Overstretched pension fund needs reform

Overstretched pension fund needs reform

Calls to start payouts earlier, put on hold for now, are under fire post-Covid

Nee Suesakul, 59, right, sells ice cream to a customer while also taking care of her four-year-old nephew on a tricycle. She faces an uncertain future because she cannot afford to pay for her social security.
Nee Suesakul, 59, right, sells ice cream to a customer while also taking care of her four-year-old nephew on a tricycle. She faces an uncertain future because she cannot afford to pay for her social security.

The Social Security Fund's (SSF) pension scheme, which was designed to provide a source of income for those who have retired from the private sector, may not last unless changes are made to strengthen its finances, experts warn.

Concerns about the SSF's sustainability are being echoed by academics and labour advocates after Labour Minister Suchart Chomklin last month put the brakes on a proposal to start paying out pension benefits at the age of 60 as opposed to 55.

The proposal, submitted by the Social Security Office (SSO), is part of draft amendments to the Social Security Act aimed at increasing benefits for subscribers whose number now exceeds 10 million. It needs a cabinet nod before being forwarded to the House of Representatives for scrutiny.

Approved by the SSO board in 2017, the proposal to raise the retirement age from 55 to 60 was put up for debate and received support from employers and employees, who would see benefits in terms of more retirement savings and greater fund sustainability.

But following the Covid-19 pandemic, the change has drawn strong objection from those in the labour sector out of concerns it will affect workers' retirement plans.

Factory workers in several industries are known to retire at 55, and the businesses offer generous early retirement schemes to older workers to motivate them to retire early so they can be replaced with younger ones. They are among opponents of a later payout age.

Fund slipping into red

The issue of fund sustainability is nothing new; it was raised even before 2014 -- the first year fund subscribers who had reached the age of 55 started collecting their pension benefits after 15 years of contribution.

Estimates from actuaries and the International Labour Organization (ILO) show the fund's inflow would match its outflow in 2039. With pension benefits being paid out fast in the following years, the fund would be in a deficit by 2044.

If this scenario comes to pass, it will affect the confidence of subscribers who are paying in now but are not yet qualified to claim their pension benefits. The SSF may not be able to pay full benefits to retirees who draw from the fund in the coming years.

A number of proposals have been floated to strengthen the fund's finances and shore up subscribers' retirement savings so they will have a decent income after retirement.

These include raising the retirement age to 60 to push back pension payouts and increasing subscribers' contribution to the fund by adjusting the maximum salary base of 15,000 baht to 20,000 baht, or hiking the contribution rate.

The maximum salary base of 15,000 baht has been in place since the SSF was introduced in 1989, while monthly contributions to the fund for salaried employees were capped at 5%, or 750 baht per month, before Covid-19. Of the contribution, 3% goes to the pension scheme.

After lengthy discussions, it is agreed by all stakeholders that any changes will be gradual to minimise impacts. The SSO has sought changes to the pension scheme over the past several years but the proposals were put on hold by politicians because the issue is sensitive and can affect their popularity.

There appears to be no attempt to raise awareness on retirement savings among fund subscribers, while past scandals involving the SSO might have discouraged workers from investing in the fund.

Reforms needed

Somchai Jitsuchon, research director for inclusive development at the Thailand Development Research Institute (TDRI), said restructuring the pension scheme is an urgent matter, and it should have been done five or 10 years ago.

He said there are several reform proposals to make the fund financially secure, and they can be used in combination depending on the economic situation. The principle is to increase income and slow down the outflow.

Raising the retirement age is one option adopted by several countries, which raise the age gradually to avoid affecting those who are close to retirement. The age should rise, for example, six months or one year, incrementally over the years until it reaches 60.

He suggested the measure should apply to current subscribers because it will increase the size of the fund. It will not make a difference if it applies to new subscribers, he added.

Raising contributions from subscribers by increasing the monthly base from 15,000 baht to 20,000 baht or reflect inflation also will augment the fund. The base salary has never been revised despite minimum wage adjustments, he said.

However, he said increasing the contribution rate is the most viable proposal to increase retirement savings for fund subscribers. Few can make do on monthly pension payouts of just 3,000-4,000, he said.

Even though the economic situation is not favourable, the government must move to prevent a crisis in the next two decades, he said.

Mr Somchai called on policymakers to have the courage to act because the changes sought will benefit the country and future generations.

Unless the pension scheme is reformed to increase savings, a proposal to give retirees a lump sum upon retirement and reduced monthly pension should be reviewed.

A source close to the SSO board said the government needs to convince workers of the benefits of raising the retirement age instead of putting brakes on the proposal, which will apply to new subscribers.

Receiving the old-age pension later will let recipients pick up a bigger monthly payment too, and the retirement age would not be raised to 60 in one go but gradually increased over the years. The source also warned that the fund could be depleted long before 2044 because when the assessment was made in the past, Covid-19 pandemic was not factored in.

After the Covid-19 pandemic brought economic activity to a halt, the government decided to lower contributions to the fund to alleviate hardship for subscribers. The contribution cuts were estimated to have cost the fund about 20 billion baht, which affects its ability to pay out pension benefits.

SSO allaying concerns

SSO secretary-general Boonsong Thapchaiyuth has allayed concerns about the fund's sustainability, saying the office is committed to improving the fund's finances and increasing benefits for subscribers.

He said the SSF made profits of 56 billion baht last year and its investment plans are expected to generate returns to pay for all benefits including retirement for SSF subscribers.

"The SSF has more than 2.3 trillion baht and the money is spent as needs arise," he said, noting that part of the fund is disbursed to help workers affected by the Covid-19 pandemic.

He said there are several ways to strengthen the fund's finances and make the fund secure, and one is to collect more monthly contributions by increasing the maximum salary base. However, he noted the proposed increase in monthly contributions is likely to be based on progressive rates and on a voluntary basis.

Mr Boonsong also discussed new benefits to be added in the proposed amendment to the social security law. Under the draft, retirees are allowed to choose between a one-time payment upon retirement and monthly pension benefits.

Also, those who are not yet qualified to claim retirement benefits will be allowed to seek a partial refund and collect the remaining amount when they reach 55. In addition, part of their contributions to the old-age pension fund can be used as loan collateral, he added.

When asked about reports that several subscribers choose not to collect pension benefits in exchange for medical coverage in the wake of the Covid-19 pandemic, he said the issue is also addressed in the bill.

The subscribers who collect pension payments are not eligible to claim medical welfare benefits. To retain these benefits after retirement, they choose to continue contributing to the fund. The SSO is also studying a plan to set up a hospital for the fund subscribers by upgrading rehabilitation centres to provide general medical services.

Payee contributions still seen as 'low'

Recipients of pension payouts must be at least 55 and no longer insured under the Social Security Act.

Those who have contributed to the fund for 15 years will get a monthly payment equal to 20% of their average wage for the last 60 months before retirement.

For those who have contributed to the fund for more than 15 years, they will get an extra of 1.5% per each additional year.

Currently employees pay 3% of their monthly salary, capped at 15,000 baht, to the scheme, and the amount is matched by employers.

The combined contribution of 6% to the scheme is considered low when compared with the recommended 13%. It is recommended that retirees should receive no less than half of their base salary.

Payee contributions still seen as 'low'

Recipients of pension payouts must be at least 55 and no longer insured under the Social Security Act.

Those who have contributed to the fund for 15 years will get a monthly payment equal to 20% of their average wage for the last 60 months before retirement.

For those who have contributed to the fund for more than 15 years, they will get an extra of 1.5% per each additional year.

Currently employees pay 3% of their monthly salary, capped at 15,000 baht, to the scheme, and the amount is matched by employers.

The combined contribution of 6% to the scheme is considered low when compared with the recommended 13%. It is recommended that retirees should receive no less than half of their base salary.

Calculation of pension benefits

Number of years of contribution/ pension rate/ monthly payment (baht):

  • 15 years/20%/3,000
  • 20 years/27.5%/4,125
  • 25 years/35.5%/5,250
  • 30 years/42.5%/ 6,375
  • 35 years/50%/7,500
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