The Saigon Times Daily: Some people say that the State sector is benefiting more from social insurance because there exists a difference between the pension calculation ways for the State and private sectors. What do you think?
– Carlos Galian: Inequality is a worrying feature of the Vietnamese pension system. Different workers are treated differently: military, civil servants and private employees. Unequal treatment leads to two problems: First, it causes unrest among groups that contribute more than what they receive, and consequently it gives incentives to other groups to evade social premium obligations and not join the social insurance system.
The current pension system has clear losers: private sector workers. Maybe that is why coverage expansion is lagging behind in the private sector. Unless all groups are treated equally, evasion will probably characterize the Vietnamese pension system.
The ILO believes that the pension system should treat all workers equally. Such a reform would not only be good in itself, but it would also probably increase coverage. Currently, the system can expand its coverage mainly in the private sector. Most civil servants are already enrolled. Currently, one possible explanation for high evasion among private sector employees is that the current system offers them a rigged deal: their pensions are much lower than other groups. Therefore, by changing the pension formula to provide the same treatment for all sectors including military, civil servants and private sector workers, there could be a potential for coverage expansion in the private sector.
The draft amended Social Insurance Law that will be passed in the end of 2014 does not mention any changes in pension calculation formula for these two sectors. As an ILO expert in social insurance, what would you recommend?
– The current draft includes a minor change in the pension formula and some other changes for future civil servants. However, the ILO believes that these changes are not enough to address the major financial imbalance.
Understanding the causes of the financial imbalance leads to the required reforms. The ILO has advised the Government to consider increasing very gradually the retirement age of male and female workers to 65 by 2036; changing the pension formula, removing the 75% cap, and set a flat accrual rate of 1.5% or 2% annually; revalorizing pensions for both civil servants and private sector employees in line with wage increases; including a proper annual actuarial reduction factor (5-6%); defining a multi-pillar pension system, including a supplementary scheme and a clear linkage with the old age social allowances under Decree 13.
These reforms would make the scheme financially viable, the pension level predictable for scheme members and provide work incentives for members in line with the increase of the retirement age.
Many international organizations, including the ILO, have forecast that the social insurance fund will soon run deficits and be depleted due to problems in the system. What are those problems? Is it because of inefficient investments?
– The ILO actuarial valuation shows that Vietnam does not have much time to fix its pension system. According to our analysis, the pension fund would be depleted by 2034, but much earlier, by 2021, income from contributions would equal expenditure in pensions. It is important to highlight that these projections are similar to a previous analysis carried out by Vietnam Social Security (VSS). In its report, VSS projected the fund to be depleted by 2037. These projections seem to indicate that the present public pension scheme needs urgent reforms as soon as possible.
Even if Vietnam is not an aged society yet, it has already aged incredibly fast in the last two decades. Life expectancy in 1990 was 66 years; now it is 75. More importantly, life expectancy at 60 years of age, that is, life expectancy of those Vietnamese who reach 60 years of age, is as high as 81. That figure is as high as the life expectancy in much richer countries, like Brazil or Thailand, and only 3-4 years short of Western European countries. As their life expectancy increases, their pension life will also increase.
Moreover, the Vietnamese public pension system does not only face a challenge in demographic terms. It also inherits some design weaknesses. Pensioners receive much more from the pension fund than what they contributed. The current pension formula leads to high replacement rates, that is, the share of the pension in relation with their real career average wage. According to the ILO analysis, civil servants replacement rates are over 100%, meaning that they get higher pensions than their average real wages. Usually, pension systems provide between 40 and 60% replacement rates. Actually, it is the highest the ILO experts have ever found.
Even though the social insurance fund has not obtained high returns, it has to be noted that improving the efficiency of VSS investment will not solve the problem. According to ILO estimates, even if VSS manages to get a return 2 or 3 percentage points higher, the life of the fund would only be extended for 2 or 3 years. Thus, it is clear that the problem does not lie in the financial returns of the fund, but rather on the pension formula and the retirement age.
The combination of design flaws and a very rapid ageing process has weakened the Vietnamese pension system so deeply that significant structural reforms are urgently required.