Social protection

Retirement age and pension formula – key components of social insurance reform: ILO

The revised Law on Social Insurance will be brought to discussion at the regular National Assembly meeting which starts on 20 May. Among the key changes suggested by the ILO are retirement age increase and a new pension formula. Carlos Galian, social security expert, ILO in Viet Nam, explains the issue.

Comment | 12 May 2014

Why did the ILO suggest increasing retirement age?

Viet Nam needs to consider increasing the retirement age because the pension fund is in jeopardy. Indeed, the Communist Party already acknowledged this in the Party Resolution 15, where it stated that the Social Insurance Law should be changed to address the long term financial sustainability of the fund.

According to the ILO-Government joint research, if no reform is urgently passed, by 2021, the Viet Nam Social Security (VSS) contribution income will equal expenditure. The whole pension fund would be completely wiped out by 2034. In other words, all Vietnamese male workers under 40 years old and all Vietnamese female workers under 35 will not receive any pension benefit after retirement.

Nevertheless, it is important to understand that the ILO has not advised to raise the retirement age right away, but rather increase the retirement age very gradually. Thus, most workers close to retirement age nowadays will not be affected by the reform. The ILO has proposed to increase the retirement age to 62 by 2030. The Government proposal is even slower: women workers retirement age would be 60 by 2034 and males workers' retirement age would be 62 by 2025. By that time, the Vietnamese society will be totally different.

Basically, Viet Nam faces a dilemma: carry out a gradual reform now; wait 3 or 5 years to implement a much more radical and harsh reform; or leave young and middle aged workers without pensions in the near future.

Increasing retirement age means people will work longer. Is it in conformity with the development of Vietnamese people’s health status and life expectancy?

There are several indicators that show that indeed the health status of Vietnamese, especially those who get pensions, has improved.

First, life expectancy in 1990 was 66 years; now it is 75. More importantly, life expectancy for 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. It is impossible to extend the life expectancy by 9 years without improving the health status.

Second, according to the Viet Nam Household Living Standard Survey (VHLSS) 2012, around 40 per cent of pensioners do work until 65 years, even though they may not work in full-time jobs. In the informal sector, around 70 per cent workers still work at the age of 65, at least occasionally, and around 25 per cent work is on a regular basis. Therefore, it seems that there is some working capacity.

Third, it is important to understand who pensioners are. They are not the average Vietnamese workers. Even though there are exceptions, they usually have a higher living standard and better health status than most Vietnamese. According to VHLSS 2012, around 70 per cent of pensioners belong to the richest 40 per cent of Viet Nam’s population. On the other hand, less than 4 per cent of them are poor.

How would it affect job pressure then?

The ILO does not support and has not advised to increase retirement age right away, but rather start now so that the Vietnamese labour market and society have time to adjust.

Even though now it is true that many young people enter the labour market annually, in the next 10 years that figure will reduce gradually. According to official data, the labour force grows at 700,000 workers annually. However, from 2019 to 2029 the labour force will grow much more slowly, at around 350,000 workers annually. In the following decade, exactly when the retirement age is expected to stabilize at 62, the labour force will also stabilize at around 62 million workers. Therefore, the retirement age calendar seems to fit fairly well with the development of the labour market, giving time to both the Government and the society to adjust.

China offers an interesting example for Viet Nam. Still in 2010 China had around 150 million workers labour surplus, according to IMF estimates. However, the trend is dramatically changing. Last year, labour shortages were already happening in the East Coast. Different projections estimate that China will start facing labour shortages between 2017 and 2025. Therefore, Viet Nam should learn from the Chinese rapid labour market changes and start adjusting slowly.

The ILO recommended changing the current pension formula. Can you explain this?

Pensioners now 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 ILO analysis, civil servants replacement rates are over 100 per cent, meaning that they get higher pensions than their average real wages. Usually, pension systems provide between 40 and 60 per cent replacement rates. The ILO Convention on Social Security states that replacement rates should be above 40 per cent to ensure well-being for pensioners. Hence, the Vietnamese replacement rate is way higher than the minimum rate set in the ILO Convention. Actually, it is the highest rate in the world ILO experts have ever found. This endangers the financial sustainability of the fund. So the pension formula must be adjusted.

However, if the reform proposed by the ILO is implemented, pensions should increase. The ILO has underlined that one critical reform is to follow the Labour Code reform so that workers and employers pay contributions based on total income, not on basic salaries. If that reform is implemented, pensions would be much higher, even if the formula is slightly reduced.

Inequality is another worrying feature of the pension system. Different workers are treated differently: military, civil servants and private employees. Unequal treatment leads to two problems: pension jealousy causing unrest among groups that contribute more than what they receive- and evasion harmed groups will have incentives to evade 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.

(This content is from an interview with the Sai Gon Times)