VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY NGUYEN LE DIEM HANG FACTORS DETERMINING LOW PENSION PARTICIPATION RATE AMONG VIETNAMESE WORKING POPULATION AND POTENTIAL EFFECTS ON RETIREMENT INCOME MASTER’S THESIS 1 VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY NGUYEN LE DIEM HANG FACTORS DETERMINING LOW PENSION PARTICIPATION RATE AMONG VIETNAMESE WORKING POPULATION AND POTENTIAL EFFECTS ON RETIREMENT INCOME MAJOR: PUBLIC POLICY CODE: 8340402.01 RESEARCH SUPERVISOR: DR. VU HOANG LINH Hanoi, 2023 2 STATEMENT OF COMMITMENT I have read and understood the plagiarism violations. I pledge with personal honor that this research result is my own and does not violate the Regulation on prevention of plagiarism in academic and scientific research activities at Vietnam Japan University (Issued together with Decision No 700/QDD-DDHVN dated 30/09/2021 by the Rector of Vietnam Japan University). This dissertation is being submitted in partial fulfillment of the requirements for the master’s degree in Public Policy.
Other sources are acknowledged by giving explicit references. Signature Nguyen Le Diem Hang 3 ACKNOWLEDGEMENT I am very thankful to my supervisor Dr. Vu Hoang Linh for guiding me throughout the process. Without his support and valuable advice, this master’s thesis cannot be done.
I have learned precious lessons from Dr. Linh and from my classmates while preparing this thesis. I am grateful for my family, friends, and colleagues at work who have supported me diligently. I appreciate the inspiration from my family, especially my son – Nguyen Hai Trieu.
Hai Trieu has inspired me to live, work and enjoy life with a warm heart and curious eyes. I have enjoyed the journey and I wish the next chapter in life will be much brighter. Thank you all. Hanoi, May 2023 Author Nguyen Le Diem Hang 4 ABSTRACT The pension fund is considered to be one of the most important factors in social affairs.
Preparing a pension fund is one of the ways to get financial freedom to earn a steady income at an older age. Although Vietnam has achieved significant milestones in improving average income, social benefits such as social security remains a problem for most workers. This study builds on the body of literature, re-accessing the findings and expanding the work by adding more observations. This study also uses a quantitative method to find a correlation among factors suggested to be reasons which make people choose to participate in the pension program or not.
The research is based on data collected by The labor force survey 2021 (organized by The General Statistics Office with technical support of the International Labor Organization (ILO)). The research finds a correlation between the pension participation rate with factors such as the type of company (state vs. private), the type of labor contract (long vs. short contract or no contract), gender (female workers vs, male workers), length of work, and total income.
With these findings, the research proposes policies to improve the pension participation rate in the Vietnamese labor force. 5 TABLE OF CONTENT STATEMENT OF COMMITMENT. 5 TABLE OF CONTENT. 6 LIST OF TABLES.
7 LIST OF FIGURES. Error! Bookmark not defined. LIST OF ABBREVIATIONS. Law on Social Insurance: No 58/2014/QH13 on 20/11/2014.
Decree on voluntary supplemental retirement program: No.: 88/2016/ND-CP on 01/07/2016 .4 The research questions. 12 CHAPTER 2: LITERATURE REVIEW. Type of labor contract. Error! Bookmark not defined.
43 CHAPTER 6: APPENDIX: Labor Force Survey 2021’s questionnaire. 45 6 LIST OF TABLES Table 1: Structure of labor force classified by gender. 31 Table 2: Structure of labor force classified by area. 33 Table 3: Explanation of descriptive data.37 Table 4: Summarize of the descriptive variable.
39 Table 5: Regression result. 40 7 LIST OF ABBREVIATIONS ATM Automated Teller Machine BPJS Badan Penyelenggara Jaminan Sosial (Indonesian Social Insurance Administration Organization) DC plan Defined Contribution plan GSO General Statistics Office of Viet Nam GSO LFS General Statistics Office Labor Force Survey GSO SYB General Statistics Office Statistic Yearbook ILO International Labor Organization ILSSA Labour Science and Social Affairs MDA Multiple Discriminant Analysis OECD Organization for Economic Co-operation and Development OJK Otoritas Jasa Keuangan (Indonesian Financial Services Authority) PAYG Pay-as-you-go VDF Vietnam Development Forum VHLSS Vietnam Household Living Standard Survey VNAS Vietnam Aging Survey VND Vietnam Dong VSS Vietnam Social Security 8 CHAPTER 1: INTRODUCTION According to GSO Labor Force Survey (2021), Vietnam's national labor force amounted to be nearly 55 million persons as of 2021. Nearly sixty percent of the labor force is in the age range of 25 to 54 years old. While this is an advantage of Vietnam's labor force, so-called "the golden age window", it also suggests that massive of the working population will be aging in the next 20 years.
According to a World Bank report and GSO (2021), the number of senior citizens from 45 years old and above has gradually increased since 2018 and will reach its high of 41% in 2049. (Glinskaya et al. On the other hand, Vietnam's total fertility rate has been decreasing from 6. GSO LFS 2020 report predicted that the total fertility rate will continue to decrease to 1.
With the two stated data above, it is drawn to attention that the total dependent population in Vietnam is predicted to be increased sharply from 2045. In detail, the ratio of the number of older people who are more than 65 years old over the working people is predicted to be increased from 25% (in 2040) to 50% (in 2100). What will happen when the labor force is getting older? First, the older the person gets, the lesser the working capacity can be. Income for an older age person is predicted to be lower than when he/she is younger, in the worst scenario, the income will no longer exist.
Second, the cost of living in older age is higher, as elderly people expect to bear the higher cost of medical and personal care. So, how can people prepare for this aging period of their lives? Ideally, workers need to prepare for a pension fund as soon as they start working to create a fund that helps to generate income once they retire. What is the situation of pension preparation in Vietnam's working population? 1.1 Background In Vietnam, there is Vietnam Social Security ("VSS") system which operates as a mandatory pension system. Participating in VSS is one of the solutions to prepare for retirement income.
According to the GSO (2020), the total number of VSS participants reached nearly 15 million persons by 2019. So, if there is no other alternative solution to pension, only 27% of the working population will receive income which generates from the pension when they retire. 9 What about the remaining 73%? How will they sponsor their lives when they stop working? What are the factors from the labor force perspective which determine the low pension participation rate among the Vietnamese working population and what are the potential issues on retirement income when workers do not have a pension plan? The research is aimed to understand the factors from the labor force perspective which determine the low pension participation rate among the Vietnamese working population and the potential issues when retiring. Based on understanding the underlying factors, the research shall recommend policies to increase this participation rate which aims to increase the pension-covered ratio when the Vietnamese population is getting older.
First, the pension/social security system plays an important role in every country to maintain an efficient social welfare platform. A pension system is created so that employees and employers can contribute as soon as the first day of work. By contributing a small fraction of the monthly income and investing in trusted assets for a long period, a pension fund can help to fight against inflation and create a trusted fund that will generate a monthly income once the contributors retire. Five key elements which shape the pension system to be effective are (i) the number of participants (to diversify and economy of scale), (ii) early contribution (to reach a long horizon of investment), and (iii) frequency of the contribution (to average the dollar cost), (iv) effective fund management skill (to reach to adequate return), and (v) the governance process (to govern the system).
The first three elements are based on the contributors' decisions. So, why the employees do not participate in a pension program that was designed for their benefit is the question that needs to be asked. Second, the VSS is a Pay-as-you-go ("PAYG") defined benefit that relies on inter-generation contribution. It is designed so that young and future workers contribute to pay for the current pensioners.
The PAYG system is designed that the next generation will contribute for the retired generation. The PAYG in an aging situation creates an inter-generation inequality. Since 60% of the labor force will be aged rapidly and the younger generations’ pension contribute will not be enough to cover for the retired population. In additional to that, the decreasing fertility rate suggests that Vietnamese labor force is predicted to shrink and there will not be enough of younger workers to contribute for the retired ones.
These related issues are discussed by Giang (2004). 10 According to the Law of Social Insurance of 2014 (No 58/2014/QH13), it is the right of employees to participate in the VSS program to receive income when workers retire. By observing data in GSO (2020), from 2015 to 2019, the number of VSS participants increased from 12.3 million workers to 15.7 million workers, recording a 5% average annual increase. Given the Vietnamese whole working population reached 51 million workers in 2021, the participation rate is significantly low.
Law on Social Insurance: No 58/2014/QH13 on 20/11/2014 Under Social insurance law, employees being Vietnamese citizens shall be covered by compulsory social insurance. So, it is illegal for a company if the company does not enroll the staff into social insurance program. It is also required by law that the company must contribute to the monthly social insurance amount with the employees. Decree on voluntary supplemental retirement program: No.: 88/2016/ND-CP on 01/07/2016 In 2016, the decree on voluntary supplemental retirement program was released: decree 88/2016/ND-CP on 01/07/2016.
The decree initiated the idea that employees can make contribution for their own pension program after fulfilling all the obligation under social insurance law. Since 2016, there are 4 fund companies established voluntary supplement program.3 Problem statement Given the aging population in Vietnam, preparing the fund for retirement is important for the Vietnamese working population. Participating in a social security program is one useful way to build a fund for retirement. However, the rate of participation in VSS among Vietnam's working population is quite low.
Therefore, how can workers who are not in the VSS program prepare for their retirement one? Assuming other conditions are constant, in 2021, an average worker earned monthly income of 6.6 million VND and spent an average monthly living expenditure of 4. The average worker had 2.4 million VND outstanding. Assuming this person did not participate in the VSS program and has an average life expectancy of 75 years old (average life expectancy 11 – GSO, 2020), then he/she needs to fund himself/herself for 15 years after retiring at 60 years old. Assuming this person puts in a saving deposit of 0.5 million VND (~10% of monthly income) at the annual real interest rate of 4% (annual benchmark interest rate is 6% and inflation is 2%), after 30 years of saving, he/she can get a fund of total 347 million VND.
If we divide this 347 million VND by 15 years of retirement or 180 months, then it comes to an average monthly income of 1.9 million VND, which is a lot less than the 4.2 million VND minimum average living expenditure as stated by GSO data. In other words, the worker cannot have enough money to survive the 15 years of retirement, not to mention to have a fruitful life.