Viet Nam’s social security reform looks to the future

ILO’s senior specialist Nuno Cunha analyses the new resolution on the Master Plan on Social Insurance Reform which reflects the country’s comprehensive and integrated approach to address challenges in the years to come.

Comment | 25 July 2018
© ILO/Nguyễn Việt Thanh
A breakthrough resolution on social insurance reform has brought Viet Nam closer to the world’s most advanced economies in social security policies.

The approval of Resolution 28-NQ/TW on the Master Plan on Social Insurance Reform on 23 May was an historic decision promoting a comprehensive and integrated approach to address contemporary social security challenges.

The growing attention that social protection has been gaining in the global and regional agenda is undeniable. The UN Sustainable Development Goals, endorsed by Viet Nam, confirmed the new momentum, with the extension of social protection figuring prominently. In a world where no one is expected to be left behind, certainly no one can be left without social protection, widely recognized as indispensable in reducing and preventing poverty and vulnerability.

The impact of the reforms delineated under the master plan on social insurance reform goes well beyond the welfare of its beneficiaries. History in most advanced economies shows that social security has positive direct and indirect productivity effects. For many decades, it has reduced social contradictions, enhanced national identity, compensated for market failures, contributed to stabilizing, and often even stimulated economic growth.

In a moment when Viet Nam is going through an important social and economic transition, social security can be an important enhancer for the broader modernization efforts that the country is embracing. China for instance has used a combination of expanded social security and increased wage levels to boost domestic demand and enable economic transformation. The existence of a well-established social security system was widely recognized as essential to help China navigate the impact of the recent global economic crisis.

Universal coverage

Back to Viet Nam’s master plan, an extremely welcomed decision by the ILO is the country’s establishment of the goal of universal coverage. Through this resolution, Viet Nam aligns itself with the key international normative references such as the ILO Recommendation on Social Protection Floors (R202) and the previously mentioned UN 2030 Sustainable Development Agenda. The decision to reach universal coverage through the use of a multi-tier system, combining non-contributory (tax funded) with contributory benefits (social insurance) sets Viet Nam in the path of other countries in the region that already reached universal coverage such as Japan, Republic of Korea, China or Thailand.

This gains even more importance considering that Viet Nam is one of the fastest ageing societies in the world. Rising longevity and declining fertility have combined to swell the number of elderly needing care and reduce the number of workers supporting them. While in 2015 there were around six working age adults for one older person above 60 years, in 2055 it will only be two working age adults for every elderly. This means that tomorrow’s so-called “sandwich generation” (working age population which are “sandwiched” between caring both for their children and for their parents) will face a heavy burden of caring for three generations – their children, themselves and their parents. In the absence of pensions, the onus will be even heavier. This burden is aggravated as there will be fewer working age adults and thus fewer siblings with whom to share the increasingly heavy burden of caring for ageing parents. Ensuring universal protection in old-age is hence not only beneficial for older persons, but also for families.

These are essential to guarantee that the system will be able in the future to respect the rights being acquired today,"

On a different dimension, the proposed incremental reforms regarding the gradual increase in retirement age; equalization between men and women; approximation of the replacement rates to the international general levels will all contribute to ensure the long term financial balance of the system. Some of these reforms are not easy and not always enjoy public opinion support. However these are essential to guarantee that the system will be able in the future to respect the rights being acquired today. It is also important to note that the resolution introduced a measure to make the pension system more attractive by setting a specific target to lower the qualifying conditions from the current 20 years to 10 years, meaning that someone who reaches retirement age limit will receive a contributory pension even if they only contributed for 10 years.

Another equally important element of the reform is the limitation of access to lump sums. International practice shows that lump sums are not the best solution for old age income security as most of the money is often spent immediately. If this practice does not change, the pension system will never reach its objective of providing decent protection and families will need to be called in the future to bear the costs with the elderly.

From plan to reality

Despite its ground-breaking nature, the master plan should be only seen as one more step. The challenges to move from words into actions are significant. The ILO trusts the capacity of Viet Nam to reach its goals, however it is also important to be aware of existing challenges.

On pensions, the key directions are definitively defined but special attention needs to be given to details. Whatever design elements are decided, if the current percentage of workers enrolled in the social insurance system is considered, reaching universal coverage will depend significantly on the allocation of Government resources to be channelled through the non–contributory social pensions.

By 2030 the number of elderly above 65 with a contributory pension will most likely not be much more than 2 million. This would leave around 10 million elderly without a pension, what clearly confirms the need to invest in the expansion of the social pension and the good decision to establish a universal system.

ILO preliminary calculations estimated a cost of less than 0.8 per cent of the GDP to ensure that all elderly above 65, even those who could not contribute, can receive a basic pension by 2030. It will mean an increase in the current Government expenditure, but the ILO strongly believes that Viet Nam can afford this challenge.

Other challenge is policy coherence and coordination. In a multi-tier system the coherence between different tiers is essential. Viet Nam has made remarkable policy developments in terms of social assistance (funded by taxes) and social insurance (depending on contributions). However, the establishment of a multi-tier system requires more. Moving from two independent policy axes to one harmonized multi-tier system is certainly the best option, but will possibly require some modifications in the institutional and legal framework. Is it the moment for Viet Nam to move towards a comprehensive social security policy or law that embraces social insurance and social assistance under a single policy framework?

Finally, the main ingredient for the success of the resolution will lie on its concrete implementation. The development of a client-oriented culture in social security administration, with a constant monitoring of progresses and of the satisfaction levels of its customers is essential. Transparency and the participation of employers and workers’ representatives in the system design are key to build the trust in the system, a central ingredient for the long term sustainability of the system.

For the reasons described above, the chosen road ahead is undoubtedly not an easy path for Viet Nam. However, the ILO is here, reinforcing our enthusiasm with all these developments and reaffirming our commitment to support our constituents – the Government, workers and employers’ organizations – in implementing the ambitious and important reform agenda set by Resolution 28-NQ/TW.