OIT - The future of social insurance in Viet Nam - Policy options and recommendations

The future of social insurance in Viet Nam: Policy options and recommendations Suported by ILO/Japan Multi-bilateral ProgrammeThe future of social insurance in Viet Nam: Policy options and recommendations Andre Gama, Charles Knox-Vydmanov, Nguyen Hai Dat© International Labour Organization 2025. First published 2025.

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ISBN: 9789220427224 (print); 9789220427231 (web PDF) DOI: https://doi.org/10.54394/NLRW4215

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Photos: ©ILO Printed in Viet Nam2 The future of social insurance in Viet Nam: Policy options and recommendations

Contents

1. Introduction

2. Coverage

a. Expanding legal coverage b. Providing financial incentives c. Management, administration and communication

3. Lump-sum withdrawals

4. Child benefits

5. Old-age pensions

a. Multi-tier pension system models b. Integrating the social pension under the social insurance system c. Pension level adequacy d. Care credits

6. Conclusion References Legislation and international labour standards

4 5 5 6 6 8 10 12 12 13 14 14 15 17 173The future of social insurance in Viet Nam: Policy options and recommendations Acknowledgements The report was prepared by André Gama, ILO Social Protection Programme Manager for Viet Nam, Nguyen Hai Dat, ILO National Programme Coordinator for Social Protection in Viet Nam and Charles Knox-Vydmanov ILO's consultant. The authors wish to thank Nuno Cunha and Markus Ruck, Senior Technical Specialists on Social Protection for the ILO Decent Work Technical Support Team for East and South-East Asia and the Pacific, for their technical comments and overall guidance in the development and finalization of this report. The authors would also like to express their appreciation to the Social Security Department of the Ministry of Labour, Invalids and Social Affairs (MOLISA), the Viet Nam General Confederation of Labour, and the Viet Nam Chamber of Commerce and Industry for their valuable inputs and collaboration throughout the research process. Special mention should also be made of Ngo Thi Hoang Lam and Tran Thanh Tu for their administrative support. Finally, the authors gratefully acknowledge the generous financial support provided by the Government of Japan and the Government of Ireland, which made this research possible. This report was developed to support the revision of the Social Insurance Law 2014. Its analysis did not take into account the provisions of the Social Insurance Law 2024, and was based on the government and administrative structure in Viet Nam as of December 2023. It therefore does not reflect subsequent changes in the configuration of ministries and provinces.The future of social insurance in Viet Nam: Policy options and recommendations4

take into account the provisions of the Social Insurance Law 2024, and was based on the government and administrative structure in Viet Nam as of December 2023. It therefore does not reflect subsequent changes in the configuration of ministries and provinces.The future of social insurance in Viet Nam: Policy options and recommendations4 1 VSS data, https://baohiemxahoi.gov.vn/tintuc/Pages/hoat-dong-he-thong-bao-hiem-xa-hoi.aspx?ItemID=20122&CateID=0 Viet Nam has made important progress in strengthening its social insurance system in recent years. Coverage of the scheme has increased substantially from around 23 per cent of the working labour force in 2015 to 38 per cent in 2022 1. The scheme covers a relatively wide set of contingencies with good levels of benefit adequacy for many participants. The Government of Viet Nam has also been proactive in advancing both policy and administrative reforms towards the continued improvement of the system. The Government of Viet Nam has set out a broad and ambitious agenda for further enhancement of the social insurance scheme, and adaptation to changing circumstances. These are captured in Resolution 28-NQ/TW, which sets out key ambitions with a focus on social insurance for all. The key reforms priorities are: • building the multi-tiered pension system; • expanding mandatory insurance; • increase integration of policies for expanding the coverage; • stricter rules on the withdrawal of lump-sum benefits; • some parameter reform; and • administration and management reforms. This report provides a summary of key recommendations from ILO analysis for the purpose of supporting the ongoing revision of the social insurance law. This draws on an array of ILO studies and analytical work conducted in recent years. Given the focus is the social insurance law (rather than the wider social insurance system) the report does not cover social health insurance and unemployment insurance. Four key areas are discussed based on areas of in depth ILO research in Viet Nam: coverage, lump-sum withdrawals, child benefit and building a multi-tier pension system. Each section describes both the context and challenges for each topic, and key strategies to address

unemployment insurance. Four key areas are discussed based on areas of in depth ILO research in Viet Nam: coverage, lump-sum withdrawals, child benefit and building a multi-tier pension system. Each section describes both the context and challenges for each topic, and key strategies to address them. A short final section also lists a broader set of additional topics for future consideration and analysis. These recommendations are meant to inform both ongoing and future policy discussions and reforms. 1 Introduction5The future of social insurance in Viet Nam: Policy options and recommendations 2 The definition of Social Insurance considered under this report follows International Labour Standards, as the set of social security benefits financed through workers and employers contributions, and it does not differ significantly from Social Insurance as understood in Viet Nam. 3 In the Vietnamese context, compulsory social insurance refers to the social insurance system to which certain categories of workers must participate according to the social insurance law, whilst voluntary social insurance pertains to a parallel social insurance system, with different levels of contributions and contingencies covered, which is open to all workers who are not eligible to participate in the compulsory system. Ensuring the effective coverage of social insurance reaches its full potential means addressing the various barriers that workers and enterprises face to participate2. These can be grouped into: • Legal barriers: There are workers and enterprises who have the capacity to participate in compulsory social insurance schemes, but are not legally covered (such as workers in household businesses or domestic workers). • Financial barriers: For many uninsured workers, making contributions to the social insurance system would have a prohibitive impact on household welfare. For MSMEs, social insurance contributions can be a significant labour cost, which partly explains low levels of participation. • Administrative barriers: Many enterprises and workers (especially MSMEs and the self-employed) lack capacity to navigate often complicated administrative procedures. Resolution 28-NQ/TW rightly recognizes that extending coverage of compulsory social insurance is at the core of efforts to extend coverage 3. While a sizable portion of uninsured workers will not be in a position to contribute in the near future due to limited contributory capacity an important portion of the uninsured have (or are close to having) capacity to participate. Efforts to maximise the potential

is at the core of efforts to extend coverage 3. While a sizable portion of uninsured workers will not be in a position to contribute in the near future due to limited contributory capacity an important portion of the uninsured have (or are close to having) capacity to participate. Efforts to maximise the potential coverage of social insurance are best focused at creating the conditions for these workers and enterprises to participate. International experience shows that this is best achieved through extending legal and effective coverage of compulsory insurance. This is also reflected in the experience of health insurance in Viet Nam, where significant expansion of coverage has been achieved by expanding compulsory insurance, combined with subsidised premiums for some groups of workers. While the voluntary social insurance scheme can provide an important complement to efforts to extend coverage, it is likely to be relatively marginal to the bigger task of coverage expansion in terms of size. a. Expanding legal coverage Recognizing the principle of universal social protection, a key priority for expanded coverage of the compulsory scheme is to increase legal coverage to groups of workers with capacity to participate, but which are currently excluded. These include (but are not limited to): • workers with multiple employers (e.g. construction workers); • part-time workers; • workers under flexible working-hour contracts; • household business owners; 2 Coverage6 The future of social insurance in Viet Nam: Policy options and recommendations • domestic workers; • non-wage managers of enterprises and cooperatives; and • self-employed (e.g. those in the platform economy). Expanded legal coverage would be best achieved through a gradual process that allows social insurance administrators, enterprises and workers to adjust to any changes. There is also a case that expanded legal coverage should not be solely based on the social insurance law, given that this is only revised infrequently. Expanded legal coverage should also be integrated with other non-social insurance policies, such as those relating to formalisation and economic expansion (e.g simplified business registration procedures). Furthermore, attention should be given to how the Labour Code evolves in its definition of workers and employees, as further changes can alter which workers are considered for instance as wage employees, and thus be eligible to participate in compulsory social

insurance policies, such as those relating to formalisation and economic expansion (e.g simplified business registration procedures). Furthermore, attention should be given to how the Labour Code evolves in its definition of workers and employees, as further changes can alter which workers are considered for instance as wage employees, and thus be eligible to participate in compulsory social insurance (for example, gig economy workers). b. Providing financial incentives Given the significant share of workers and employers which might struggle to meet the current contribution rates of the social insurance system, it is important to explore ways to provide them with sufficient support to ensure they still join and remain in the social insurance system. Such financial incentives can be designed to ensure that workers and enterprises close to the level of contributory capacity required to participate are able to contribute while limiting the negative consequences for household welfare and enterprise development. There are two broad approaches to achieve this: • On the contribution side, subsidized contribution regimes can be put in place for certain categories of workers and/or enterprises, an approach which is common in compulsory social insurance schemes around the world. In Viet Nam, this approach already exists in the social health insurance scheme where contributions of different groups of workers are either partially or fully subsidised. Designing subsidies requires care to ensure that this does not incentivize certain type of enterprise and employment arrangements which result in lower employment rights and protections. • On the benefit side, a strengthening of short-term benefits can offset the level of contribution paid by workers, which can reduce or eliminate the impacts on household welfare and provide greater incentives to participate. An example of this approach is the introduction of a child benefit discussed in Section 4. c. Management, administration and communication Extension of social insurance coverage should be considered part of an overarching government strategy towards formalisation of the labour market. As part of this, simplifying administrative procedures and clearly communicating key information about the system to a wide range of stakeholders can facilitate the participation of MSMEs and self-employed workers in the system. Key areas of management and administration for coverage extension include:7The future of social insurance in Viet Nam: Policy options and recommendations

procedures and clearly communicating key information about the system to a wide range of stakeholders can facilitate the participation of MSMEs and self-employed workers in the system. Key areas of management and administration for coverage extension include:7The future of social insurance in Viet Nam: Policy options and recommendations • Enforcement is key to increasing effective coverage of those legally covered by the compulsory scheme. Important areas include greater investment in specialized labour inspection for social insurance (including capacity building of inspectors) and better coordination with judicial authorities on matters that go beyond the scope of the law. Enforcement will also be supported by a strengthened framework defining what counts as evasion and the penalties that apply to different cases. • Communication is important for improving understanding of the current social insurance system which, in turn, can create greater trust. It is key to communicate the rationale and intended outcomes of reforms, in order to make workers and employers more comfortable in accepting these changes, and increase compliance with the parameters set forth by the law. This can be supported by making linkages across government, such as: • Connecting government databases – such as tax and business registration – so that information can easily be shared and verified across government. • Actively combining government processes. For example, tax and social insurance contributions can be made as a single payment, as is the case with the monotax approach found in Latin America, which also includes financial incentives (ILO 2014). Similarly, registration for social insurance can be combined with processes of business registration – an approach which is being pursued in Cambodia. © ILO8 The future of social insurance in Viet Nam: Policy options and recommendations 4 For example, the 2014 Social Insurance Law completely removed the option of lump-sum withdrawals after discontinued payment. In Viet Nam, a significant number of workers take the option to make a lump-sum withdrawal after one year of discontinued social insurance contribution throughout their careers. Between 2016 and 2021, the number of workers who took a lump-sum payment from social insurance exceeded the number of newly retired workers starting to receive a retirement pension across the same period. They are mainly taken early in workers’ careers and are more likely to be taken by women. More than

2021, the number of workers who took a lump-sum payment from social insurance exceeded the number of newly retired workers starting to receive a retirement pension across the same period. They are mainly taken early in workers’ careers and are more likely to be taken by women. More than two thirds (69 per cent) of termination lump-sums taken out in 2019 were received by women under the age of 35 (ILO and World Bank 2023). This trend creates a number of issues for the social insurance system: • Reducing pension coverage and adequacy: Fewer years of contributions means workers are less likely to reach the minimum required for a pension and – if they do – will receive less. • Limited protection from short-term risks: Workers often make withdrawals to manage events such as job loss, childbirth and raising children. Such life events (or contingencies) would be better managed by strengthening short-term benefits provided by the social insurance system. • Financial sustainability: The unpredictable nature of the number of people accessing lump-sum payments each year in Viet Nam lowers the confidence of the actuarial estimations on performance and financial sustainability. • Reducing the redistributive and solidarity capacity of the system: allowing workers to withdraw the totality of their social insurance contributions (and employers’) at any point of their careers – a feature very unique to the Vietnamese social insurance system – leaves the system less equipped to perform its role as provider of protection across the labour market, severely limiting its solidarity nature as workers start seeing and using social insurance more as a personal bank account of sorts, and less then as a mechanism to pool contributions among all workers to provide support to those in need in face of the different contingencies faced through their lives. Given this context, it is important that policy priority is given to reducing the share of total social insurance contributions workers can access via lump-sum payments. As a compliment, waiting periods to access withdrawals could also be increased to reduce incentives for workers to leave the social insurance system, although these are expected to have less impact in the number of lump-sum withdrawals than reducing the share of contributions workers can take out as lump-sum payments. However, reform of lump-sum withdrawals will likely require a delicate process that combines

social insurance system, although these are expected to have less impact in the number of lump-sum withdrawals than reducing the share of contributions workers can take out as lump-sum payments. However, reform of lump-sum withdrawals will likely require a delicate process that combines gradual introduction of limits on withdrawals with strengthened short-term benefits (e.g. child benefits discussed in Section 4). Previous efforts to limit access to lump-sum withdrawals have met with significant opposition from workers. This is likely linked to both the speed and magnitude of reforms 4, the low levels of trust in the system, and the lack of alternative forms of support provided. More gradual approaches that combine both greater incentives and stronger enforcement are likely to be more feasible. 3 Lump-sum withdrawals9The future of social insurance in Viet Nam: Policy options and recommendations A gradual approach would involve incrementally reducing the option and incentives to withdraw lump-sums, while avoiding an abrupt change in policy. As an example, each year the share of contributions workers can withdraw could be reduced by ten per cent. This can be seen as an acceptable change as, even after five years, workers still can withdraw the majority (50 per cent) of their contributions in case of need. The remaining contributions would be retained in the system and paid to workers as a retirement pension upon retirement age, thus also improving their old-age income security. These gradual approaches would have the added benefit of avoiding the risk of creating a mass wave of lump-sum withdrawals the year before any changes come into effect, as the year-by-year change would be the same. © ILOThe future of social insurance in Viet Nam: Policy options and recommendations10 There is a strong case for strengthening the role of the social protection system in protecting families with children. The birth of a child and raising them to adulthood constitutes a significant cost for families in Vietnam. Supporting families with children can help them manage these costs, and also support them to make investments which have significant positive implications for society and the economy. Despite this important role, child/family benefits is the only contingency uncovered by the social insurance system and – as a whole – families with children are one of the least likely groups to

support them to make investments which have significant positive implications for society and the economy. Despite this important role, child/family benefits is the only contingency uncovered by the social insurance system and – as a whole – families with children are one of the least likely groups to benefit from social protection in Viet Nam (Dat and Gama 2022; McClanahan and Gelders 2019). The aim of a child benefit is to provide assistance to families in meeting the costs of raising children, thereby minimizing childhood disadvantage associated with wide disparities in household incomes. Child benefits also seek to optimize societal investment in children, recognizing that it is in the public interest that children are healthy and well-educated while, in the absence of child benefits, the costs of achieving this would otherwise fall completely on individual families. Child benefits – which also include cash or in-kind childcare assistance – may also partially compensate families for the opportunity costs of caring for children. Child benefits can also play an important role in incentivizing workers to contribute to social insurance. A child benefit providing monthly benefits for children of active contributors to social insurance would reduce the weight of contributions on families’ net income. Specifically, analysis has found that a child benefit would turn a welfare loss of 8.2 per cent for all working parents from contributing to social insurance, into an average net gain of 3.8 per cent of household income per capita. Given that 44 per cent of uninsured workers have children, this could play a significant role in incentivising extended coverage (McClanahan, Gelders, and Ramírez López 2019). Introducing a child benefit within the compulsory social insurance scheme would entail a flat-rate benefit being paid for each child (within a defined age range) of active contributors. Ideally, this benefit would form part of a multi-tiered system of child benefits including a non-contributory component for those outside the social insurance scheme (See Box 1). While various options exist for the benefit level of a child benefit, analysis has shown that a benefit of 350,000 Vietnamese Dong (dong) per month could cost between 0.7 per cent and 3.4 per cent of

component for those outside the social insurance scheme (See Box 1). While various options exist for the benefit level of a child benefit, analysis has shown that a benefit of 350,000 Vietnamese Dong (dong) per month could cost between 0.7 per cent and 3.4 per cent of insurable earnings depending on the age of eligibility. For a benefit indexed to inflation, these costs would fall over time in line with economic growth and demographic change. One option to gradually extend a child benefit at limited cost would be to begin at age 0-3, then increase the age of eligibility by one year each calendar year to eventually cover children 0-15. Simulations show this would entail an initial cost of 0.7 per cent of insurable earnings, gradually rising to 1.5 by 2030. 4 Child benefitsThe future of social insurance in Viet Nam: Policy options and recommendations 11 5 Assuming a benefit of 150,000 dong per month, and excluding participants in social insurance who would receive the Tier 2 benefit. Costings relate to 2020. Box 1: Multi-tier child benefits In order to be rights-based and equitable, a child benefit within the social insurance system would be accompanied by a child benefit for those not covered by social insurance. Caregivers not paying social insurance contributions would receive an adequate, guaranteed child benefit financed through general taxation (Tier 1), but those workers who enrol in Viet Nam Social Security (VSS) would be entitled to a higher rate contributory child benefit (Tier 2) (Figure 1). This difference in value would preserve the incentive to join social insurance – a key government priority. A multi-tier child benefit could be financed in different ways. If financing the social insurance child benefit fully from the fund, this would reduce expenditure on the scheme from government revenues. Costings indicate that a Tier 1 child benefit for all uninsured children aged 0-15 would cost just 0.38 per cent of Gross Domestic Product, with even lower costs if limiting the benefit to younger children (McClanahan, Gelders, and Ramírez López 2019) 5.

government revenues. Costings indicate that a Tier 1 child benefit for all uninsured children aged 0-15 would cost just 0.38 per cent of Gross Domestic Product, with even lower costs if limiting the benefit to younger children (McClanahan, Gelders, and Ramírez López 2019) 5. Alternatively, a minimum child benefit could be financed from government revenues, with only the additional social insurance supplement financed by the social insurance fund. Figure 1: A multi-tiered child benefit

Source: McClanahan and Gelders 2019

VSS membership means a higher child benefit and other higher-level benefits across the lifecycle (unemployment and maternity/paternity benefits and old age pension) Child Benefit income Poorer Richer As VSS expands tax-financed benefits reduces in coverage Contributory child benefitTax-financed child benefit Population12 The future of social insurance in Viet Nam: Policy options and recommendations 6 ILO Convention 128 (C128 - Invalidity, Old-Age and Survivors' Benefits Convention, 1967) specifies that old age pension benefits should be provided, at least, to workers who have completed a qualifying period of 15 years of contributions. Viet Nam is currently pursuing a twin track approach to expanding pension coverage and adequacy. First, coverage of social insurance pensions is being expanded by increasing the number of workers participating and by reducing the minimum years of contribution required for a pension entitlement (from 20 to 15, and then 10 years). This represents a move towards greater alignment with International Labour Standards6. Second, the coverage of the non-contributory social pension is being expanded, most notably by reducing the age of eligibility for the pensions-tested component (currently 80 years). This approach aligns with the ILO strategy of extension of social protection coverage, which seeks to combine a social protection floor (the horizontal dimension) with higher levels of adequacy for those with contributory capacity (the vertical dimension) (ILO 2012). Combining these two approaches in a way that is coherent and complementary requires careful

coverage, which seeks to combine a social protection floor (the horizontal dimension) with higher levels of adequacy for those with contributory capacity (the vertical dimension) (ILO 2012). Combining these two approaches in a way that is coherent and complementary requires careful design