Vietnam's Aging Population Will Push Social Security Expenditure Upwards at an Accelerated Pace

Rapid prospective aging. Vietnam’s population will be aging rapidly in coming decades, making deeper reforms in the pension system now a priority. The old dependency ratio expected to double of the next 25 years, and replacement rates are around 70 percent, significantly above the OECD average of 54 percent.

At the same time, retirement ages are low, with 55 years for women and 60 years for men, far below the OECD average of 67 years, but also below that of other Asian countries (between 63 and 65 years of average). Coverage is still low (estimated at about 20-25 percent), and will unlikely increase fast given a large informal sector in Vietnam.

Vietnam’s Social Security (VSS). VSS will play an increasing role in Vietnam’s debt dynamics as of 2030. Within the next decade, a rapidly aging population will push VSS expenditure upwards at an accelerated pace. The below baseline projections show that, in absence of policy changes, developments at VSS could lead to an explosive public-sector debt dynamic as of 2045.

Projections indicate that the Pension Fund, the largest element of Vietnam’s Social Security (VSS), will run deficits starting around 2035. Pension revenue stood at around 5.2 percent of GDP, and expenditure at 3.2 percent of GDP in 2017. Keeping all parameters constant, spending will increase steadily, and overtake revenues in 2030.

The NPV of pension liabilities until 2050 (1 percent discount rate) are 172 percent of GDP, while the NPV of pension revenues lies at 158 percent of GDP.

In the absence of reforms VSS deficits will raise PPG debt. VSS is financially unsustainable in the absence of reforms. Without policy changes, the deficit in the pension system could add to public debt as of 2035. VSS holds and invests about 90 percent of all assets and surpluses in government bonds, roughly 12 percent of GDP.

PPG debt net of VSS holdings of government debt is 46 percent of GDP in 2017. Yet, projected VSS deficits will require additional borrowing in the future in the absence of reforms. Even with the health insurance fund kept infinancial balance, by 2022 GDP growth is expected to outpace VSS asset growth. Around 2035, when VSS will start experiencing deficits and its assets will decline to around 7 percent of GDP by2035.

VSS is expected to run out of assets in 2044 and will have to borrow in addition to the general government. By 2050, VSS debt could be as high as 8 percent of GDP.

NHAT TRUNG