The $119tn question: how do we get China to save for retirement?

Fifty years ago, no one naming the greatest challenge facing Asian nations would have put retirement planning as the region’s most intractable problem.

Life expectancy in India in 1970 was 47 years. In China, it was 59.

Getting to old age was a rarity and if you made it to your 90s, poverty was not an appreciably greater threat than in your youth. Most extended families in rural Asia were poor but supported the oldest members.

Since then, the economic revolution of the Asian century has brought prosperity to billions. Greater income has meant widespread urbanisation, smaller families and fewer multigenerational households. Better healthcare has extended lives by up to 20 years.

Improvements in living standards have reduced poverty but not yet made populations rich in absolute terms. Many Asian countries risk turning grey before their people become wealthy.

The Asian Development Bank estimates that by 2050 Asia will account for about half of the global population aged more than 60.

Today, millions of Asians face the prospect of ending up poor and isolated. The World Economic Forum suggests that the retirement savings gap in China is projected to grow to $119tn in the next 30 years.

Doing nothing is not an option. Better and more retirement planning has to be a priority for policymakers.

This is not to say Asian governments are strangers to the demographic time-bomb. Many have already taken substantial action to try to shore up financial sustainability.

The mathematical reality is that government safety nets will be insufficient. Taxes on the young will not fund the old indefinitely.

Culturally, Asians are great savers but they often make poor investment choices, such as saving in cash rather than increasing their wealth sufficiently or compounding their returns to sustain retirement spending needs. Moreover, their savings are increasingly stretched between short and long-term goals.

Part of the answer must be greater individual responsibility. This will mean rethinking the way Asians interact with pensions and empowering people to make better decisions about their own financial wellbeing.

The question for governments then is how do you build private (ie voluntary) pension structures and put in place incentives to encourage or require more saving without overstepping freedoms? There is no one-size-fits-all solution, but there are common levers.

First, policymakers need to be clear about what they are aiming for and secure public backing. Is it a minimum standard of living for everyone in retirement or is it providing people with a target retirement income? Define the problem that private pensions will fix.

Second, harness human nature by using the power of inertia. Put workers into contributory retirement plans at a particular rate by default, unless they opt out (few will). Quiet nudges encourage greater personal responsibility.

Understand how the mind hinders investment decisions and counter that with smart system design, such as steering people to diversified, long-term investment options. Most do not have the time or expertise to invest on their own and people often underestimate how much risk they can take in investing over a long period; conversely, they take on too much risk when time is short.

Third, use data and behavioural tools to influence conduct. In addition to automatically enrolling people in savings plans, incentivise them to save. Require employers sponsoring retirement plans to match workers’ contributions by a certain percentage. The promise of “free money” will encourage people to put sums aside.

Fourth, plan to keep people engaged. Private pensions should provide personalised account statements that show progress towards a goal. Present accumulated wealth as the level of income it will provide in retirement. If retirement savings look like a bank account balance, they may seem easier to spend. Ensure individuals have the information they need, when they need it.

Help people consider how retirement savings can be converted into income streams once they are in retirement. Provide guidance on how asset management and insurance products can help meet an individual’s income goals.

Fifth and finally, policymakers need to establish a review process to measure how well the system is doing. Keep the debate based in fact. This will be your friend when political pressures come to bear.

Asian governments urgently need long-term, coherent pension policies that make it easier for individuals to plan their savings and take active ownership. The trade-offs in designing these policies are complex. What succeeds in one country’s retirement system may fall short in another. Constructing better retirement systems to help Asia’s ageing populations has to be an immediate priority.

Wina Appleton is Asia Pacific retirement strategist at JPMorgan Asset Management

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