Transcript Criteria for Pension Reform in Thailand

Criteria for Evaluating Social
Security Systems in Thailand
By
Estelle James
How should we evaluate social
security systems?
• Is it sustainable? System should be able to
pay promised benefits for at least 75 years-the future lifetime of young workers today
• Is it equitable--are contributions, benefits
and risk distributed fairly?
• Is it good for broader economy?
• Now I will talk about economic growth and
distribution; later today about sustainability
Populations Are Aging
• By 2030 the proportion of the world’s
population that is > 60 will nearly double,
from 9% to 16%
• Developing countries are aging fastest of all
• And the family system of old age support is
breaking down, due to urbanization, etc.
• In Thailand % > 60 is 7.4% today, will be
18% in 2030
Percentage of the Population Over 60 Years Old,
by Region, 1990 and 2030
1990
OECD countries
2030
Transitional Socialist Economies
China
Latin America and the Caribbean
Asia (excluding China)
North Africa and the Middle East
Subsaharan Africa
WORLD
0
10
20
30
Percentage of population over 60
When Populations Age, Public
Pension Spending Increases
• Many industrialized countries now spend
more than 10% of their GDP on pensions
• Public spending on health and pensions now
exceed 20% of GDP in some countries
• Thailand: Little pension spending now but
this will escalate sharply in 21st century.
How much and in what form depends on
policies you choose now
Relationship Between Percentage of the Population
over 60 Years Old and Public Pension Spending
Pension spending as
percentage of GDP
16
Austria
Italy
Poland
Luxembourg
12
Greece
France
Sweden
Uruguay
U.K.
8
Panama
U.S.
Costa Rica
4
Israel
Japan
Australia
China
0
Jamaica
5
10
15
Percentage of population over 60 years old
20
With such large sums, social security
affects entire economy. It influences:
• Peoples’ incentive to work (espec. near retirement)
• Employers’ willingness to hire labor
• Labor allocation between formal-informal sectors
• Level of national saving and its allocation
• Financial market development
• Government’s fiscal position
• Therefore, the quantity and productivity of
labor and capital and level of GNP
• We should choose an old age security system that
increases size of the pie--good for old and young
Impact of payroll tax on
employment and wages
• If employers bear tax, this raises labor costs,
lowers competitiveness, employment, output:
employers less willing to hire
• If workers bear tax in form of lower takehome pay: less willing to work, exert effort
• May shift labor to informal sector--lower
productivity--in developing economies
• Distortions increase exponentially with tax
Impact on employment (cont’d)
• Payroll tax ranges from < 5% in many Asian
countries to 35% or more in Singapore,
some European countries (UnE)
• Old age security likely to cost 10-15% in
well run system in long run
• Payroll tax in Thailand now < 5% but will >
25% in your lifetime under current policies
• Important to choose system that provides
benefits at lowest possible payroll tax and
avoids peak rates--rationale for pre-funding
Impact on work--retirement age
• Workers retire early if can receive benefits
without penalty (Gruber-Wise)
• Yet, many systems permit early retirement
without actuarially fair decrease in pension (6-7%
decrease per year of early retirement)
• Longevity increases require periodic hikes in
retirement age--but politically difficult
• So experienced labor supply declines; less
productivity and output
• Thailand--early retirement (55), no penalty, and
no reward to postponing benefits
• Important to choose system that encourages
continued work--rationale for DC plan
Impact on national saving
• New PAYG system decreases national saving
– due to increased consumption of first
generation covered and expectation that
government will pay on-going benefits
• Mandatory pre-funding can increase saving
– builds up fund of investable resources,
providing not offset by decrease in voluntary
savings or increase in public dissaving (deficits)
• This is an issue in Thailand, where household
saving has been falling, capital is needed
Impact on capital productivity
• More important, pension funds shift type of
saving--committed for long term--can be used
for equity investment, venture capital,
infrastructure, long term government debt
• Productivity of savings depends on how funds
are managed and allocated--rationale for
private management with regulation
• Thailand: how will funds in GPF and new DB
plan maximize productivity?
Impact on financial market
development
• Privately managed funds stimulate stock
markets, secondary bond markets, new
financial instruments, credit rating
agencies, info disclosure (Chile, OECD).
• Aid in corporate governance, minority
rights, accountability--if regulated to avoid
conflicts of interest
• Thailand: financial market development
important--synergy with pension reform
Impact on government’s fiscal position
• Pension deficits may lead to general
revenue finance, less money for important
public goods
• May induce inflationary deficit finance
• Deficits can be avoided by planning and
prefunding; prefunding also permits long
term funding of debt
Impact on income distribution-intra- and inter-generational
• Many people think social security should avoid
old age poverty and redistribute to low earners-but many DB plans don’t do this
• In PAYG schemes largest redistribution is to first
generations covered, future generations lose
• Reduced savings, capital hurts future generations
• Thailand: in new DB scheme redistribution goes
to high earners, first cohorts of retirees. But noncontributory means-tested pension is targeted to
rural poor. What redistribution do you want?
Conclusion
• Important to choose system that
– is sustainable so promises can be kept,
– distributes tax burden and benefits fairly
– maximizes size of GNP pie
• Pre-funding, defined contribution, good
fund management and social safety net help
to satisfy these criteria. In next few days we
will discuss how.