Obligating short-term employees to register for social insurance would help add much-needed funds to an ailing system, as well as prevent firms from avoiding their insurance obligations by offering employees a string of short-term contracts.
Many firms avoid paying into the nation's pension system by signing employees to one to three month labor contracts, Bui Sy Loi, vice chairman of the National Assembly’s Committee of Social Affairs, said at a meeting in early August on a draft amendment to the Social Insurance Law.
How it's supposed to work
A Vietnamese worker's compulsory social insurance contributions come from both the worker and his employer.
Employers do all the paperwork and deduct part of employees' salary to pay the insurance fund. When employees start paying social insurance, the employer is issued a certificate that functions as the employee's account book at the insurance agency. When an employee moves on to another job, he/she simply gives this certificate to his new employer, who continues to manage his or her social insurance contributions without having to start the paperwork afresh.
Employers have long complained that the paperwork associated with this process can take up to half a year to complete.
If the draft law is approved, an estimated seven million laborers signed to short-term contracts will be required to pay a portion of their salaries -- matched by their employers -- into the country's Social Insurance Fund.
How it actually works
Employers point out that this could be problematic; it sometimes takes up to six months to fill out the paperwork to register a new employee into this system.
At present, the system barely functions at half its potential capacity.
Contributions are currently compulsory for some 17 million laborers nationwide, but only 10.8 million workers currently participate, said Loi from the NA's Social Affairs Committee. Some 20 percent of the country’s workforce is currently subject to compulsory social insurance; the rest participate voluntarily.
Current regulations require people employed for more than three months to pay into the fund. Premiums are calculated as 26 percent of the laborer’s monthly salary, of which, the employee contributes 8 percent and the employer the rest.
Supporting the draft revision, Mai Duc Chinh, vice chairman of the Vietnam General Confederation of Labor, claimed that many laborers are permitted to avoid paying into the system, causing a loss of some VND56 trillion (US$2.67 billion) each year to the Social Insurance Fund.
However, a representative of the Association of Japanese Enterprises in Vietnam said the government should only pull temporary workers into the fund after the system after insurance registration and payment procedures are reformed. The representative noted that some firms wait as long as six months before obtaining the insurance registration certificate that allows them to start depositing into the fund on behalf of new employees.
In this way, the draft revision is unreasonable, she said.
The government should encourage laborers to obtain voluntary social insurance, she added.
Responding to those concerns, Loi said the draft revision includes a proposal to subsidize premiums to encourage people to buy into the fund. Over 40 percent of the people subject to voluntary social insurance payments are employed in rural areas and work in the agricultural sector.
Pension problems ahead
Truong Thi Mai, chairwoman of the National Assembly’s Committee for Social Affairs, said Vietnam has some 54 million laborers aged 15 and over. Only one-fifth have registered for the social insurance fund, which pays out pensions.
This means that millions of retired laborers could receive nothing in their old age, shifting that burden onto the state, she said.
Meanwhile, the social insurance fund faces a real risk of bankruptcy, Mai said. One reason for the situation is that many firms have delayed social insurance payments, affecting inputs into the fund.
In addition, Vietnamese laborers continue to retire relatively young--55 for women and 60 for men--even though their average life expectancy has increased, from 66 in 1990 to 75 at present.
This means that pensioners will draw money from the fund for longer.
The fund is expected to begin operating at a deficit starting in 2021 and its reserves could be totally depleted by 2034, causing big problems for Vietnam's economy, she said.
In other words, male employees now 39 or younger and female employees under 34 are at risk of receiving nothing when they retire.
Working longer, older
Last year, the International Labor Organization (ILO) warned that Vietnam's pension scheme needs comprehensive reform.
Many businesses, mostly in the private and foreign sectors, have delayed or failed to make social insurance payments on behalf of their employees, contributing to an overall debt of more than VND12.4 trillion (US$590.5 million) by late April, which affected the fund’s income, said Chinh from the Vietnam General Confederation of Labor.
To deal with the shrinking pension fund, Vietnam plans to amend the current pension formula, which could lead to lower replacement rates.
The fund's current replacement rate is 45 percent of a worker's average monthly wages in the first 15 years of contribution, plus an additional 2 percent for every subsequent year of contribution for men and 3 percent for women, until it reaches a maximum rate of 75 percent.
The National Assembly’s Committee for Social Affairs has proposed that the replacement rate, starting in 2018, begin at 45 percent of a worker's average monthly wages for the first 15 years of contribution for women, and 16 years for men plus 2 percent for every following year of contribution afterwards, until it reaches the maximum rate of 75 percent.
The contribution period to receive 45 percent replacement rate for men should gradually increase to 17 years in 2019, 18 years in 2020, 19 years in 2021, and 20 years from 2020.
Globally speaking, pension system replacement rates usually sit between 40 and 60 percent, according to the International Labor Organization.