Social Protection and Labor Markets in Vietnam

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Mildred Eaton
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1 Social Protection and Labor Markets in Vietnam Martin Rama The World Bank Commission on Growth and Development Labor Markets and Growth Washington DC, October 15, 2007

2 An Ambitious Strategy Towards universal health insurance coverage (Originally, by 2010; now with no target date) A similar approach emerging for pensions (First-ever Social Insurance Law in 2006) But Vietnam is still a poor rural country (GDP per capita: $725; urban population: 27%)

3 Building on a Trajectory of Inclusive Development Poverty rate Gini coefficient

4 All amidst Dramatic Economic Transformations Introduction of market mechanisms in health Government decentralization Rapid urbanization Expansion of wage employment

5 Leading to Widening Inequalities in Health Cost (% of expenditure) Hospital contacts (per year) Poorest Near poorest Middle Near richest Richest Poorest Near poorest Middle Near richest Richest

6 and to Massive Geographical and Occupational Mobility About one million people migrate to urban areas every year Inactive Active Employed Government State enterprises Private sector Non-farm self-employment Farmers Unemployed Source: Vietnam Development Report 2006: Business, Hanoi: The World Bank, Based on household survey data.

7 The Health Model: One Program, Multiple Entries Health Insurance Program Subsidized (Poor and targeted) Voluntary (Informal sector) Compulsory (Formal sector)

8 Pensions: A More Incomplete Picture Old age Pension Program Subsidized (Not established) Voluntary (Since 2008) Portable? Compulsory (Since 1995)

9 Coverage is Expanding Rapidly M illio n p ersons Health Insurance M illion persons Pensions Compulsory Targeted Voluntary Note: The total population of Vietnam is about 82 million, and there are probably less than 15 million wage earners.

10 Health: A Change in Financing Mechanisms Premium Households VSS Households Out of pocket payments Subsidy Refund Copayments Government Budget transfers Healthcare providers Government Budget transfers Healthcare providers

11 but the Actual Change in Funding is Limited for Now Funding sources for hospitals in 2005: Government budget: 42 % User fees by patients: 36 % Health insurance: 16 % Miscellaneous sources: 6 %

12 Pensions: A Financially Sustainable System Ratio of Contributors to Beneficiaries % 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Annual Balance of the Pension System In percent of GDP Current regulations Public and private pension rights merging Public and private pension rights merging and contribution rate increase Source: Comments on the Draft of the New Social Insurance Law, unpublished manuscript, Hanoi: The World Bank, The right figure assumes that real income per capita grows by 6 percent per year and consumer prices by 3.5 percent per year.

13 but Indexation Rules Will Lead to Low Benefits Average Pension versus Average Salary 100% 80% 60% 40% 20% 0% Public draft law Private draft law Source: Comments on the Draft of the New Social Insurance Law, unpublished manuscript, Hanoi: The World Bank, It is assumed that real income per capita grows by 6 percent per year and consumer prices by 3.5 percent per year.

14 Weak Design for Benefits and Provider Payments in Health Demand for health services not well known (and how will it respond to health insurance coverage?) Cost of health services not properly assessed (current cost schedules are partial and outdated) What to do with catastrophic shocks? (an issue when health insurance coverage is not universal)

15 Weak Incentives to Contribute towards Pension Pension as Percentage of Salary at Retirement Age (Current Formula) 60% 60% 55% 55% 50% 50% 45% 45% 40% 40% 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% Years of Contribution 10% Years of Contribution Actuarial High case Public Private Actuarial High case Public Private Men Women Source: Comments on the Draft of the New Social Insurance Law, unpublished manuscript, Hanoi: The World Bank, The left panel corresponds to a man retiring at age 60 and living until age 78, assuming that the growth rate of real wages is 6 percent and the inflation rate is 3.5 percent. Both the actuarial benchmark and the return on the lumpsum for workers retiring with less than 20 years of contributions are computed assuming a four percent real return rate. The right panel is for a woman retiring at age 55 and living until age 80.

16 Voluntariness in Health: Adverse Selection Admission rates and cost for selected groups Inpatient care Outpatient care Source: Preliminary data from Ministry of Health Cost per card (000 VND) Compulsory Formal sector workers Meritorious groups and elderly Pensioners Poor Voluntary Students Non-students

17 Voluntariness in Health: Insufficient Participation Participation by the near-poor depending on the cost of the card Participation rate Urban Rural (000 VND) Source: Nguyen Viet Cuong at. al. (2007): Survey on Willingness to Pay for Voluntary Health Insurance in Vietnam, unpublished manuscript, Hanoi.

18 Voluntariness in Pensions: Insufficient Participation Interested (% of informal sector) Subsidy (% of contribution) Source: Sarah Bales and Paulette Castel (2005): Survey on Voluntary Social Insurance for the Informal Sector in Vietnam (VSIIS): Policy implications, unpublished manuscript, Hanoi.

19 The Cost of Covering the Poor: Health US$ m Children under 6 Near-poor Poor Source: World Bank estimates assuming full subsidization of the poor, a 50 percent subsidy for near-poor, and a contribution rate based on poverty line.

20 The Cost of Covering the Poor: Pensions Poor household heads: 2.8 million Near-poor household heads: 2.8 million Full subsidy for the poor; 50% subsidy for the near-poor Initial participation rate by the near poor: 50% Pension level at poverty line Return on contributions: 4% per year Average contribution: $ 26 per year ($13 for near-poor) Total cost: $ 90 million per year Poverty reduction will decrease the target population but aging will increase the average contribution

21 Balancing the Books: the Contribution Rate A temptation to raise the contribution rate to ensure financial sustainability. But: A high contribution rate will slow down job creation and the formalization of employment Especially as minimum wage for domestic firms will be raised to match FDI minimum wage And questionable attempts to expand personal income tax will further increase labor costs

22 Balancing the Books: Managing Pension Reserves With a young and formalizing population, the annual balance of the pension system will be large 6% 5% 4% 3% 2% 1% 0% -1% in percent of GDP No State subsidies finance pensions paid to the pre 1995 retirees Source: Comments on the Draft of the New Social Insurance Law, unpublished manuscript, Hanoi: The World Bank, It is assumed that real income per capita grows by 6 percent per year and consumer prices by 3.5 percent per year..

23 Further Reforms: Health Better cost health care services, and understand how demand evolves and reacts to cost Certify health care providers (public, private and non-profit) and negotiate wholesale with them Shift from fee-for-service to case-base payments to providers, to encourage efficiency gains Encourage (financially) mass organizations to promote group insurance, to better pool risk Implement systematic user feedback on the delivery of health services (Decree 43)

24 Further Reforms: Pensions Bring pension benefits closer to the actuarial benchmark (based on return on contributions) Introduce proper indexation to prices (not to minimum wages) of contributions and benefits Reduce the gap between population groups (public versus private, men versus women) Strengthen the capacity of the system to manage and invest its reserves Consider the subsidization of contributions by the poor (total?) and the near-poor (partial)

25 Universal Programs Need a Universal Social Insurance Number Many among the poor are denied health care for not having proof of coverage Health care and other benefits are only provided in the locality where a person is registered Assessing the demand for health services and their cost requires good records of their use Contributions need to be portable as workers migrate, change jobs and formalize Track record of contributions will help move pension benefits closer to actuarial benchmark

26 Currently, Multiple Information Systems Overlap HOUSEHOLD Poor household certificate (all) Health insurance card (individual) Social insurance book (individual) Access to targeted benefits (e.g. school) but only in the same locality Access to health services but only if the card is recognized Entitlement to old-age pension but no real information system

27 Towards a Single Social Insurance Number HOUSEHOLD Social insurance number (individual) Access to targeted benefits Access to health services Entitlement to old-age pension Nation-wide Electronic verification and reporting of services and cost Electronic access to individual history of contributions and benefits Easy to match with other information systems (tax, budget)

28 Linking all the Government Levels and Agencies Involved Social insurance number 4. Reports poor household status to local VSS branch (annually) 1. Issues SS number (for life) 5. Updates poverty status (annually) Local authorities Provincial governments Central government VSS 3. Sets the number of subsidized participants (annually) 2. Informs budget allocation for subsidies (annually)

VIETNAM: SOCIAL HEALTH INSURANCE: CURRENT ISSUES AND POLICY RECOMMENDATIONS

SERIES: SOCIAL SECURITY EXTENSION INITATIVES IN EAST ASIA VIETNAM: SOCIAL HEALTH INSURANCE: CURRENT ISSUES AND POLICY RECOMMENDATIONS ILO Subregional Office for East Asia Decent Work for All Asian Decent