A high-ranking police official with a sizable income, Simon has promised not only to care for his wife, Sung-Hye, but to provide for her parents. Besides their two children, they would have only the country’s meager pension system to support them. But the marriage celebration is bittersweet. Simon will take his bride and hopes for children back to his adoptive home, Germany – and make the shift in demographics even worse.

The country is in a phase of double-aging, a term that applies to populations that experience declining birth rate simultaneously with increasing life expectancy. In South Korea, adult children traditionally provide for parents in old age. “People don’t want to ask so much of their children anymore,” says Simon.  Yet many in South Korea must because, as Simon points out, “The pension system in Korea is still just in its infancy.”

Why the change? In the last 60 years, society shifted from agricultural to industrial and urban. In the rural society of the past, old age was short and relatively inexpensive. Today improvements in health care and standards of living mean South Koreans are living longer and better. But the cost to their children to support them is high.

Meanwhile, increased mobility and urban living have contributed to weaker family ties. Like so many well-meaning Asian parents, Sung-Hye’s parents sent their older child to a European university to prepare her for a professional career. Today her mother feels the price of the investment. She’s already begun to steel herself against the pain of Sung-Hye’s pending, and likely permanent, departure.

According to the report Asia-Pacific Pensions 2007, South Korea is one of the key pension markets in Asia. Due to demographic and societal changes, the family-based system of support is becoming unsustainable. In 1950, women had on average six children; today, it’s closer to one. In the same period, life expectancy has risen from 55 to 77 years. In the next 40 years the ratio of over-65-year-olds per 100 of working age is expected to jump from 13 to 64, potentially the highest in the world. War casualties, a traditional preference for male children and an adoption policy that placed approximately 150,000 children like Simon outside the country may have affected the South Korean numbers.

But factors are more widespread. Simon is part of a demographic watershed spanning South Korea and much of Asia as well. New systems must be established quickly to avoid a dramatic rise in old-age poverty. Solutions found and developed here have the potential to lead the way for other countries in the region.

The rapid shift is catching much of South Korea’s younger workforce between tradition and a new system. In-Jung Kim, a 30-year-old guest at Simon’s wedding, says, “I don’t plan to do as much for my children as my parents did for me. Instead, I’ll put that money aside for when I can’t work anymore.” But Kim will have to invest in her own retirement while still supporting her parents. She pays her parents’ health insurance and gives them 10% of her earnings. “My father had his own business but competition from India and China forced him to close. He used his savings to keep the business running,” says Kim, “ and now he has nothing to retire on.”

South Korea is one of the most rapidly aging societies in the world, but China will be affected soon after. Wealthy Japan is already the world’s oldest country, and younger India is challenged by a breakdown of the family-based system. Aging populations are putting Europe’s mature systems under pressure, too. But many Asian countries must establish new systems and prepare them for the senior boom simultaneously.

In South Korea, reforms are already under way. A comprehensive public system was introduced in 1988, providing benefits through occupational schemes. Yet many people are not eligible and must save on their own. Unfortunately, tax incentives for private savings are minor, and savings products designed specifically for retirement purposes rare.

Innovative private-sector products are vital to meet future pension challenges. A 2008 Allianz Global Investors report, Pension Trends in Emerging Markets, outlines why DC schemes offering individual choice fit this need across much of Asia. Tax laws such as the corporate savings structure introduced in South Korea in 2006 can help boost private savings. And asset managers will be looking for products that offer protection against longevity risk, such as innovative bonds, swaps and options linked to mortality rates to hedge against longevity.

Along with innovative products, Asia will require increased financial services and education. The dynamic, life-cycle portfolios needed to meet longevity challenges require professional management. The population on a whole must be educated in how to select from the range of retirement products. But the willingness to save and plan ahead is already there – nearly half of China’s GDP goes into savings.

Until formal plans mature, tradition in South Korea struggles on: parents are the responsibility of the oldest son. With no son, the role falls to the daughter and her husband. Simon’s new in-laws, while heartbroken to see their daughter leave the country, are relieved to know they can depend on him. And how will Simon manage from such a distance? With innovative services for urban, mobile living: “Wire transfers and lots of phone calls.”   

Published by PROJECT M in September 2009     

(Photo: Jae-hyun Kim/Orchardrepresents.com)