Vietnam’s population will be aging rapidly in the coming decades, so introducing deeper reforms in the pension system is now a priority, the IMF said in a recent report on the country’s economic outlook.
|A young doctor gives healthcare checkups to the elderly. Within the next decade, a rapidly aging population will push Vietnam Social Security’s expenditure upwards at an accelerated pace.|
The dependency ratio is expected to double in the next 25 years, and replacement rates are around 70%, significantly above the Organization for Economic Cooperation and Development (OECD) average of 54%.
At the same time, the retirement age is low – 55 years for women and 60 years for men, which is far below the OECD average of 67 years, and lower than other Asian countries, where the average is between 63 and 65 years.
The IMF predicted that coverage is still low at 20-25%, and is unlikely to increase at a faster rate given the large informal sector in Vietnam.
Vietnam Social Security will play an increasing role in Vietnam’s debt dynamics from 2030. Within the next decade, a rapidly aging population will push VSS expenditure upwards at an accelerated pace, according to the IMF.
“In absence of policy changes, the developments at VSS could lead to an explosive public-sector debt dynamic as of 2045,” the agency noted.
The projections indicate that the Pension Fund, the largest element of VSS, will run into deficit, starting around 2035. The pension revenue stood at around 5.2% of the gross domestic product (GDP), and expenditure was 3.2% of GDP in 2017.
In the absence of reforms, VSS deficits will raise public and publicly guaranteed (PPG) debt. The VSS is financially unsustainable in the absence of reforms. Without policy changes, the deficit in the pension system could add to public debt from 2035.
The VSS holds and invests about 90% of all assets and surpluses in government bonds, which is roughly 12% of the GDP. The PPG debt net of VSS holdings of government debt was 46% of the GDP in 2017. But, projected VSS deficits will require additional borrowing in the future, in the absence of reforms.
Even with the health insurance fund kept in financial balance, GDP growth is expected to outpace VSS asset growth by 2022. The VSS will start experiencing deficits and its assets will decline to around 7% of the GDP by 2035.
The VSS is also forecast to run out of assets in 2044 and will have to borrow from additional sources besides the general government. By 2050, VSS debt could be as high as 8% of GDP.
While pension reforms are difficult, they take decades to complete and should be implemented as soon as possible to ensure long-term sustainability, the IMF said.
“An aging population will equally strain Vietnam’s health insurance fund, which has few assets to spare and has already been seeing almost zero balance over the last years,” said the agency.
The agency put forward several possible reforms to delay and reduce the overall deficit in Vietnam’s pension system.
For example, the scenario assumes an increase in the official retirement age of 0.4 year per year, so the retirement age is 62 for women and 65 for men. An increment of 0.4 in retirement ages until it becomes 62 years for both men and women is already being discussed by the authorities. SGT