A REFORM PROPOSAL FOR VIETNAM PENSION SYSTEM: THE PUBLIC PENSIONS EXPERIENCE FROM THE REPUBLIC OF KOREA45493

VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS A REFORM PROPOSAL FOR VIETNAM PENSION SYSTEM: THE PUBLIC PENSIONS - EXPERIENCE FROM THE REPUBLIC OF KOREA Phuong To Lan1*, Y ou Mi Lee2, Ngoc Hoang Bao1 Vietnam National University SungKyunkwan University ABSTRACT With declining birth rates and increasing life expectancy, the Vietnamese population is expected to age rapidly, making building a modern social insurance system in Vietnam a top priority urgency The current social insurance system faces many challenges, such as low coverage in both formal and informal sectors, inequality between groups participating in insurance, and lack of financial sustainability main, and weak management and implementation capacity of insurance programs Innovation is needed to expand coverage, encourage equality, enhance financial sustainability, and modernize social insurance management to ensure income security for the ageing population of Vietnam in the coming decades This paper addresses Vietnam’s pension system in the context of an ageing population with some key challenges in retirement policy in Vietnam and presents policy options to address these challenges from retirement management experience from Korea The article begins with an overview of the current pension system, describing the main features of the system Next, the author will present major challenges and propose possible measures to strengthen and strengthen the pension system in the future Keywords: Pension, Pension Fund, PAYG, The pension system in Korea, Public Pension, Pension model in Korea… INTRODUCTION The change in population structure, in particular, the ageing of the population, has a great impact on the economic and social activities of countries, regions and the world The proportion of elderly people in the total population has increased rapidly due to declining birth rates and increased life expectancy The ageing of the population requires national governments to spend more on pensions, health care, medical services and thus affect government budgets, pension funds and the sustainability of the financial system * Corresponding author Email address: phuongtl@vnu.edu.vn 85 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 The problem of the ageing population becomes serious when considering the PAYG (pay as you go) pension system with a predetermined benefit level Many recent studies by scholars such as (Hagemann, R and Nicolleti, G., 1989), (Auerbach, A et al, 1989), (Holzmann, R., 1998), and (Holzmann, R et al, 2001) have shown that these two factors have a negative impact on the financial stability of pension funds in particular and the state budget in general in most countries around the world In addition to being a possible cause of financial instability, the PAYG system with a predetermined benefit level also causes inequity between generations If the proportion of the elderly population in the society increases rapidly, this problem may become more serious because the generation of future workers must contribute more to cover the costs of those who are currently enjoying benefits from the pension fund Therefore, this system is likely to collapse due to problems such as evasion of insurance, high levels of welfare and large potential pension debt These issues have been addressed in studies conducted by such scholars as (Gokhale, J., 1996), (Feldstein, M., 1998), (Kotlikoff, L, J and Leibfritz, W., 1998), (Takayama, N et al, 1998), and (Kunieda, S., 2002) Vietnam has begun to reach an age of the ageing population and will face similar problems arising from ageing populations like other countries today Thanks to impressive economic growth and social progress, the improved living standards of the Vietnamese people have led to a rapidly increasing life expectancy, from 40.2 years in 1950 to 64.8 and 69,2 and 76,25 in 1990 and 2001 and 2016; and the birth rate decreased from children / woman in 1960 to 3.4, 2.33 and 1.73 respectively in 1990 and 2001 and 2017 (General Statistics Office, 2018) According to the UN population projection (2002) for Vietnam, by 2050, the population aged 60 and over will account for 24% of the total population; and the percentage of elderly dependents will be 42% Besides, the PAYG pension system has a predetermined level of welfare that is currently managed by the state of Vietnam, often in a financially unstable condition due to the limited number of participants, low contribution rate while the replacement rate is quite high A recent statistical assessment of Vietnam’s social insurance system shows that the insurance fund will run out in 2030 if Vietnam does not implement the reform for this system This is the risk for the Vietnamese pension system soon The paper begins with an overview of the current insurance system in Vietnam, describing the main features of the system Next, the authors will present major challenges and propose possible measures to strengthen the pension system in Vietnam in the future Finally, the authors will share the experiences in the public pension system in Korea and discuss some implications in Vietnam VIETNAM PENSION SYSTEM: CURRENT SITUATION AND CHALLENGES A fairly bleak outlook is that Vietnam will grow old before becoming rich With declining fertility and increasing life expectancy, the Vietnamese population is expected to age rapidly Vietnam is facing a significant challenge: The ageing population is still ahead, with the proportion of the population aged 60 and older will increase from 10% today to nearly 35% by 2050 Meanwhile, the proportion of the young population will be scaled down It is, therefore, necessary to design a strong 86 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS financial system and with long-term funding strategy and institutional arrangements for good governance and governance With these trends, building a modern insurance system is a top priority for Vietnam Vietnam has adopted a system of compulsory social insurance for formal sector employees since 1995 The Social Insurance Law enacted in 2006 has brought about significant changes in the calculation of retirement benefit payments, pension adjustments, and contribution rates The law also defines the rules for implementing a voluntary insurance system and an unemployment insurance program However, despite these advances, the population’s coverage is still limited, and there are concerns about the financial sustainability of the system and equity The provision of social insurance also needs to be modernized To address these challenges, policymakers will need evidence-based input data and policy debates that require good information and financial management systems The management of the modern information and finance system of a well-functioning Social Insurance system is important not only for proper governance and administration but also for the innovation process itself The pension system is part of the Vietnamese social insurance system, which began operating in 1962 Before 1995, the retirement system was a predetermined benefit system with the participation of public sector workers This system is managed by many authorities under the general supervision of the government In that system, the level of the retirement benefit is determined based on the number of years of contribution and basic income (usually the salary at the time of retirement) The benefits are paid from the social insurance fund made up of employers’ contributions (part of the salary fund) and from government subsidies The insurance fund is managed and sponsored by the government and is part of the state budget Given the complexity and difficulties arising from administrative and financial management, along with the rapid growth of the private economic sector, has led the government to reform that system into a pension system named PAYG with a predetermined benefit level in 1995 as well as established the Vietnam Social Insurance (VSI) at the same time to manage the system under government sponsorship Main features and shortcomings of the system Current retirement system participation is compulsory for the following subjects: Labor in the public sector, including those working in government, Party organizations and armed forces; Labor working in stateowned enterprises (SOEs); Private enterprises have more than 10 employees, including foreign enterprises, representatives of foreign enterprises, enterprises operating in industrial parks and export processing zones, and international organizations Besides, Vietnamese people working abroad or foreigners working in Vietnam can participate in the voluntary insurance system However, the system participation rate is very low because the number of participants is mainly from the state sector, especially state-owned enterprises, and only very few people participate in the voluntary insurance system According to Vietnam Social Insurance statistics, in 2018 the system participation rate for the public sector is about 92% for civil servants and 89% for workers working in state-owned enterprises The number of employees in the state sector participating in the system accounted for 84%, while the private 87 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 sector accounted for only 16% Pension is paid to men and women at the age of 60 and 55 respectively, with at least 20 years of contribution The pension level is adjusted according to the basic (or minimum) wage and must be at least equal to the minimum basic wage In the current pension system, there are two types of beneficiaries, those of the system before 1995 and those of the system after 1995 Those of the previous system are paid for using the state budget, while those in the latter system are covered by the Vietnam Social Insurance The Vietnam Social Insurance is responsible for paying the entire number of beneficiaries of both systems and then it receives payments from the government through the Ministry of Finance (MoF) Besides, the dependency ratio of the system (also known as the system’s population rate) in 2018 is only 13.64%, indicating that the number of beneficiaries is only 13.64% of the contributors This also shows the fledgling of the system Therefore, the system’s PAYG cost ratio is calculated by taking the replacement rate multiplied by the system’s population rate of only about 3%, implying that the total payment of this system only equal to 3% of the total contribution This rate is also known as a sustainable contribution rate, the rate of contribution to balance the retirement fund The total revenue of the system is only about 28% of nominal GDP in 2018 due to low wages, low participation rates, and the high rate of insurance premium evasion, especially in the private sector Revenue sources of the system include contributions from employees and employers, government’s support, investment income, and other sources Contributions to the social insurance system include 5% of the employee’s monthly salary and this amount is used to pay pension for, death and burial allowance; and 15% of the employer ‘s salary fund, of which 10% is for long term payments, such as pension, and the remaining 5% is for short term payments, such as sickness or maternity leave Government payments and support include payments for people under the system before 1995 and support the operational costs of the system such as cost for human resource training, building facilities In fact, in the context of limited financial instruments and financial assets in Vietnam, the social insurance fund’s investments are focused primarily on safe forms but very low-interest Figure Number of retirees in the system after 1995 88 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS Just as the nature of the PAYG system has a predetermined benefit level shows that the contribution and benefit of the Vietnamese pension system are currently incompatible with the number of beneficiaries of the system before 1995 Figure Number of retirees in the system before 1995 Source Ministry of Labor, War Invalids, & Social Welfare  As the nature of the PAYG system has a predetermined level of benefits, the contributions and benefits of the current pension system in Vietnam are not compatible with each other, so the pension fund may be exhausted in the future The financial instability of the pension fund is more evident in the context of a large number of people being allowed to retire early (which was once considered a way to solve the redundant labor in enterprises state-owned enterprises) and an ageing population is predictable According to the report (Ministry of Labor, War Invalids and Social Welfare, 2016), the average retirement age is nearly 4.5 years lower than the prescribed; 57% of current retirees retired early, and 12% of current retirees retired under the age of 45 (Figure 3) This suggests that the retirement time of these people will be longer as their life expectancy increases, and thus the amount of money to pay for their retirement will increase rapidly in the future when the benefits are still indexed minimum wage this salary must naturally increase over time as the cost of living is higher Figure Population dependency ratio of Vietnam, 2000-2050 Source: United Nations Population Forecast (2012) 89 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 Management and legal framework of the system Since 1995, Vietnam Social Insurance has been responsible for performing the short-term and long-term functions that previously belonged to the Vietnam General Confederation of Labor and Ministry of Labor, War Invalids & Social Welfare Vietnam Social Insurance is organized vertically and it has branches at the district level, and local branches are responsible for both revenue and expenditure The decentralization of management in this form has increased the efficiency of manageing the number of participants in the system by updating information on the local labor situation However, this form also leads to an increase in administrative costs and can lead to negative issues such as corruption or wrongdoing Moreover, the management cooperation between Vietnam Social Insurance and other ministries, especially the Ministry of Planning & Investment, with the function of managing various types of enterprises in the country, has not yet been effective As a result, the evasion of social insurance is still common, especially in the private sector Along with management issues, tax regulations for the social insurance system and other types of security savings also make the problem of insurance evasion more serious For example, employer and employee contributions and benefits received from the pension system not have to pay any income taxes, while contributions to the pension system Social security is not exempt This makes businesses find ways to evade social insurance such as reducing the number of employees in the enterprise, signing short-term labor contracts with regular (or long-term) employees System challenges: From a social and economic perspective, we can see that the Vietnamese pension system faces two challenges Financial sustainability At first glance, the accumulated accumulation of social insurance in Vietnam makes the system seem quite financially strong In 2010, VSS accumulated a reserve of US $ 5.78 billion, equivalent to 5% of GDP A large number of reserves results from a relatively small number of beneficiaries compared to the number of contributors This is because: (i) The program was only established in 1995; (ii) The majority of Vietnam’s workforce is very young; (iii) Requires 20 years of work to be paid Retirement reduces the number of pensioners among current seniors VSS receives money from the general budget to support payment of allowances to public sector employees who retired before 1995 However, despite the large reserves of Vietnam’s pension system, it is not financially sustainable in the long run The current value of the properties of Vietnam Social Insurance is lower than the present value of payment obligations of Vietnam Social Insurance This is due to: (i) The rapid decline in fertility and the forecasting of Vietnam’s ageing population will greatly increase the dependency ratio of the system defined as the number of beneficiaries Per contributor from its current value of 0.11 (excluding retirees before 1995) to around 0.50 by 2050; 90 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS (ii) The low retirement age (average 54.3 years of age) compared to life expectancy; (iii) Relatively high income allowances reflecting the high rates of benefit accrued from each year of employment, especially for women and public sector workers Moreover, VSS’s interest rate is lower than the inflation rate This issue will be discussed in more detail below Figure Retirement funds are not financially sustainable in the long run Source ILSSA, 2009 The average retirement age is low Vietnamese workers retire early compared to life expectancy Because Vietnamese people live longer, their time to receive pensions will be relatively longer than in other Asian countries Early retirement is quite common in the public sector, with women on average retiring at age 51 and men Gender is 54 As a result, a longer pension period puts pressure on the system Figure Vietnamese workers retire early and there is a big gap between life expectancy and retirement age Source Vietnamese Women’s retirement age Gender equality and sustainability of Social Insurance Fund, World Bank, 2009 91 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 Pension payment increased In a country where workers’ incomes are rising rapidly, adjusting pension income to the rate of increase of minimum wages (public sector wages) is putting enormous pressure on pay and ability to pay Future payment of the system This trend is even clearer when there has been an attempt to unify minimum wages between the domestic and foreign-invested sectors, as required by WTO accession However, the pessimistic scenario and the results are shown below may be delayed if some policy changes are made An example of a policy change is a pension change at a rate lower than the wage increase Figure Position of Vietnam’s pension fund if pension is adjusted based on CPI Pension system - Basic situation Source ILSSA, 2009 The pension is high compared to the salary of the insured The maximum rate of pension benefits up to 75% of the current salary of social insurance in Vietnam is not affordable according to international standards Men who retire after 30 years of work and women who retire after 25 years of work will receive up to 75% of the salary used to calculate benefits Because public sector wages are expressed relative to the minimum wage, pension benefits are close to the final salary before retirement As the green seamless line in Figure shows, employees with more than 20 years of insurance benefit are more generous than their contributions The important implication is that unless the return on investment of the pension fund is higher than the savings interest rate, the current pension system is financially imbalanced However, the return on investment from pension funds is not and will not be high enough (or in other cases, they will be too risky because the expected high return has a positive relationship with high risk) to pay for that benefit level Similarly, setting a minimum retirement pension to be the minimum wage will cause financial sustainability problems Insurance contributors are based on a minimum wage but are entitled to a pension equal to a higher minimum wage than a formulabased pension For example, workers who have paid for the minimum wage for 20 years will receive 55% (or 60% for women) of the minimum wage when they reach retirement age By law, they are guaranteed a pension equal to 100% of the minimum 92 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS wage The fact that reporting inadequate wages will result in a large number of people receiving minimum pensions and in the future will cause financial sustainability Lack of VSS investment and long-term payment strategy VSS’s current low return on investment reflects a too risky investment strategy As mentioned above, Vietnam has accumulated a considerable pension reserve fund, totalling nearly US $ 5.78 billion in 2010 Currently, VSS management is not diversified and its portfolio is large Include only fixed-income assets This investment strategy is less risky but offers a low rate of return, sometimes lower than inflation Figure Investment profits of VSS are still lower and lower than GDP growth and inflation Profits of investment fund of VSS, 2003-2010 Source The author calculated according to the data of VSS Moreover, the capacity to invest funds in VSS is limited It seems that the fund will not meet its future mission/ability if VSS’s investment objectives are not clearly set and if the investment process is not in progress Although the Social Insurance Law 2006 allows VSS management more autonomy and flexibility in developing investment policies and portfolio expansion, VSS funds need to have a clear change direction and stronger investment management capacity to improve fund management implementation It is not clear who the true owner of the fund’s assets is, as reflected in reporting responsibilities VSS is under the supervision of the Management Council, headed by the Minister of Finance This structure recognizes that the State is ultimately the guarantor of retirement rights However, creating this mechanism still does not solve the existing conflict of interest VSS and the Government As a manager of the insured’s contribution, VSS needs to find a way to implement the most profitable investment strategy In contrast, the government’s concern is to obtain funds at the lowest cost From this perspective, the surplus of insurance contributions is a tax that provides for the budget and can sustain growth Insurance insurers in Vietnam believe that they are assured of their future pensions by the Government so they feel no need to be bothered and there is no need for information on VSS activities The uncertainty about who is the real owner of the fund and its ability to pay in the future is probably the reason why VSS 93 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 funds are only responsible for reporting to the Management Board and a number of Government agencies (Ministry of Finance, the Ministry of Labor, War Invalids, & Social Welfare, the National Assembly and the Government Inspectorate) if required, without reporting to its members who contribute to the fund Figure The current reporting relationship shows the accountability of VSS to the government Fair There is inequality between the participating groups and the Vietnamese pension system is far from the insurance standard In an equitable retirement pension system, participants’ pension benefits are closely linked to the time and amount of contributions and the average life expectancy of the insured at the time they retire This principle applies regardless of gender and / or region (public and private) where the insured works However, in Vietnam, pension benefits vary by gender and region in a few ways Figure Compared to the statistic benchmark insurance line, the system’s pension is very unfair Source World Bank, Vietnam Development Report 2012 There are gender differences, female workers have better benefits than their male counterparts 94 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS Employees in the public sector have better retirement benefits than privatesector peers As mentioned above, different principles apply to calculate pensions, averageing the last 10-year salaries for the public sector, compared to the private sector lifetime average For private-sector workers, historical wages are calculated by using changes in the consumer price index For public sector employees, historical wages are expressed relative to the minimum wage for the purpose of calculating benefits at the time of benefit Looking at the Figure below, we see that the system benefits vary greatly between the public and private sectors, far from the market benchmark or the case of high insurance premiums As discussed above, women receive 3% of their salary each year after 15 years of service, compared to 2% for men Moreover, women enjoy retirement benefits five years earlier than men Because women’s average life expectancy is higher than men’s, they will on average benefit from the pension system for longer periods than men The level and criteria for disability pensions offer little protection The right to a disability pension is very limited and pension benefits are lower than the retirement benefits for participants who can retire early Only women 45 years of age and older and men 50 years of age and older with 20 years of premium payment are entitled to a disability pension if they lose 61% or more of their ability to work Pension benefits are calculated similarly to other pension benefits, but the pension as a percentage of the average pension of the pensioner is reduced by 1% for each year of retirement prior to the standard retirement year People with disabilities are at higher risk of poverty and require more help and medical care than others Reducing pension benefits and limiting disability pensions for the elderly are contrary to the state’s duty for social security to protect workers from income shocks and falling into poverty Coverage Although the pension system has grown rapidly over the past two decades, only a small percentage of the working population is enrolled in insurance An analysis of the Enterprise Census data shows that in 2005 the official sector employed about 6.2 million people (excluding public and military administration); 3.7 million (60%) are insured, 1.2 million (19%) work under short-term contracts and are not insured, and 1.3 million (21%) work in enterprises hide and pay social insurance premiums With the continuous development of the private sector since 2000, coverage has steadily increased About 9.4 million people registered in VSS in 2010 (including the Participation sector The level of participation in the compulsory insurance system is low, in part because of the combination of evasion, policy design, and lack of awareness, and want income in the short term This low range of participation is not only due to the fact that evasion is quite common, as in many low-middle income countries, but also due to Farmers and self-employed people who are not required to be insured still account for a large proportion of the Vietnamese workforce Unstable income, based on a regular salary, accounting for one-fifth of the labour population.9 Moreover, enterprises with fewer than 10 workers are not legally registered with the tax authorities and may have a wrong opinion thinking that they are also exempt from registering the number of employees in their enterprises with VSS.10 The widespread use of short-term labour contracts also limits the coverage of the 95 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 compulsory system Analysis of GSO’s Household and Enterprise Census data shows that in 2006, about 30% of the company’s employees or million individuals were employed under short-term contracts or through intermediaries (VASS CAF, 2009) What is not clear, however, is that the widespread use of short-term contracts is to meet the needs of business flexibility or to the intention of the business to avoid paying social contributions Similarly, 7.7 million workers are employed in small businesses, many of whom not have labour contracts Low reporting wages, which can occur due to loopholes of regulations, are another factor that helps businesses evade insurance contributions and pay higher real wages Wages reported in labour contracts may be much lower than actual salaries, limited primarily to the formal economic sector, where Vietnam’s current workforce is 43 million As shown in Figure above, this level of coverage is not low compared to per capita income in Vietnam, but relatively low compared to other countries in East Asia and probably low for The challenge of population age This also shows the basic challenge facing the Government is to achieve the goal of expanding the coverage of 50% of the workforce by 2020 Data from the Vietnam Living Standards Survey shows that about 10% of the elderly (over 60 years old) receive a pension The poor among the elderly accounted for 18% in 2010, lower than the average in Vietnam (20.75% based on the spending poverty line of the General Statistics Office World Bank), but with a change in economic Social, and demographics (including migration, increasing number of small families, increasing medical costs, etc.) the difficult living conditions of the elderly are very important issues for Vietnamese society Nam in the coming years The payment depends on the payment method established to minimize the employer’s contribution to social insurance Moreover, the wages reported in the first employment contract usually not change over time, despite the actual wage increase According to research by the Vietnam Academy of Social Sciences, this is a fairly common practice used by small and medium-sized business owners to offer higher salaries to workers to attract more workers Research shows that the cost of insurance contributions paid on average is less than half (42.7%) of actual wages Moreover, less than 10% of enterprises pay insurance premiums for their current salaries (VASS, 2009) In exchange for a higher current salary, employees are not interested in asking employers to pay social insurance premiums based on actual wages This will lead to low effective income replacement levels when they reach retirement age and receive pensions The coverage of the voluntary system is still very low, mainly because it is not attractive enough for new entrants The rate of participation in the voluntary insurance program remained low in 2009 and 2010, with the majority of participants being individuals moving out of the formal sector and wanting to complete the minimum premium payment period required The outcomes will certainly occur without reform Because most of the workforce is in the informal sector, less than half of the elderly will be able to receive pensions by 2050 If voluntary participation is low, by 2050 less than half of the elderly will receive pensions Women in their early 40s and men in their mid-40s are still less motivated to participate 96 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS Notably, a large proportion of low-income workers cannot afford to participate in the pension system Low-income workers include all people who earn less than the minimum wage (in years) According to the General Statistics Office of Household Living Standards 2008, Vietnam has 13.1 million low-income workers in 2008 Although all of these people are not necessarily poor, the impact of poverty This group is often high These people could not afford to join the social security system Regarding the coverage of insurance as well as poverty among the elderly Long-term challenges can be even more serious when we consider equity between generations As mentioned in many studies, the PAYG pension system with a predetermined entitlement in an ageing population also means that the current and future generations of young people will bear a greater burden can cover the cost of the system This larger burden can be expressed in many different forms, such as a continuous increase in the contribution rate, and thus participants who contribute to the system will seek to flee or retire early All of the above factors make the pension system face many problems and can put the pension system into crisis in the future, reflected by financial instability and inadequacy fairness between generations Financial stability and the maintenance of intergenerational equity in the PAYG pension system with a predetermined level of benefits and a rapidly ageing population are the most difficult policy questions for any economy Come on Therefore, finding policies that can be applied in accordance with certain socio-economic conditions to limit these problems and stabilize the system is the right thing to right away Given the current situation and challenges for the pension system in Vietnam above, it can be seen that building a pension system in Vietnam is very urgent and necessary The question is which retirement model is suitable for economic - cultural - social conditions in Vietnam? Experience in Korea The Korean economy is a developed capitalist economy, ranked fourth in Asia and ranked 11th in the world in terms of GDP in 2018 In the late 20th century, Korea was one of the countries with the fastest economic growth in modern world history The country’s GDP per capita has jumped from just under the US $ 100 in 1963 to over US $ 10,000 in 1995 and over the US $ 25,000 in 2007 Despite the heavy effects of the Asian economic crisis in 1997, this country has recovered the economy very quickly and firmly Table Unbelievably Rapid Economic Growth of Korea OECD Korea 1970 3,541 605 2015 40,095 (11 times) 34,549 (57 times) Unit USD Source OECD (2016) Korea is witnessing a dramatic change in population structure The population below 50 years old is decreasing, while the population over 50 years old is increasing The 97 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 number of people over 60 increases an average of 540,000 people per year, but the population aged 15 to 49 is expected to decrease by an average of 340,000 people per year This means that the working-age population is shrinking, and the number of retirees is increasing In 2019, people born in 1959 will turn 60, the statutory retirement age, and the number of retirees will continue to increase in the coming years Low birth rates and the rising number of retirees are creating a heavy burden on society Therefore, beside unbelievably Rapid Economic Growth of Korea is unbelievably Too High Old-age Poverty Rate of Korea Figure 10 Unbelievably Too High Old-age Poverty Rate of Korea Source OECD (2016) Before 2007 the two major government programs providing old-age security in the Republic of Korea were: (1) the partially funded PAYG-DB National Pension Scheme (NPS), a social insurance program (introduced in 1988) and (2) the National Basic Livelihood Security (NBLS) program (introduced in 2000), a means-tested social pension not limited to the older population (Moon, H , 2009) Many of the elderly poor were not able to meet the eligibility criteria for either of these programs In 2007, as part of the effort to deal with the lack of adequate old-age security provided by the NPS and NBLS programs, a new noncontributory program, the (3) Basic Old Age Pension, was introduced It is a modest affluence-tested social pension; that is, the eligibility provisions exclude those in approximately the top 30% of the income distribution (Moon, H., 2008) For the NPS the basic pension amount (BPA) is determined by both the worker’s average indexed monthly wage over the total contribution period and the three-year average national monthly wage for all workers at the time of retirement (SSA, 2009) Due to the relative “newness” of this system, contributions currently exceed benefit payments and the surplus is being used to build up a trust fund, some of which is invested outside the country (Jung, C L., & Walker, A., 2009 ) The original benefit formula promised what many experts now consider an overly generous income replacement rate (60% for the average worker after 40 years of contribution) relative to the size of the payroll tax contributions (Kwon, H J., 2002), (World Bank , 2000) Over the years subsequent legislation has already reduced the replacement rate to 50%, and it is currently scheduled to fall further to 40% by 2028 (Moon, H , 2009) Despite these benefit cuts, due to the 98 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS increase in the number of workers who will become eligible for NPS benefits during the decades ahead, benefit payments will soon be exceeding contributions, unless further cuts are made In short, South Korea faces a serious long-term sustainability problem The NPS pension is the most generous of the three schemes, but even its benefit levels are currently low because the program has been in place for just over 20 years Many workers have not contributed for the required 20 years and have opted instead for a reduced pension based on 10-19 years of coverage But there are other factors also tending to reduce the NPS benefit level NPS regulations allow many (currently 28%) covered workers a “grace period”; that is, they are not required to contribute if they “cannot afford” their contributions This provision means that when these workers retire, their pension benefits will be lower due to periods of not contributing (Moon, H., 2008) Besides, many of the self-employed, those working in the informal sector, and those working for small businesses are evading their mandatory NPS contributions, which again will lead to lower NPS pension benefits (Kang, J Y., & Lee, J., 2009) Source WorldBank, 2017 As mentioned earlier, one problem confronting the South Korean old-age pension plan is sustainability The 2007 amendments to the National Pension Act represented a major step toward dealing with the short-term sustainability problem However, even with the major cuts in promises with respected to future income replacement rates (from 60% in 2007 to 40% by 2028), a long-term gap remains between contributions made and revenues needed to pay even these much reduced pensions As currently structured, the trust fund will be exhausted by about 2060, about 15 years later than would have been without the 2007 amendments (Moon, H , 2009) One option for dealing with the projected revenues/ payments gap would be to further reduce the promised income replacement rate below the 40% level Alternatively the payroll tax could be increased substantially above its current 9% level to about 24% in the absence of legislative changes between now and 2060, but less if substantial cuts are made sooner (Moon, H , 2009) It is safe to assume that both of these options would be politically unpopular In the end, the government will have no choice but to lower the amount of national pension payments This is unavoidable situation NPS has to both to increase raise fund and to manage fund well But the National Pension Fund, It may delay the timing by increasing the operating yield Pension premiums and benefit has been changed dramatically If the operating profit rate of the fund is raised by percentage point every year, it can delay time to exhaust the national pension by three years As our interest rates fall further and the stock market is likely to undergo a correction, NPS is also difficult to make a domestic profit It is hard to make a high return on investment in the 99 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 stock market In the end, it will have to increase its overseas investment For this purpose, fund managers as well as chief executives who manage national pensions are not only in the global economy bur also in the financial market NPS should have a deep insight into the investment Since 2017, our current account surplus has exceeded $100 billion NPS fund is going abroad as a direct investment or as a stock investment $30.6 billion of $50 billion which is more than half of the total which is total NPS fund went to overseas stock investment As of the end of June 2018, the fund management amount of the national pension fund has risen to 638.476 trillion won Fund size is increasing rapidly every year to 427 trillion won in 2013, 512 trillion won in 2015 and 622 trillion won in 2017 It is positive signal to manage NPS fund The return on fund management has become more important than ever before This is because the profit and loss of trillion won will be decided by only 1% a return rate It is possible to secure soundness of NPS fund In conclusion, the Korea government will have to revise the long-term fiscal plan for NPS fund in consideration of the changed economic conditions and make bold plans, especially to boost the return on the management of NPS funds (Byung Kyu Jung, Young Soo Oh, Bok-Kun Yoon, 2018) The government wants to resolve the depletion of the fund by slowing the age of the pension benefit age from the 60 to 65 years old They need to have solution vacancy period which is after retirement and before pension age That is why pension or annuity product in private insurance market will be another solution People buy annuity product which is sold by private insurance company during working period in advance But according to the study which has been about relating to reduction in payment of the National Pension and private pension product The empirical results indicate that reduction in payment of the National Pension causes the third incometier household to decrease the contribution while fourth income-tier household to increase the contribution to private pension in response to the reduction in payment This result suggests that the contribution to private pension is related with income level, so it is necessary for the government to increase tax benefits and subsidize low income households for private pension to assist National Pension The empirical results indicate that reduction in payment of the National Pension causes the third income-tier household to decrease the contribution while fourth incometier household to increase the contribution to private pension in response to the reduction in payment This result suggests that the contribution to private pension is related with income level, so it is necessary for the government to increase tax benefits and subsidize low income households for private pension to assist National Pension (Jae-Ho Kim, 2011) A third option would be to add an NDC pillar to the present NPS scheme This would create individual accounts tied directly to additional contributions made over the years and it would index those accounts to future demographic and economic growth trends as reflected in the “wage sum” or other such measures used to index contributions over the years This option would call for a politically unpopular payroll tax increase; but by linking it to an additional source of pension income based on notional assets in an individual account, it might be popular or at least less unpopular than other alternatives Were a new NDC pillar gradually phased in as part of the South Korean 100 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS pension scheme, it would help smooth the intergenerational impact of the anticipated increase in the dependency burden associated with population ageing It would call for an increase in the payroll tax; but workers would get a return on their additional contributions, that is, an individual account that would add to pension income at retirement Also, the indexing mechanisms linked to the NDC model are designed to automatically, but in extreme situations only partially, compensate for economic and demographic changes (Börcsh-Supan, A H., 2006) While the introduction of an NDC pillar would help deal with the problem of long-term sustainability, as noted earlier, this is not the solution to an even more pressing immediate problem South Korea faces, the low rate of coverage and the low level of benefits for current retirees associated with the existing pension schemes (Jung, C L., & Walker, A., 2009 ) This is an issue for which a social pension is particularly well suited But it is unstable to pay a significant role, It needs to balance the scheme to avoid over reliance in NDC schemes The good news is that the 2007 amendments to the National Pension Act created the Basic Old Age Pension scheme, a noncontributory affluencetested social pension (SSA, 2009) It was restructured as the Basic Pension Scheme in July 2014 and paid KRW 200.000, but pays KRW 300,000 a month from Apr of 2019 to 70 per cent of the older population aged 65 old or older (SukMyung Yun, 2016) The monthly basic pension payment of KRW 300.000 is inadequate to cover the minimum cost of living (which was KRW 617,000 in 2015) or address the relative poverty (KRW 900.000 a month) issue The country is said to have the highest elderly poverty rate among Organization of Economic Co-operation and Development countries There are considerable limitations to what can be done to relieve poverty among older persons who have no income sources other than the basic pension The rapid increase in the number of older persons will soon augment the number of eligible people and make it inevitable to allocate an enormous amount of financial resources to the basic pension An approach that is based on a concept closer to absolute poverty than relative poverty would be more effective to address the issue of poverty among older persons in the Republic of Korea In the Korean experience to date, the effect of the basic pension on relieving elderly poverty has been limited Increasing support for the underprivileged who require more state assistance would be a better approach to enhance policy effects within limited budget constraints (SukMyung, Yun, 2016) (SukMyung Yun, 2016) Special job group, teachers and career soldiers have separate pay-as-you-go pension schemes in place These special occupation pension schemes have already entered the maturity stage and offer generous benefits, compared with the National Pension Scheme, in which there is a big difference between theoretical and actual income replacement rates due to its short history The accrual rate of the National Pension Scheme is 1.1625 per cent (equivalent to 46.5per cent income replacement rate for 40 years’ insured period), however, the accrual rate of the special occupational pensions is 1.9 per cent (62.7 per cent for 33 years) As of 2014, the average pension amount of the Government Employees Pension Scheme was KRW2.27 million per month, while the average pension amount of the National Pension Scheme was only KRW340,000 (about KRW900,000 in case the person was insured more than 20 years) The contribution versus benefit structures of special occupational pensions have been skewed and limited financial sustainability has emerged as a serious social 101 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 concern It seems that state-run public pension services be brought in line to narrow the gaps in the entitlement levels that have become an obstacle to labor market flexibility These publicly managed and separate pension plans are inherently unfair compared with the National Pension Scheme, which targets the wider public and has undergone strong measures to ensure financial sustainability The lesson learned from the Korean experience, with its special occupational pension systems (such as the Government Employees Pension Scheme) is that pre-emptive action needs to be taken to maintain a degree of equity within pension systems Source WorldBank, 2017 Despite the limitations, coverage of the public pension system in the Republic of Korea theoretically expanded to the entire population within a short period of time In addition, the country has achieved significant reforms (including financial sustainability measures) and raised the pension age The National Pension Scheme also has achieved another meaningful policy outcome: It has established itself as 102 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS a reliable option as an old-age income source as a result of proactive measures to secure financial sustainability and engage in effective publicity activities This experience can provide lessons for other countries in the Asia-Pacific region In effect, the essential meaning of the basic pension system is to force the child generation to support the parent generation (YongHa Kim, 2007) Moreover, the increased social burden through the basic pension system in turn reduces the burden on private households by leaps and bounds In other words, the society’s elderly care is achieved through the Basic Old Age Pension system, a private pension system, and a private depending After all, a society’s senior citizens’ wealth is a matter of social consensus on whether to place the responsibility on a collective level (public pension system) or on a personal level (private pension system or private depending) As for private pensions, the Republic of Korea has in place a ‘retirement pension’ and individual pension The retirement pension scheme was introduced in 2005 to replace the severance lump sum program Introduced in 1953 as a voluntary arrangement, the severance lump sum program was made mandatory in 1961 The coverage of the program gradually extended to firms with five or more employees However, as the employees received benefits whenever they changed workplace, this program did not function well on old age income security Therefore, the government introduced the retirement pension scheme However, the law allowed firms to choose between defined benefit (DB) and defined contribution (DC) types and severance lump sum, because many employees favored a lump sum payment and the trade union strongly argued to keep it The retirement pension scheme applies to workplaces with five employees and over now, but the government is preparing to expand the application to workplaces with one employee and over in 2010 The individual pension was introduced in 1994, just before the National Pension was extended to rural areas In its early years, the individual pension was quite popular, but soon after the aftermath of the 1997 economic crisis, its growth dropped abruptly and not much recovery has been achieved since then In short, both private pension schemes in the Republic of Korea - the retirement pension and the individual pension - are still in a developing stage and in need of much more improvement (Seong Sook Kim, 2013) IMPLICATIONS FOR VIETNAM In the context that Vietnam is a developed country and has a high and stable economic growth rate, however, the population is also ageing rapidly, building a retirement fund model is necessary and important From the experience and lessons from the pension model in Korea, we make some implications Consider reducing pre-determined entitlement rates in the application of the PAYG model The rate of entitlement after the retirement of Vietnam is quite high compared to other countries in the world Specifically, the statutory pension entitlement rate is a maximum of 75%, in fact, the average percentage of pension entitlement at the time of social insurance contribution is 70% (of which men are 68.5%, women are 71.4%) Meanwhile, the average pension rate in the world is about 50%; East Asian countries such as Japan and South Korea are 46%; Western European countries are 103 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 41%; South Asian countries are 55% According to the OECD calculation model, to ensure the current high level of payment, Vietnamese workers must contribute up to 40% of their income However, the reduction in the rate of pension entitlement after retirement also needs to be accompanied by the reform of the salary system because the current salary, especially the salary of the public sector, is relatively low In the long term, research is needed to change or improve the actual payment system with current predetermined benefits so that the social insurance system can increase financial independence between generations Currently, the pension of the current retirees is paid from the contributions of the working generation of employees This leads to the fact that pensioners’ income depends mainly on the social insurance contributions of the working labour force, leading to potential risks when there is a demographic change For this reason, many countries around the world have been researching on the transition from the real pension payment system to the system of personal savings accounts to reduce the risks of population ageing and create equality between generations Accordingly, the social insurance contributions of the participants of social insurance will be accumulated into a separate account and invested to create a source of payment for employees at the retirement age Increase the time of social insurance payment (extending the retirement age) As analyzed above, Vietnam’s retirement age is currently relatively low with many exceptions for early retirement, leading to a much lower actual retirement age plus a rising average life expectancy of people Leading to a longer time to pay the pension to subjects, this is the most original cause causing fund overpayment and fund collapse Experience from reforming pension systems of countries also shows that raising the retirement age is a solution that brings long-term effects, feasibility and ease of implementation Even in some countries such as Mexico, South Korea, Chile, Japan, New Zealand, Switzerland, Sweden the actual retirement age is higher than the prescribed retirement age due to age life expectancy increased, workers’ health improved and due to the need to improve their financial status after retirement In 2014, when submitting the project to amend the Social Insurance Law, the Government also proposed a plan to raise the retirement age for each target group, but it was not approved by the National Assembly However, in the long run, raising the retirement age to a level suitable to Vietnam’s conditions is a necessary solution to ensure the sustainability of the Social Insurance Fund in the future Expand coverage, increase participation rates In the long run, due to the relatively high percentage of people changing from home to home, the number of beneficiaries will increase rapidly due to the ageing population and average life expectancy while increasing the number of new entrants There is little fluctuation in the fund contribution due to limited coverage of the policy and discouragement of labour participation The reduction in replacement rates also has positive effects on growth such as raising the retirement age, reducing Replacement rates can also promote long-term growth 104 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS Narrowing and moving towards eliminating the gender gap in retirement age The gender gap in retirement age is a major cause of inequality in contribution and beneficiary fund contributions, affecting the balance of revenue and expenditure of the fund In our case, women contribute less and benefit more while men contribute more, but the benefit time is shorter than women Appropriate retirement investment policy As analyzed above, investment activities of social insurance fund (including retirement fund) in recent years have been ineffective, even when the rate of return was lower than the inflation rate The investment of Vietnam Social Insurance Fund needs to respect the principle of capital preservation, have a strategy to invest in long-term financial products, which are highly liquid, and require investment in professional personnel for the Fund Social insurance plays the role of a major and important investor in the financial market There are strict sanctions against cases of evading social insurance contributions and social insurance debts The current sanctioning level for evasion and late payment of social insurance premiums is relatively low, so enterprises are not encouraged to strictly comply with the law on social insurance Improving the compliance with the law on social insurance not only helps to limit the situation of social insurance contributions but also helps to expand the coverage of the social insurance system, which is very narrow due to enterprises’ evasion of social insurance contributions At the same time, there are measures for businesses, especially non-state enterprises and FDI enterprises to pay social insurance for employees at the actual wage, instead of the current minimum wage, in order to improve revenues of the Social Insurance Fund, improving the sustainability of the Social Insurance Fund, on the other hand, ensure the living standards for employees when they reach retirement age, contributing to strengthening the social security system Develop additional voluntary retirement programs Like the process of reforming social insurance systems of countries around the world, the reform of Vietnam’s social insurance system according to the above proposals will reduce the entitlement rate of the pension regime This will create a financial gap for retirees, so the State needs policies to encourage and support the development of more voluntary retirement programs to supplement the pension system public present These programs, on the one hand, help offset the financial gap for pensioners, and on the other hand, enable those with conditions and high incomes to enhance savings for old age The formation and development of additional voluntary retirement programs also support the development of financial markets (financial markets) and economic growth, while the development of financial centres and economic growth will have the positive impact back on the social insurance fund’s investment activities, thereby helping to increase participants’ pension income 105 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 CONCLUSION As mentioned earlier, one problem confronting the South Korean old-age pension plan is sustainability The 2007 amendments to the National Pension Act represented a major step toward dealing with the short-term sustainability problem The NDC model is designed to automatically, but in extreme situations only partially, compensate for economic and demographic changes (Börcsh-Supan, A H., 2006), (Palmer, E., 2006) While the introduction of an NDC pillar would help deal with the problem of long-term sustainability, as noted earlier, this is not the solution to an even more pressing immediate problem South Korea faces, the low rate of coverage and the low level of benefits for current retirees associated with the existing pension schemes (Jung, C L., & Walker, A., 2009 ) This is an issue for which a social pension is particularly well suited Like Korea, Vietnam is facing challenges in pension fund management Research has shown the shortcomings and some implications of pension fund management policy in Vietnam Research should be expanded with more specific assessment data REFERENCES [1] Auerbach, A., Kotlikoff, L., Hagemann, R., and Nicoletti, G (1989) The Economic Dynamics of Ageing Population: the Case of Four OECD Countries Department of Economics and Statistics, the OECD, Paris [2] Börcsh-Supan, A H (2006) What are NDC systems? What they bring to reform strategies? In R Holzmann, & E Palmer (Eds.), Pension reform: Issues and prospects for non-financial defined contribution (NDC) schemes Washington, DC: World Bank, 35-55 [3] Byung Kyu Jung, Young Soo Oh, Bok-Kun Yoon (2018) Improvement plan of national pension fund revenue Korean Journal of Public Policy Vol.25 No.1 , 65-79 [4] Feldstein, M (1998) A New Era of Social Security The Public Interest No.130 Winter 1998: Financing Our Old Age [5] General Statistics Office (2018) [6] Gokhale, J (1996) Demographic Change, Generational Accounts, and National Saving in the United States Federal Reserve Bank of Cleveland, Working Paper No.9603, the U.S [7] Hagemann, R., and Nicolleti, G (1989) Ageing Populations: Economic Effects and Implications for Public Financ Department of Economics and Statistics, the OECD [8] Holzmann, R (1997, 1998) “Financing the Transition to Multi-pillar Department of Education and Social Policy, the World Bank [9] Holzmann, R; Palacios, R., and Zvinienne, A (2001) Implicit Pension Debt: Issues, Measurement, and Scope in International Perspective Social Protection, HumanDevelopment Department, the World Bank [10] Jae-Ho Kim (2011) The Effects of the Reduction in Payment of the National Pension on Household Behavior of Private Pension Contribution by Income levels Insurance Finance Research Vol 22, No 4, 3-21 106 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS [11] Jung, C L., & Walker, A (2009 ) The impact of neo-liberalism on South Korea’s public pension: A political economy of pension reform Social Policy& Administration, 43(5) , 425-444 [12] Kang, J Y., & Lee, J (2009) A comparison of the public pension systems of South Korea and Japan from a historical perspective focusing on the basic pension schemes Paper presented at a conference sponsored by the Association for Public Policy Analysis and Management Singapore: National University of Singapore [13] Kotlikoff, L, J., and Leibfritz, W (1998) An International Comparison of Generational Accounts NBER Working Paper Series No 6447 [14] Kunieda, S (2002) Japanese Pension Reform: Can We Get Out of Inter-generational Exploitation? Pension Reforms in Asian Countries, Proceedings of the International Symposium, Hitotsubashi University, Japan, 23-63 [15] Kwon, H -J (2002) Inadequate policy or operational failure? The potential crisis of the Korean National Pension Programme Social Policy & Administration, 33(1), 20-38 [16] Ministry of Labor, War Invalids and Social Welfare (2016) Social Inrurance Report [17] Moon, H (2009) Demographic changes and pension reform in the Republic of Korea ADBI working paper series no 135 Tokyo: Asian Development Bank Institute [18] Moon, H (2008) The role of social pensions in Korea Paper presented at World BankMOF-Hitotsubashi workshop Tokyo: Center for Intergenerational Studies, Hitotsubashi University [19] Palmer, E (2006) What is NDC? In R Holzmann, & E Palmer (Eds.), Pension reform: Issues and prospects for non-financial defined contribution (NDC) schemes Washington, DC: World Bank, 17-33 [20] Seong Sook Kim (2013) Pension Reform Options in Korea IMF International Conference Tokyo, Japan [21] Social Security Administration (SSA) (2009) Social security programs throughout the world: Asia and the Pacific, 2008 Washington, DC: Social Security Administration [22] SSA (2009) Annual Meeting Announcement Seismological Society of America [23] SukMyung Yun (2016) Estimation of the Risk Aversion Coefficient Utilizing GMM (Generalized Method of Moments) Implications of the National Pension Scheme Health and Social Welfare Review [24] Takayama, N., Kitamura, Y., and Yoshida, H (1998) Generational Accounting in Japan Institute for Monetary and Economic Studies (IMES) Discussion Paper Series No 98-E-1, Bank of Japan [25] World Bank (2000) The Korean pension system at a crossroads (report no 20404-KO) Washington, DC: World Bank [26] YongHa Kim (2007) Issues and Alternatives in National Pension Reform Health and Welfare Forum, Republic of Korea, 84-91 107 ... low for The challenge of population age This also shows the basic challenge facing the Government is to achieve the goal of expanding the coverage of 50% of the workforce by 2020 Data from the Vietnam. .. benefits are calculated similarly to other pension benefits, but the pension as a percentage of the average pension of the pensioner is reduced by 1% for each year of retirement prior to the standard... contributions of the participants of social insurance will be accumulated into a separate account and invested to create a source of payment for employees at the retirement age Increase the time of social