DEVELOPMENT ECONOMICS II

ESSAY
Estimate budget sustainability of Pension Reform Policy in Vietnam:
Extending the retirement age

Trang Phuong Nguyen Hanken

Anh Quoc Nguyen University of Helsinki

Introduction
Since 1990s, there has been a common concern about increasing trend of population aging and
dependency rate in both developed countries and even in developing countries, where most of
elderly people live (Lawson et al, 2012). This phenomenon has potentially lead to instability in
of the government public pension budget as majority of the support for the elderly is provided by
public pensions and by government health care, based on redistribution principle from younger
working-age population to older generations. (OECD, 1998; World Bank, 1994).
Similar to the global trend, Viet Nam, one of the most promising economies in East Asia, is
forecasted to experience the deficits by 2021 and even depletion by 2034 in government pension
fund if no pension reform is made by International Labor Organization. This paper, therefore,
aims to both analyze the planned extended-retirement-age policy, as one of the most effective
remedy implemented in numerous countries, in the end of 2015 in case study of Viet Nam with
detail estimating the changes of pension budget in the next 15 and 30 years.
The structure of this paper is divided into 6 main sections. After literature review in section 2,
some theoretical framework will be introduced with mainly focusing on mechanism of potential
impact of extended retirement age on public pension budget. In the next section, methodology
used in this paper and dataset will be illustrated. Finally, the two final sections deal with main
results and conclusion.

1. Literature review
This growing recognition of the potential consequences of this issue has leaded to several
discussions on the need for appropriate public policies and impact evaluation of numerous
policies applied to deal with this problem around the world.
John Bongaarts (2004), for example, mentioned about the unsustainability of the pension system
as the raising dependency rate and population ageing and the need to identify and implement
reforms of public pension systems under these changing demographic conditions. Projections to
2050 in demographic trends and pension expenditures in the absence of changes in pension
system were also provided in the context of G7 countries.

Additionally, Van den Noord and Herd (1993), by researching the pension liabilities in the seven
major OECD economies, estimated the likely changes of public pension budget in the seven
OECD countries under new threat of population ageing and concentrated on the urgent needs to
reform the current system to remedy this problem. By using the generational account approach,
combining with a number of assumptions, the liabilities of pension fund was forecasted in case
with and without the implication of the extended retirement-age policy in next coming year, with
the conclusion being that raising retirement ages would make a particularly significant
contribution projected pension liabilities in all OCED industrial countries researched.
Similarly, Leibfritz et al (1995) examined the economic costs of demographic rapid
transformation on government budgets, public pensions budget, and healthcare system by using
quantitative methodology in OECD countries. Some policy options were suggested by them to
cope with all there raising threats, following the finding that further increasing in retirement age
could create stability of the economic system both in the first decade of the 21st century and in
long run. Noticeably, there were a large number of practical evidences of the effectiveness in
extended retirement age policies in many countries. In USA, for instance, the retirement age will
raise from 65 to 67 by 2022. In UK, retirement age for women, which was 60, will be increase to
65 by 2020. In Japan, retirement age will be extend from 60 to 65 for both men and female. In all
these mentioned countries, the policy has significant impact on the budget.

2. Theoretical framework: Mechanism of potential impact of extended retirement age

on public pension budget.
Increasing in the retirement age will lead to the growth in the pension tax as treated employees of
the policy pays more for the budget and the decline in the pension spending, which would have
been paid to the treated employees of the policy without the policys implication, will be saved.
There have been many manners to estimate the impact of increasing retirement age policy to
national pension budgets.
Net pension liabilities is seen as one of the most effective manner for assess the changes in
pension budget in case the extended retirement age policy is implemented, according to Leibfritz
et al (1995), Van den Noord and Herd (1993). It is defined as the gap between the cash flow of
pension tax, which refer to the potential money formal employees pay for the pension insurance

before retirement age, and the pension payments, which is the money that pension return to
payers after retirement age yearly. If net pension liability is estimated to be negative in coming
year, the pension fund is seen as financial instability in coming year and vice versa.
Additionally, public expenditure ratio, which is measured by percentage of current total annual
spending on public pension divided by current total pre-tax annual earnings of workers, is also
reliable index. (John Bongaarts, 2004). This indicator presents how many percentage of income
is spent on retired people annually.
In this paper, the net pension liabilities will be used to estimate the impact on the budget.

3. Methodology and data

4.1 Methodology
We examine the effect of the reform by estimating pension improvement from status quo.
(keeping the current retired age). People who are effected by the reform are workers that work in
formal sectors and reach the age of 55-60 for female and 60-65 for male.
Net pension improvement is driven by two main forces: (1) the gain in social pension tax due to
more people staying in the labor force and (2) the reduction in pension payment due to the
decrease in pension beneficiaries. These two effects together will improve the pension fund. In
this paper, we will estimate the magnitude of these main forces based on the past data and some
assumptions about the labor force structure.
=
Pension tax is a certain percentage of the anual salary of former workers. Pension payment is a
transfered money which is determined also by a certain amount of anual salary. These two
percentage is set by law so it is expected to be unchanged in the estimated time. Therefore, in our
analysis, annual salary of workers in extended age, which is determined by the number of
workers in extended age and the average salary for these people, is the core of our estimate. For
the following parts, we will discuss how to estimate these indices and the prediction multipier for
the future.

4.2. Data and measurement:

We will briefly discuss our data source and measurement of some important indices.
4.2.1. Demographic data and the overview of the economy and labor market:

Vietnam population

At the moment, Vietnam finds itself in a demographic golden age with 54% the population in the
working age with only 10,6% people over 65 years old1. However, the population has been aging
due to the decreasing birth rate and increasing life expectancy. Until 2030, Vietnam is expected
to have 20.3% population over 60 years old2. Therefore, in our analysis, the number of people
affected by this policy will increase over the time. We use the prediction data of World Bank as
the index for number of people in extended age.

Labour market structure and the portion of labor in formal sector

Vietnam has undertaken Doi Moi reform to liberalize the economy and attract trade and
foreign investment. The reform and integration into world economy have been taken place since
1990s by some agreements with the neighbor countries and United States. However, the boom in
foreign trade and investment only started since Vietnam joined WTO in 2007. 3 This movement
has changed the labor structure dramatically. Vietnam has moved from agriculture economy to
manufacturing - service economy (with 53.2% the labor force in manufacturing and service
sectors in 2013). The proportion of labor force in formal sector takes up around 70 -80% of total
labor force (2013) but this rate slowly increases with 0.34% per year from 2009 -2013.
In our analysis, we need to estimate the portion of labor in formal sector in order to find out the
number of treated people. As mentioned above, Vietnam is in the process of international
intergration, the economy will change over time and so do the structure of labor market and
portion of formal labor force. Therefore, for the accuracy of our analysis, we will estimate the
rate of labor in formal sector in two scenerios: (1) this rate will remain unchange over time and
(2) increase with the average speed of 0.34% annually.
1

The 1/4/2013 time - point population change and family planning survey - Major findings- General Statistics
Office of Vietnam
2
Population Pyramid of the world 1950 - 2100, Vietnam: http://populationpyramid.net/viet-nam/2045/
3
The distributive impact of Vietnam's accession to the WTO article,
http://www.cairn.info/zen.php?ID_ARTICLE=ECOI_118_0043

With the predicted number of population in the future and the estimated portion of labor in
formal sector, we could find out the number of treated people for our analysis.
4.4.2. Average salary for workers in the extended retirement age:

Average salary for workers in the extended retirement age in 2009-2013

We could access to average salary for workers in the labor force in Report on labor force survey
2013, General Statistics Office of Vietnam. However, the average salary in the labor force
overall cannot reflect the salary of workers in the extended retirement age. The older workers
tend to have more experience and earn more than younger cohorts. Therefore, workers at the end
of their career life are expected to earn more than the labor forces average salary. We,
unfortunately, do not have data on the distribution of salary across age groups. To solve this
problem, we use the labor experience and average salary increase rate to calculate the average
salary on different age group. The average salary increase rate is the average number of salary
increase rate in the last 3 years by Vietnam Total Reward Survey Report. So the average
salary at age groups i (e.g. i = 0 of age group 15-20, i=1 for age group of 21-25 and so on) in
year x is expressed by this formula:
Six

[0,11]

= 0 (1 + )

Where is the salary in year x of age group i, 0 is the average starting salary for workers, g is
the average salary growth rate, is the average experience of age group i.
To estimate the average experience for each group, we use labor participation rate across age
groups. We observed the participation rate across age groups in Report on labor force survey
in five years from 2009 to 2013 and this rate is stable over time (Graph 1). Therefore, we get this
ratio as the constant term for our measurement. The average experience of a certain age group is
the difference between their group age and the average age that this group joins the labor
participation. Demographically, the age that a worker joins the labor force varies from 15 to 25
years old. The explanation for this fact is that some people go to work right after their
compulsory secondary school and some continue to pursue higher study and join labor force later
than their cohorts.

100%
80%
60%
Female

40%

Male

20%
0%

Graph 1: Labor Participation by age group

(Source: Report on labor survey, General Statistics Office of Vietnam 2009 - 2013)
For more of the calculation, see Appendix A.

The growth rate of average salary for treated people:

In order to estimate the average salary for people in effect in the future, we need to have an
average growth rate of salary over time to be the multiplier for our estimate. In order to do that,
we look at the trend of real average salary for treated people in the last 5 years. Then we compare
this trend to the trend of real GNI per capita4 which is considered to be the representative for
salary.
The data shows us a sharp increase both in the norminal average salary for treated people and
norminal GNI per capita from 2009 2013. However, during this period, Vietnam has faced a
high inflation rate. Therefore, after adjusting the inflation rate, these two indices fluctuate around
the starting number in 2009 leading to the growth rate of salary is approximately zero in this
period (Graph 2).

World Bank, GNI per capita, Atlas method, http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

120%
110%
100%

Salary for treated

female

90%
80%

Salary for treated

male

70%

Real GNI per capita

60%
50%
2009

2010

2011

2012

2013

Graph 2: The trend of real average salary and GNI per capita 2009 2013
(Source: World Bank Development Indicators, our estimate)
For these evidence that we have colleted, we assume that the average salary is stable over time.
4.2.3. Data summary and estimate coefficient:
Here is the summary of some basic indices that we would use in our estimate. Besides, we set up
two scenerios for ratio of labour in formal sector. As mentioned above, in scenerio one, we will
assume that this ratio is constant over time and grow over time in the other case. Therefore, our
result will give a range of the pension changes responding to these scenerios.
Table 1: Data summary and annual growth rate of index
Female(55-59)

Male (60-65)

Estimated growth rate

in 2013

In 2013

per year
Min

Average salary per year (million 40,561

Max

48,904

VND)
Ratio of labour in formal sector

71.4%

80.7%

0%

0.34%

Labour participation

75%

72%

% Retirement pension/salary

75%

75%

% Social pension fee/salary

8%

8%

4. Result
Table 2 and table 3 indicate the estimated changes in pension tax, pension payment and net
pension liabilities in 2030 and 2045. In general, if extended retirement age policy was
implemented by the end of 2015 as planned by the government, it would impact significantly on
the pension fund, leading to financial stability over time and, in addition, this boost in net
pension liabilities is mostly due to cash pension payment saved (90%), rather than from the cash
pension tax received from the treated people.
In case of minimum pension gains, it is forecasted that the net pension liabilities will increase
considerable by 117 billion VND, with approximately 57 billion VND and 60 billion VND being
come from Male aged 60-65 and Female aged 55-60, respectively by 2030. Moreover, this net
pension liability is expected to witness a far more impressive growth to nearly 150 billion VND
after 30 year till 2045. When it comes to maximum pension gains, due to the larger forecasted
number of both male and female affected by the policy, all pension tax, pension payment and
pension liability are forecasted to larger than those in minimum pension gains. By 2030, for
instance, total expected pension payment in maximum pension gains will be approximately 114
billion VND, comparing to 105 billion VND in minimum pension gains. This results in expected
pension liability of about 126 billion, about 9 billion VND higher than this figure in minimum
pension gains. Similarly, 170 billion VND will be the pension liability expected by 2045, in
comparison of only 150 billion in minimum pension gains.

5. Conclusion:
In conclusion, it is clear that the extended retirement age policy lead to financial stability in
government pension fund in 2030 and 2045 at significant rate, based on some different
assumptions on average salary of treated people and demographic changes by gender and agegroups.
However, our estimate has a strong assumption that the economy will happen in the same path as
the last 5 years. The past data is quite short due to a shock of international integration leading to
a dramatic change in Vietnam economy. Therefore, we can only use the data in a short period to
eliminate noise in our estimate. So if any deviation from this economic path will lead to an
increase in the average salary per year and the effect of net social pension liability will be larger.

An extension to this issue is that we could consult the growth path of other developing countries
(e.g. China) to set a model for Vietnam growth path in the next 30 years. Moreover, our essay
only looks at the impact of this reform on the pension fund. There would be some social impacts
in different age groups of this policy that are source for further research. However, in the scope
of this 10-page essay, we choose this approach to shortly examine the impact of the reform and
give a suggestion for policy makers.

Table 2: Expected changes in net pension liability by 2030

2030
Min

Max

Female

Male

Female

Male

1,692,716

1,476,423

1,829,745

1,582,169

Pension tax (VND)

5,492,658,789

5,776,237,604

5,937,302,586

6,189,950,797

Pension payments (VND)

51,493,676,147

54152227542

55,662,211,746

58,030,788,720

Number of treated people (person)

Net Pension liability (VND)

116,914,800,082

125,820,253,849
Source: Estimation of authors

Table 3: Expected changes in net pension liability by 2045

2045
Min

Max

Female

Male

Female

Male

2,126,470

1,909,878

2,450,504

2,167,368

Pension tax (VND)

6,900,141,744

7,472,055,492

7,951,591,891

8,479,440,459

Pension payments (VND)

64,688,828,845

70,050,520,240

74,546,173,983

79,494,754,305

Number of treated people (person)

Net Pension liability (VND)

149,111,546,321

170,471,960,639
Source: Estimation of authors

Bibliography
1. Paul van den Noord and Richard Herd (1993): Pension Liabilities in the Seven Major
Economies
2. John Bongaarts (2004) : Population Aging and the Rising Cost of Public Pensions,
Population and Development Review 30(1), 1-23
3. Leibfritz et al (1995): Ageing populations, pension systems and government budgets:
How do they affecting saving, OECD studies
4. OECD. 1998. Maintaining Prosperity in an Ageing Society. Paris: OECD Publications.
5. World Bank. 1994. Averting the Old-age Crisis: Policies to Protect the Old and Promote
Growth, Oxford: Oxford University Press.
6. Lawson et al (2012): What works for the poorest, Oxford Publisher
7. World Bank Development Indicator 2015
8. International Labor Organization dataset 2015

APPENDIX A AVERAGE SALARY DISTRIBUTION OVER THE AGE

The average salary of the labor force is:
x

S x = 11
i=0 Si pi

(1)

Where Six is the average salary at the range age i in year x (i.e. i=0 for the range age from 15-19,
i=1 for the range age from 20-24 etc.), pi is the percentage of labor participation at age i over
the whole labor force. The data shows us the average salary of the labor force
S x , the labor
participation at age i pi , the average salary raise per year g.
Labour salary from work increases at the speed g (the average salary raise per year) for each
experienced year. Therefore, the average salary at the range age i in year x is:
Six = S0 (1 + g exi )

(2)

with S0 is the average starting salary for a fresh employee and exi is the experience that person
has.
The experience at range age i exi is measured in the following way. Demographically, the
starting age that people in the working age join the labor force is between 15-25. The explanation
for the variation of the join time because some portions pursue higher study and spend more time
at school and join the labor force later than the other cohorts. The percentage of labor
participation by age and gender is stable through time and had the value as Graph 1.
With the assumption that people join the labor force and will stay there, the working experience
at the range age i is effected by the labour participation time:
exi = ij=0(Start j ) 5 (j 1)

(3)

Where start i is the ratio of new labor participation of the range age i. For example, 40% of
people in the range age i=0 (15-19 years old) start working, therefore, 5 years after, this group is
at age group i=2 (20-25 years old), this 40% participate continues to work and has 5 years
experience in the labor market. At the same time, the labor market also receives new
participation of their age cohorts and these new participation get 0 year experience. Therefore,

the average of experience of this age group after 5 years will be ex2 = 40% 5 + (40%) 5
0 = 2 years. This calculation will give us the value of exi in each age group.
We then substitute the value of Six dependent on S0 to equation (1) given value of
S x and pi to get
the value of S0 . Then, we could substitute back to equation (2) to get the average salary for each
age group.