted Andy Seaman, partner and chief investment officer at Stratton Street Capital.
“Debt is a major risk for countries with aging populations, particularly once working age populations start to decline, as the debt burden will need to be financed by a smaller number of people,” he said.
Governments have tried expanding their workforce through measures such as increasing the number of working women and raising the retirement age. Countries such as Japan, South Korea and Singapore have also invested in upgrading the skills of seniors and deploying technology to boost productivity.
But those measures are prevalent mainly in advanced Asian economies, experts noted. The need to increase government revenue as the countries age means imposing higher taxes on the shrinking working population or expanding the tax base, tax specialists told CNBC.
“No country can be lauded for being able to meet the needs of an aging population and have low taxes… In light of the global economic climate, the trend in current tax reforms in these major economies are now focused on lowering income tax rates. Yet, social and medical welfare needs still need to be met,” said Chris Woo, tax leader at PwC Singapore.
The Organisation for Economic Co-operation and Development, in a 2015 report, recommended countries address tax challenges that the digital economy brings. Since then, New Zealand enforced a goods and services tax on digital services from October 2016, while Taiwan and Australia will follow suit this year.
Implementing such taxes can be tricky, however, especially among developing economies where tax enforcement capabilities are limited and taxpayer compliance rates are poor. Chiu Wu Hong, head of tax at KPMG in Singapore, cited an Asian Development Bank study that found higher tax arrears in developing economies.
“The challenges arise because of various factors, such as it is harder to track transactions undertaken over the internet and suppliers of the digital services locating outside the country,” said Chiu.
Asian countries could also be running out of time as growth in their elderly populations accelerates. The World Bank estimated that China and Singapore will take 25 years to move from when they first became an “aging” society to becoming an “aged” one, defined as having 14 to 20 percent of population above 65 years. In Thailand and South Korea, that transition will happen in just 20 years.
In comparison, the U.K took 45 years to reach that stage, while U.S. and France got there in 69 years and 115 years, respectively.
Standard Chartered economists said declining fertility, increased longevity — reportedly happening at a quicker pace in Asia — and a fall in mortality are reasons behind the region’s rapidly aging phenomenon.
“Institutional support is not yet in place to respond to the rapid rise in ageing. Pension systems remain unsustainable despite recent policy reforms. China’s nationwide pension system may run a deficit as early as 2030; Thailand will likely run a deficit from 2041. By then, the pension systems in Korea and Vietnam should also run small deficits,” they wrote.