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“Options for Expanding Thailand’s Pension Coverage to the Informal Sector Workers”. By Mrs. Pannee Sathavarodom Director–General of Fiscal Policy Office. Sustainability and adequacy of retirement income derived from pension fund system
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“Options for Expanding Thailand’s Pension Coverage to the Informal Sector Workers” By Mrs. Pannee Sathavarodom Director–General of Fiscal Policy Office
Sustainability and adequacy of retirement income derived from pension fund system Problem is aggravated by the long-term demographic trend towards aging society In the future, reduced active labor force will face a more heavily burden in supporting the rapidly increasing population of elderly citizens Current Issues on Pension Reform
To address the issue of adequate post-retirement incomes, Thai government has strived for years to achieve the multi-pillar system Pillar 1 : The first cushion for social safety net, intended primarily to provide poverty relief Defined benefit plan such as 1. The original form of the government pension or the PAY-AS-YOU-GO system, which is not funded 2. Old Age Pension System (OAP), administered by the Social Security Office, covers about 25% of workforce. Establishment of a multi-pillar system
Pillar 2 : Usually called a mandatory accumulation program, supposed to be a supplementary to Pillar 1 Based on a defined contribution principle and benefits are related to an individual’s account at his/her retirement Example of Pillar 2 is the Government Pension Fund (GPF). Proposing the “National Pension Fund” (NPF), based on the defined mandatory contribution concept, funded by both employee and employer, designed to be privately managed Establishment of a multi-pillar system
Pillar 3 : Based on a voluntary contribution. Examples are private-sector’s provident funds to which employers and employees voluntarily agree to contribute. Referred to occupational or employer-sponsored pension plan. Contributed by 7,800 employers and 1.7 million employees with assets value of 382 billion baht. Retirement Mutual Fund (RMF) also falls into this category. RMFs consist of 66 funds worth about 20 billion baht. Establishment of a multi-pillar system
Ministry of Finance has provided tax concession to both private and public pension funds. Contribution from employers and employees, accrued benefits derived from fund’s assets as well as post-retirement benefits are exempt from income tax. Except for the Pay-As-You-Go system. Establishment of a multi-pillar system
Pension Funds for the Formal Sector • Thai pension systems cover about 10.5 million people in the formal sector out of the total 35.2 million workforces, of which 16.2 million people belongs to the formal sector. • The existing pension system is yet to broaden its coverage to self-employed as well as informal workers, about 19 million people. • However, the Social Security Office has been studying the possibility of broadening The current OAP’s coverage to take account of informal workers.
Research studies on the development of the pension system for the informal sector workers Country Development Partnership-Social Protection for the Informal Sector: CDP – Pension, 4 Projects are commissioned during 2003-2005 and are already completed Preparation for the establishment of the pension fund for the informal sector workers
1st Project: “Social Risks and Responses in Thailand: Analysis of Household and Individual Survey Information” Informal sector workers account for two-third of Thai labor force This group is vulnerable and subject to several aspects of risk They are less likely to shift back and work in the formal sector Hence, the old-age pension plan for informal sector should be set up as a social safety net Some interesting results from the 4 projects
2nd Project : “The Study on Saving for Pension and Welfare of the Informal Workers Using Community Mechanism” To investigate key success factors of the existing savings group, organized by various communities in Thailand Existing savings-groups at community level are ready and suitable for extending their activities to cover savings for welfares as well as old-age pension for social insurance purpose Some interesting results from the 4 projects
3rd Project : “Social Risks, Social Protection and the Informal Sector in Thailand : Preliminary Feasibility of Savings and Pension System Options” Informal workers received less income, are less educated, and older than the formal sector workers. They received only the government’s universal programs. Suggested that the social pension for the informal workers in Thailand could be set up through the “savings culture” Two probable approaches for savings collection: (1) Community Mechanism or Area-Based Approach; and (2) Occupational Association Mechanism or Occupation-Base Approach Some interesting results from the 4 projects
4th Project : “Pilot Project for Establishment of Community Social Security and Old Age Pension Fund” The informal workers need and are willing to develop community’s old-age pension system They also welcome support from the authority in order to strengthen their capacity in developing community’s old-age pension Some interesting results from the 4 projects
The overall outcome pointed out that ….. Savings policy can be adopted as a strategic policy for development of social security and old-age pension for the informal workers. It should provide income security following retirement of this group of workers. Note that by means of the mechanism of community’s pension system, Thai informal workers should possess all the potential and they are likely to be self-sustained. Some interesting results from the 4 projects
In 2004, samples of community’s financial organizations in several provinces were investigated and discovered that at the community level, there exist several types community’s financial groups serving different purposes such as a revolving fund for community enterprises, saving group for social security, and for old-age pension purpose. Public hearing workshop on Development of Community’s Savings for Social Security and Old-age Pension. Community savings fund for old-age pension was proposed. The idea of community’s savings fund for old-age pension were fully supported by workshop’s participants. Results from other study and workshop
Klong Piah Saving Group, Song Kla province A community saving group for people’s welfare was voluntarily founded. Saving group collects savings and contributions from and offers 14 kinds of social welfare to its members, including pension for those working for the saving organization. Other social welfare benefits including medical care, education, funeral service, and child delivery, etc. Examples of Community Saving Group
In Jana District, Song Kla, and Lam Pang Province A community saving group for people’s welfare was voluntarily founded. Community’s members pledged to sacrifice their daily expenses 1 baht/day and deposit into a community saving fund. Accumulated contribution will be used for social welfare of members including medical care, education, funeral service, and child delivery, etc. Post retirement benefits : a retired member contributing up to a certain period will receive monthly benefits. Contribution is managed by the community committee who set up criteria, terms and condition of fund’s management. Examples of Community Saving Group
The use of community saving funds could be one of the options to serve for the function of social security especially the old-age pension for the informal workers. These community saving funds should be self-administered. Proper support and technical assistance are needed. The main findings from several studies, seminars and workshops:
Two primary objectives First, to collect savings of informal workers which are dispersed among various forms of community financial organization, at present. Second, is to set up an old-age pension system for those informal workers. Proposal for “Saving for Welfare and Old-age Pension of the Informal Workers Using Community Mechanism”
Rationale Community old-age pension fund can be further developed from community saving funds that already exist throughout the country. Should be separated into 2 funds, one for fundamental social welfare, the otherfor old-age pension purpose. Since the latter provides income security upon retirement involving time dimension and accrued benefits derived from members’ contributions. Proposal for “Saving for Welfare and Old-age Pension of the Informal Workers Using Community Mechanism”
Rationale (continued) Community saving funds should be integrated with network of community-level funds, so as to be able to assist, cooperate and exchange administrative information among themselves. A special institution is needed to provide assistance in terms of knowledge, risk and financial management, and to coordinate the funds with other relevant agencies Community old-age pension for informal workers should be integrated with the rest of financial system Proposal for “Saving for Welfare and Old-age Pension of the Informal Workers Using Community Mechanism”
4 areasof further consideration First, to promote a nationwide efficient, robust, and sustainable saving-groups at the community level Second, properly address issues related to legal status and legitimacy of the existing community saving groups Third, community saving groups or community financial organizations should be established in a network system or institutionalized in a similar manner as the formal financial institutions Forth, the roles of government Old-age pension for informal workers, using community mechanism ... is one of the options The way forward ….
Areasof further consideration With regard to the roles of government Ministry of Finance should play a role in strengthening technical knowledge in financial/risk management, financial discipline, this could be done in terms of capacity building Advise on how to improve return on assets. Provide information on other viable alternatives for investment reserves and assets, apart from earnings from bank saving deposit. They should also benefit from capital market development where there are increasing numbers and variety of financial instruments with different associated risks Old-age pension for informal workers, using community mechanism ... is one of the options The way forward ….
The two master-plans namely, Financial Plan for the Grass Root Level and Financial and Fiscal Plans for the Social Sector Should be implemented and be used as guidelines to promote savings as well as provision for social welfare at the grass root level Old-age pension for informal workers, using community mechanism ... is one of the options The way forward ….
This option can be pursued in accordance with workers’ occupation, for informal workers who are financially capable of saving for the retirement benefit purpose Base of their occupations, the entertainer, direct seller, tour guide, and vender are among the first groups that are considered most ready ones ... Another options ...Broadening the coverage of the Old Age Pension Fund to cover also the informal workers.
One is to further develop the community saving funds. Following the four recommended areas of study and consideration. The other option is to extend the coverage of the Old Age Pension Plan to take account of workers in the informal sector as well. This option is based on workers’ occupations, starting with the most ready occupation groups. Fiscal Policy Office will explore both options in more details The success of broadening pension system to informal sector would help improve post-retirement financial status of the informal workers and reduce the need for other government social security programs for the informal sector. Hence, more public resources will be available for other purposes ... Concluding Remarks …2 most likely options
