Social insurance conundrum

The International Labour Organization (ILO) forecast Vietnam’s retirement pension fund would start incurring deficits from 2020 and be running out by 2029. These figures came on the back of ILO’s sweeping study about Vietnam’s retirement pension fund under proposal from Vietnamese government.

The study had pointed out a number of problems in Vietnam’s current social security system. Accordingly, only 20 per cent of the workforce contributes to the social insurance fund whereas the rate of contributors/recipients is falling dramatically.

This is shown from the fact that in 1996 there was one retirement pension recipient per 217 contributors to the fund, it slid to around 10 contributors per one recipient in 2011.

Meanwhile, the current average retirement age remains low (53.43 years generally for men and women), resulted in shorter time for payment against extended period of getting insurance benefits as the average life span of retirement pension recipients has extended to 73.

In addition, pension hikes have significantly driven up fund costs.
“After three six upward revisions from 2007 until present the pension hiked 134 per cent whereas social insurance fund rose an average less than 10 per cent per year,” said ILO Vietnam’s associate expert Carlos Galian.
Hence, the fund’s actual expenditure made up 94.65 per cent of total collected amount in 2011 against only 64.4 per cent in 2007.

To boost incomes sources, under current regulations the fund’s balance can be used to lend state commercial banks with usually low interest rates, to buy public bonds and government bonds. It could not be used for direct investment to ensure safety. This has resulted in low profit rates of 9-11 per cent only.

From that practice, Ministry of Finance’s Administrative Finance Department’s deputy head Do Thi Thuy Hang suggested to hike idle capital efficiency through combining short-term and long-term loan provision or reforming lending rate setting methods.
Hang proposed forming a specialised investment body to ensure the fund sustainable growth.

ILO’s Insurance and Finance Section expert Hiroshi Yamabana suggested gradually scaling up the retirement age.
Accordingly, ILO suggested increase retirement age for men to 61 and to women to 56 from 2016, one year more than current levels. Then every two years the retirement age for men and women will increase one more year until reaching 65 years.

However, this move alone is not enough, according to the ILO. Yamabana also suggested introducing regulations to restrict early retirements such as slashing 5-6 per cent retirement pension to each year of early retirement.

“As the Law on Social Insurance slated to be put on National Assembly agenda in later this year session and might be approved in early 2013, we expect a raft of measures to help balance fund collections and expenditure soon be in place,” said Yamabana.