Ten million shades of grey: Plan now for aging Thailand

Thailand is already an aging society. About ten million Thais have passed the age of 60, which amounts to 15% of the population. By 2030, this number will rise to 25%. Our declining birth rate and rising life expectancy are driving the change. Of course, it's good news that we have reached the stage of development where we live 74 years on average.

But are Thais financially prepared to retire? Unfortunately, the answer is a solid no. 

We're getting old a few decades later than Japan and Europe, but way before the rest of Southeast Asian peers. Indeed, what's special in Thailand's case is the fact that we will be one of the first societies to become aged before the economy has reached developed status. It poses some serious challenges.

To put things into perspective, Thailand's population structure today is as old as Japan's was in the 1980s. But Japan's per capita GDP back then was three times Thailand's current level. We're getting old before we get rich.

The aging demographics will constrain the Thai economy's potential to grow in the years ahead. Already it is squeezing employers, who can't find enough workers in a labor market with 0.7% unemployment (at or near the world's lowest rate). Cheap and abundant labor used to make Thailand highly competitive in the global stage. Population growth was part of what fueled our explosive economic growth in the 1980s-1990s.

Starting around 2018, Thailand's working-age population will begin to decline, because births declined decades earlier, when many Thais moved to the city and opted for smaller families. The slowing of population growth will trim 0.8% from Thailand's potential GDP growth rate each year.

Slower economic growth will exacerbate Thailand's looming social problem of insufficient retirement assets. A customer survey by SCB shows that Thais often underestimate the amount of savings they need for retirement. Many lack any form of retirement plan.

In the past, old folks often lived as part of a large extended family. With it came implicit financial support. But today more and more of the elderly are living by themselves. About 10 percent of all Thai households today consist solely of members aged above 60, according to the National Statistics Office. This further emphasizes the need for retirement planning. Yet government data also show that this group of older people is not financially independent. They rely on assistance from their kin and the government for over a third of their income.

That reliance will become increasingly at threat, as many will have to depend more on the social safety net funded by the government. Aggravating the situation, tax revenue growth might slow because dependents are increasing faster than earners. As of now, there are 7 working-age people for every elderly person. This number will be halved in the next 15 years.

Countries with aging populations tend to be hit by soaring government debt due to higher spending on healthcare and public pensions. Thailand's government should expect these fiscal burdens to rise and plan ahead. Our existing social pension schemes are predominantly defined-benefit, whereby a predetermined amount is paid out to the retiree when eligible. This differs from the defined-contribution approach, which pays out according to how much the person has contributed.

Thus it appears that Thailand's heavy reliance on defined-benefit pension schemes, together with rising healthcare costs, could pose a threat of fiscal insolvency. Therefore the government must restructure its fiscal planning to become more sustainable. Otherwise the younger, working-age population would have to bear a substantially heavier tax burden.  This would strain implicit social contracts between the generations, as well as between the government and the public.

Based on our survey, most Thai savers' asset allocation patterns will not deliver the returns they expect. A large chunk of wealth remains in traditional bank deposits; while the prospect for returns is not too bright as dissaving by the elderly could reduce the real interest rate via changes in the loanable funds market.

Moreover, as population ages, aggregate portfolio tends to shift towards safe assets potentially depressing returns on assets like government bond yields. A recent IMF research shows that such phenomenon could partially contribute deflationary pressures as seen in Japan and Europe right now. Financial literacy will help households better manage their wealth and seek higher returns on those savings.

Late retirement can also help. The government should remove the institutional and legal barriers that keep older people from working. Many capable seniors would like to prolong their careers, but face obstacles including healthcare costs, labor laws, pension regulations and corporate attitudes toward older workers. Today's older generation is much healthier than their counterparts were just a decade ago. Thais are living longer and staying strong and healthy well into their golden years, but official retirement age has not risen in response.

The option of delayed retirement age would benefit not only older people but also the organizations and businesses they work for. In many sectors and positions, job experience is crucial. Companies can unlock valuable human resources by allowing older employees to work from home or for fewer hours. Employees in turn can help make these conditions viable for companies by accepting lower benefits and wages.

The insidious demographic change will have profound and inevitable socio-economic impacts on Thailand. Even economic powerhouses like Japan and Europe are struggling to deal with their population's aging. Now is high time to get serious about reforming Thailand's lax approach to retirement.