Keywords: finance, retirement, aging population

1. Background to the study

Changes in demographic have immense effect on economic and social activities of countries, regions, the world and Vietnam is not an exception. The clearest change in population in the recent time is demonstrated by the fast aging population because the rate of birth and life expectancy has increased, thereby the dependence rate also increases. Aging population forces the government to make more spending on retirement pension, healthcare, thus affecting government budget and financial sustainability of pension fund. This article aims to address some issues that have impacts on the Vietnam pension fund security within the context of aging population and suggest solutions in order to guarantee stability of pension fund development to meet society’s demands.

2. Population aging trend in Vietnam

Vietnam is now in the period of golden population, but also on the verge of rapid population aging. The proportion of people aged 60 and over in the total population increases constantly: it was at 9.4%, 11.14%, 11.58% in 2010, 2013 and 2015 respectively. The projected percentages are 16.04 % in 2029, 20.41% in 2039, 24,79% in 2049.  The fast rate of population aging will cause pension payout to expand, affect considerably the fund balance (positive balance) in the long term if the current design of pension system is still applied despite the annual increase in the number of workers reaching pensionable age and there will be 12,14 million pensioners by the end of 2015 (a twofold increase comparing with the statistic of 2015).

Improved living standards has caused a continuous rise in the average life expectancy of Vietnamese people, from 59 years old (in 1960) to 68.5 (in 2001), 70 (in 2005), 72.9 (in 2010), 73,2 (in 2004) and 73.3 in 20151, in which average age of men if 70.7 years old and women 76.1. High life expectancy is synonymous with greater average pension length.

Increasing average life expectancy has driven a surge in the number of people aged 65 and over. In 1999, its percentage was 5.8%, 6.5% in 2009 and 7.1% in 20142. According to predictions of UN (2010), this number will increase by 10% by 2020 and up to 24% by 2050.

Image 2. The amount of population groups aged less than 15 and more than 65.

Source: General Statistics Office

Due to the improved living standards and rising average life expectancy, dependence rate of the elderly (the rate reflects relation between the population aged 65 + and 100 working-age people) increases; from 8.4% (in 1989) to 9.4% (in 199); 9.3% (in 2009) and 10.2% (in 2014)3. This reality has posed challenges that need facing to social welfare system in the coming time.

One of the important indexes is the aging index 4 illustrating population aging trend. The index shows that our country entered population aging period in 2011. The predicted time gap between Vietnam’s “aging population” and “age population”5 is 17 to 20 years, shorter than many other countries’, including those more developed (for example the gap of France is 115 years, Sweden 85, Japan 26 and Thailand 22). According to World Bank6, the number of 65-year-olds and over accounted for 7% of the total Vietnamese population, equivalent to 6.5 million people; the percentage of people aged 60+ is over 10%. In 2040, population aged 65+ will triple to approximately 18.4 million, making up for 17% of the total number. In other words, there will be a nearly threefold increase in the dependence rate, from 10% as of

today to about 26% in 2040. This will burden not only the working-age force but also the Government and the pension system, which is a part of the social insurance (SI), will increase more and more.

Population aging trend presents challenges to national financial system, specifically financial pension systems in the next few decades. On the other hand, the burden on social welfare, health system and labor force participants will increase significantly. Therefore, the government must prepare resources, plans, implement strategies of economic policies and social welfare programs in order to adapt and timely respond to challenges posed by population aging process.

3. Vietnam pension fund’s reality and challenges

 3.1. The application of Pay-as-you-go (PAYG) pension model with defined benefit (of 5%) will affect the balance of pension fund seriously within the context of population aging in Vietnam.

 Since founded in 1962, Vietnam Pension Fund has applied PAYG pension model with defined benefit (DB) in which there is sharing among generations as current labor force participants work to provide pension for retired workers, which will be suitable for nations having young demographic.  Given the young population, the average number of contributors for one beneficiary is high, thus pension fund always has a “spare” amount used for economic development.

When there are population aging and increases in average life expectancy, the number of contributors will decline and the pension time length will increase, thus  the application of PAYG model with the relatively high DB level (75%)  will prove itself to be serious and have negative impacts on the financial stability of pension fund and government budget in general in almost all countries around the world7.

Besides inflicting financial instability as a result of aging demographic, PAYG system with defined benefit is also the culprit of inequality among generations. When population ages rapidly, this problem gets worse because future workers will have to contribute more in order to cover expenses for current pensioners.

On the other hand, the implementation of PAYG system with DB under state administration over the past time has been often unstable financially as a result of the small number of system participants, low contribution level whereas the replacement rate is rather high.

The combination of these factors will lead to a foreseen consequence: instability of the system due to negative financial impacts. According to calculations by Vietnam Social Insurance (which already included the 2011 amount of contribution by SI participants joined before October 1st, 1995, which the State Bank planned to transfer to SI budget), it is estimated that balance in 2023 will be positive, from 2024 onwards, in order to guarantee sufficient budget for pension scheme and survivor benefits, besides in-year revenue, surplus of the fund must be employed. By 2037, if there is no policy or measure to increase revenue and decrease spending, the amount of SI money collected and the fund residual will not be able to make payments, the expenditure will outrun the in-year revenue

3.2. The reality of PAYG model implementation over the past time.

3.2.1. The issue of revenue – expenditure

The rate of collecting contributions is lower than that of spending because the increase in the rate of SI participants is lower than that of pensioners. According to the Ministry of Labors, War Invalids and Social Affairs (MOLISA)’s Summary Assessment Report on the implementation of Social Insurance Law, by the end of 2012, the total Social Insurance fund will be 162.615,3 billion dong (the amount of pension fund and survivor benefits is 136.930 billion dong). The increase rate of the average number of SI participants in the period from 2007 -2012 is over 5% per year, while SI pension beneficiaries’ percentage is nearly 16%. Many experts claim that if following the roadmap of payments into compulsory SI and granting benefits 9 as of today (26% of salary), the amount of revenue will be equal to that of expenditure by 2021, the whole budget will be depleted by 2034. Or in other words, all male workers under 39 years old and female under 34 will not be entitled to pension by then.

According to the statistics on revenue -expenditure of SI fund in 2007 – 2013 period, Vietnam continues to have positive balance and maintains surplus. However, current SI budget surplus is not sustainable due to the fact that raising revenue over the past time is mainly based on the following policies: (1) Diversifying the compulsory SI participants, the adoption of voluntary SI (2006); (2) The 2007 -2014 roadmap of augmenting payment level helps bring more SI Budget revenue sources; (3) the number of pensioners due to the relatively long cycle of SI policy. However, according to Vietnam Social Insurance forecasts, if there is not any policy or measure to increase revenue and decrease expenditure, revenue of Pension Fund will be equal to expenditure by 2023. From 2024 onwards, to guarantee sufficient pension payout and survivor benefits for workers, the fund surplus will have to be extracted in addition to the in-year collected revenue.

There is a rapid increase in the ratio between pension payout and collected contributions.

The revenue of pension fund, survivor benefits eclipse the expenditure in each and every year from 1995 – 2015. However, in the future, there will be more and more pension fund beneficiaries. The 2007 -2015 period saw the average annual pension payout accounting for 72% of the revenue. It is projected that there will be a surge in the number of pensioners due to an increase in average life expectancy and the fact that the Pension fund and survivor benefits’ expenditure will be equal to their revenue by the end of the cycle in 2023. From 2024 onwards, besides in-year revenue, closing balance from previous years must be utilized. By 2037, the in-year SI revenue and residual will be insufficient to cover the expenditures. In the following years, the expenditure will considerably surmount the revenue. Therefore, Pension Fund and survivor benefits stand a chance of losing their balance.

Table 1.Situation of Pension fund’s revenue – expenditure 2007 -2015 by thousands of billions dong

Source: Calculations made by ILSSA from Vietnam SI statistics in 2007 -2015

3.2.2. Low rate of participants

Generally, Vietnam SI system is of state and its coverage is still low. Currently, the coverage just accounts for 80 % of the participants in compulsory SI and 20% of the labor force. At the end of 2015, the number of people participating in both compulsory and voluntary was 12.14 million, a twofold increase comparing to 2005, in which the number of compulsory SI participants only makes up 22.3% of the labor force. This reality is due to the following facts: (1) there is a great number people working in unofficial sector, moreover some enterprises, especially small ones tend to avoid participating in SI. In the recent years, the trend of transferring labor from official sectors to unofficial ones has taken place despite the current economy, making it even harder for SI coverage to expand. (2) The process of restructuring the economy and re-organizing labor inflict a decrease in the number of workers in pucblic sectors, especially state-owned enterprises. The re-organized labor force work in private sector but do not participate in social insurance system.

3.2.3. Retirement age is low, fund contribution time is short

According to the current regulations, our retirement age is low (60 years old for male and 55 for female) but in reality the average retirement age is even lower (merely 53.2 years old) whereas the average life expectancy is gradually increasing, making the actual pension time is more and more extended. The statistical data in 2024 showed that the average lifespan of pensioners is 73.08 years old, in which that of male is 71.6, female 73.99. Therefore, the pension time is relative long, in average nearly 20 years (73.99 years old – 53.2 years old), in which male’s is 19.2 years old, female’s is 20.08. Besides, due to the low retirement age, the average SI pay time length is rather small, male 28 years old, female 23, thus making pension time length relatively great.

The regulated early retirement age is too low for a certain number of workers (male 50 years old, female 45 years old, if a person does extremely heavy work for at least 15 years, real age is not considered), therefore their pension time length is great, whereas the contribution time is short. Specifically, contributing for 20 years and benefitting for up to 30 – 40 years.

3.2.4. Low rate of Social Insurance financial contributions, making it difficult to balance with high benefits rate.

The rate of contributions to pension and survivor benefits fund is still low ( from 2012 backwards, the total contributions of employers and employees was 20%, from 2014 backwards, the proportion was 22%, that of 2015 to present was 26% whereas the maximum rate of pension benefits has always been 75% of the average amount of salaries and wages on which SI payment is based; while there is just a small number of people retiring at the regulated age10 (40.5%), the average proportion of pension receivers is high (70%), which makes it difficult to maintain long-term balance with low rate of contributions and has not complied with the principle which says great contributions will result in great benefits. On the other hand, the amount of salaries, wages on which SI is based is still much lower than workers’ actual salaries and wages (just accounts for 60% of actual salaries and wages). The rate of pension beneficiaries is high and the formula for calculating pension amount is not justifiable (75% for 25 years of contribution into SI as for women or 30 years for men). The rate of pension decrease due to early retirement is low (each year of SI contribution results in 2% more for men or 3% for women while the rate of decrease stands at merely 1% for each early year).

3.2.5. The number of SI contributors is gradually declining.

According to calculations by Vietnam SI, 217 people paid SI for 1 pensioner in 1996, this went down to 34 people in 2000, 19 people in 2004, 14 people in 2007, 11 people in 2009, 9.9 people in 2011, 9.3 people in 2012, and only 8.13 people in 201511.

3.2.6. Deficit pension fund takes place due to gender issue in retirement age

Women’s retirement age is 5 years lower than that of men (60 years old for men and 55 for women) which means that SI contribution time is shorter than that of men. Along with this, women’s average life expectancy being higher than men’s has made pension time length of women greater than their counterparts’. This not only leads to gender inequality in pension benefits but also affects the fund’s payment ability, if continues, this situation will impact severely on the existence of pension fund and fail to realize the goal of pension system reform, which is narrowing down gender gap and discrimination, putting focus on changing the male and female retirement age distance.

In 6 years from 2008 – 2013, Government adjusted pension, SI subsidy for 7 times through which the pension rate has grown by 144% comparing to December, 2017. The obvious trend in which adjustments of pension are made in the face of chaotic society helps ensure improvements in pensioners’ lives and stabilize the society.

However, it is hard to maintain the balance of the pension fund when a certain amount of it is used for adjustments.

3.2.8. Investment in SI fund has not been effective over the past time

Investment methods during 2008 – 2012 are allocated mainly to lend state bank, therefore, interest rate from investment activities is very low, the interest from investment in growing SI fund is lower than the inflation index. In 2008, in the context of high inflation in the economy, the average interest rate from fund investment activities was 11.76%. However, it stood at about 9.17% to 10.00%, lower than the Consumer Price Index in 2008 -2012 at 13.4% per year.

3.2.8 Enterprises’ debt and SI payment elusion.

Although late SI payment or debt rates tend to decrease over the years, they still remain quite high. In 2015, despite the fact that enterprises’ SI debts accounting for 3.68% of the total collected money, this proportion was actually much lower than 4.5 – 6.2% of the previous years. In the late 2015, there were about 480.000 enterprises having tax codes registered whereas Vietnam Social Insurance was only able to manage 199.500 enterprises which were SI participants, making up 42%. Of these enterprises, nearly 22.231 units are in SI debts and unable to ensure SI benefits for their employees. There are 175.958 workers in these places with the debt of SI, Medical Insurance, unemployment insurance amounting to 1900 billion.

There are plenty reasons for enterprises’ intentional avoidance, late payment and willingness to pay fine to make use of SI Fund, namely:(1) According to Social Insurance Law 2006, Medial Insurance Law 2008, interest rates from late payment of these two types of insurance and unemployment insurance are lower than bank’s lending interest rates.  Penalties are not strict enough, fine for late payment is still low, not viable to intimidate people so that they would not dare illegally occupy social insurance fund instead of taking bank loans. Unfairness in formulas calculating pension levels of public sector and private one has led to private sector workers’ SI evasion.(2) Employers and employees have not complied with SI regulations, state-owned enterprises are ranked 1st in terms of late payment, payment elusion, illegal occupancy of workers’ contributions into SI Fund.(3) Coordination between SI companies and state administrative agencies in examining to see whether enterprises abide by the law concerning SI, MI is still limited, infrequent.

4. Suggested solutions

In order to balance the account as well as guarantee sustainability of pension fund when population aging is occurring at the fastest rate in the world, some solutions must be taken into considerations.

4.1. Considering reducing defined benefits when applying PAYG model

Vietnam’s amount of retirement benefit is quite high comparing to other countries’. Specifically, the maximum pension rate regulated is 75%, in reality, the average volume of benefit based on SI contribution time stands at 70% (in which that of male is 65.8%, female 71.4%). The average retirement benefit rate of the world is about 50%, that of East Asian countries such as Japan, Korea is 46%; of West European countries is 41%; of South Asian nations is 55%… According to OECD calculation model, to guarantee high payout level as of today, Vietnam’s workers have to contribute up to 40% of their income.

However, pension reduction needs accompanying by salary scheme reform due to the fact that the level of salaries, especially in public sector, is relatively low.

4.2. In the long term, research is needed to change or improve Pay-as-you-go model with Defined benefit in order to increase financial dependence among generations

Pension is paid out thanks to contributions from current workers, leading to the situation in which pensioners’ income depends mostly on level of SI payments from current workers. This will pose an underlying risk when there is a change in demography. As a result, many other countries is conducting research on replacing the pension system with individual accumulative account system with the aim to reduce the risks posed by population aging and create equality among generations. Thereby, SI participants’ payments will be accumulated in separate accounts which are invested in to become sources of pensions to them.

4.3. Increase SI contribution time (extend retirement age)

As analyzed, current Vietnam retirement age is relatively low with many exceptions for early retirement, making actual retirement age low. This, together with increasingly high life expectancy, has made pension payment time length longer, which is the core reason for negative account and depleted fund. Other countries’ pension system reforms also prove that increasing retirement age is a long-term solution which is possible and easily implemented. In some countries like Mexico, South Korea, Chile, Japan, New Zealand, Switzerland, Sweden, the actual retirement age is even higher than the regulated one in consequence of higher life expectancy, improved health condition and demands for financial amelioration.

In 2014, when introducing the project on amending SI Law, the Government also proposes some solutions to raise retirement age for specific groups, which, however, not been approved by the National Assembly. Nevertheless, in the long run, to ensure sustainability of SI fund, it is necessary to raise the retirement age to the level which is suitable with Vietnam’s condition.

4.4. Expanding the coverage, advancing participation rates

In the long term, because the rate of replacing Vietnamese citizens’ paying with receiving is quite high, the number of beneficiaries will elevate rapidly as a result of the fact that population aging trend and average life expectancy is expanding whereas there is hardly any change in the number of fund contributors on account of limited coverage of policies which have not encouraged participation of workers. Decreasing replacement rate also has tremendous impacts on growth such as retirement age rise and promotes long-term growth.

4.5. Shortening and eliminating gender gap in retirement age

Gender gap in retirement age is the main reason for inequality in fund contributions and receiving benefits, affecting the ability to balance the account. In our country, women contribute less and enjoy more benefits than men.

4.6. Adopting suitable policy for investing in pension fund

As analyzed, investments of SI fund (including pension fund) has not been very effective over the past time, interests rate is even lower than inflation rate in some periods. With regards to investment in Vietnam SI Fund, we need to respect regulations on capital maintenance, develop strategies to invest in long-term financial products which have high liquidity, as well as invest in professional human resources so as for SI Fund to serve as a major investor in financial market.

4.7. Imposing strict penalties against the acts of SI payment elusion and debt owing.

The current level of fine for late payment and pay elusion is relatively low, thus not able to encourage enterprises to abide by SI law. Boosting SI law compliance not only constrains late payment but also helps expand SI’s coverage which is already being limited due to enterprises’ avoidance to make SI payment. At the same time, there is also a need for solutions to make sure that enterprises, especially foreign and FDI ones, pay SI for workers according to their actual salary levels, instead of the current minimum level, with the aim to raise SI’s revenue, sustainability and guarantee living standards for workers when entering retirement, contribute to strengthening of social protection system.

4.8. Develop complementary voluntary pension schemes

Similar to other countries’, Vietnam’s SI system reform based on above suggestions will decrease pension entitlement rate. This will create financial gap for pensioners, therefore the Government must adopt policies which encourage and support building of voluntary pension programs as a complement to the current state pension program. These programs not only help fill in pensioners’ financial gap but also allow high-income people boost their old age savings. Foundation and development of these programs also assists in financial development and economic growth, which have positive converse effects on investments in SI Fund, thereby elevating participants’ pension.

Nguyen Khac Tuan, M.A.

Research Center for female labor and gender

Institute of labor science and social affairs