Social security system 'needs urgent reform'

The social security system needs to be reformed as it faces big challenges due to the rapid growth of a more elderly population, economists have warned.

In a paper called "Safeguarding Our Nation's Nest Egg: Necessary Reforms to our Social Security System", Kobsak Bhutrakul and Anak Serichetthapong of the Bank of Thailand said that to keep the social security system intact was one of the most important challenges facing policy-makers in the coming decades due to the cost of old-age pensions once the 'baby-boom' generation starts to retire and people live longer.

The researchers criticised the current pension scheme as being "too generous" and lacking resolution of important components. They said pensions could not be sustained over the long term if there were no reform.

The old-age benefits scheme began in 1990 when the Social Security Act was passed. The law ensured members of the Social Security Fund (SSF) of an old-age pension after they had contributed for at least 180 months and reached 55 years of age.

The pension, however, has not been paid yet. Payments will begin in 2014 when the first group of qualified retirees will be paid monthly, with about 20 per cent of their salary during the last five years, for life.

So far, only an old-age lump sum has been paid as an old-age benefit.

The monthly contribution to the SSF is calculated from a 3-per-cent payroll tax from both workers and employers from a base of Bt1,650 per month to a cap of Bt15,000 monthly.

At the end of 2006, the Social Security Office (SSO) had collected contributions from employers, employees and the government to the tune of Bt93.24 billion, with about Bt1.1 billion belonging to the old-age benefit fund.

Kobsak and Anak fear the old-age benefit fund will face problems in the long run, as the number of workers in the top bracket of Bt14,001 to Bt15,000 per month has steadily increased from about 11 per cent of the members in 1998 to 14 per cent in 2006.

The data, they said in their paper, partly reflected the fact the system concentrated mostly on less well-off workers and the simple fact that with inflation, normal wages continue to rise, pushing this group of workers against the formal wage cap.

The researchers also said the SSF was too generous in setting a retirement age at 55. "Over the long term, if this problem is not resolved, it means the programme will matter to workers less and less since the share of real taxable income for the pension scheme will decline," the researchers wrote. They encouraged the SSO to focus more on wage and benefit indexation, as well as incentives to delay retirements.

The SSO estimated the first group of members to receive a pension in 2014 would be about 6,300 persons and that Bt230 million would be needed. Another Bt12 billion would also be paid as an old-age lump sum.

Jurin Chiravisit, secretary-general of the SSO, said he was not worried about the ability of the old-age benefit fund during the early years to pay the pension as he estimated the fund would reach Bt1 trillion in 2014. But he was concerned about the long-term, as the number of pensioners would increase every year and the fund might face problems in 2038 when the number of pensioners would increase to 3.13 million, needing about Bt800 billion.

He agreed with Kobsak and Anak that the SSF needed reform.

Jurin said he had closely monitored the SSF and found that if there were no reform, it would have to reallocate savings from other SSF benefit funds to support the old-age benefit fund from 2038, as the SSF money could run out by 2042.

Jurin said the SSO was seeking ways to retain the old-age pension fund. It was also studying options with the International Labour Organisation: delaying retirements, increasing contributions from employees and employers, and long-term investments by the SSO to generate income - to sustain the fund.