Financial Sustainability of Thailand’s Social Security System

As shown in Figure 10, the amount of contribution for the first four types of benefits (sickness, invalidity, death, and maternity) has been safely exceeding the amount of compensation, except for 2009, and 2012-2013. The amount of contribution declined abruptly in those three years because the government temporarily reduced the contribution rate for workers and employers as a measure to reduce the “social pain” caused by the world-wide recession triggered by the bankruptcy of Lehman Brothers in September 2008 and economic down-turn caused by a severe flood, which hit many parts of Thailand, including Bangkok, in the latter half of 2011. So long as the usual contribution rate is maintained, provision of the first four types of benefits is unlikely to run a deficit. Though the amount of compensation paid has been increasing, the pace of increase is lower than the pace of increase in the amount of contribution.

Figure 11 shows that unemployment insurance, which is a part of the Social Security Fund, has been accumulating a huge amount of profit. Even in 2009 when the Thai economy was hit very hard by the worldwide recession and Thailand’s GDP growth rate plunged to -0.7%, the amount of unemployment benefits paid did not exceed the amount of contribution collected.

As already explained, unemployment benefits offered by Thailand’s unemployment insurance is not as benevolent as those in European countries. Laid-off workers can receive only 50% of their wage for 6 months at the maxim. So long as the present contribution rate is maintained and unemployment benefits remain the same, Thailand’s unemployment insurance is

very unlikely to run a deficit for a prolonged period (for more detailed analysis of the financial sustainability of Thailand’s unemployment insurance, see Asami 2010).

Figure 12 shows that Thailand’s old-age pension scheme, which is also a part of the Social Security Fund, has been accumulating a huge surplus every year. The huge surplus shown in Figure 12, however, conceals a very serious financial unsustainability of the pension scheme.

The Social Security Fund started collecting contributions for old-age pension and child allowance in 1998. Workers, however, become eligible to receive a pension only after they pay contributions for at least 15 years. If they retire before the number of years of their enrollment reaches 15 years, they only receive a relatively small amount of lump sum old-age benefit. It means it was not until 2013 when the Social Security Fund started paying old-age pensions.

As shown in Figure 8, the number of workers registered with the Social Security Office in 1998 was less than half of the number of registered workers in 2014. For the time being, the number of those who pay contribution far exceeds the number of those who received pension.

Such a situation, however, will change drastically in the not-so-distant future. The Thai society is rapidly aging, as clearly shown in Figure 13.

Figure 13: Changing Shape of Thailand’s Population Pyramids, 1970, 1990, and 2010

1970 1990 2010 (Source: Haub 2013)

In addition, as the average year of workers’ enrollment in the Social Security Fund become longer, the amount of pension to be paid also becomes larger. Those who retired in 2013 or 2014 received only 20% or 21.5% of their wage as their pensions, because the period of their enrollment with the Social Security Fund is just a little longer than 15 years. In 20 years, however, a large number of workers come to retire after registering with the Social Security Fund for 35 years or more. As explained earlier, if the present regulation is not revised, workers who retire after paying contributions for 35 years are entitled to receive 50% of their wage until their death.

Simple arithmetic calculations show that Thailand’s pension scheme is likely to become financially unsustainable in a few decades. Let us take an example of a worker who retires after registering with the Social Security Office for 35 years. To make our calculation simple, let us suppose that he or she continue to receive 10,000 baht as his or her monthly wage throughout those 35 years. As a contribution rate for the pension scheme and child allowance is set at 3%, this worker must pay 300 baht per month. His or her employer also pays 300 baht per month, the government 100 baht (see Table 1). Altogether, the Social Security Office receives 700 baht per month. After his or her retirement, the Social Security Office must pay 5,000 baht per month, that is, 50% of his or her monthly salary.

How long the Social Security Office can pay 5,000 baht per month by using the accumulated amount of contributions made for this worker depends on how much return the Social Security Office will make by investing the pension fund. It also depends on the number of children for whom they claim child allowance, because their contributions are to cover not only an old-age pension but also child allowance. Table 2 shows the relations between the average rates of return of the pension fund’s investment and the number of years they can provide a pension as stipulated in the present regulations to our hypothetical worker explained above. To make our calculation simple, we assumed that the rate of return remains at the average rate throughout 35 years⁴.

4 This unrealistic assumption makes our projection less accurate, but not to the extent that it prevents us from drawing a rough picture. Unless, the rates of returns of their investment in the first half of those 35 years differs considerably from those in the latter half of the period, the range of underestimation or overestimation would not be very large. It should also be noted that another unrealistic assumption of ours is that the worker’s salary remains at the same amount over 35 years and is likely to overestimate the average number of years for which the Social Security Office can provide a pension to a worker without running a deficit, because in reality a worker’s salary is likely to become larger in the final several years than in their early years of their working career.

Table 2: Relations between the Average Rates of Returns of the Pension Fund and the Number of Years for which the Social Security Office Can Provide an Old Age Pension to Those Who

Paid Contributions for 35 Years by Using the Accumulated Amount of Their Contributions rate of return 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

number of years

kids no 4.9 5.9 7.1 8.7 10.7 13.3 16.5 20.7 26.1 32.9 41.7 1 kid 4.4 5.3 6.3 7.6 9.3 11.3 14.0 17.4 21.7 27.3 34.4 kids 2 3.9 4.6 7.1 6.6 7.9 9.6 11.7 14.5 18.0 22.5 28.3

*For the case of one kid, we assumed that child allowance would be paid for six years from the 5th to the 10th year. For the case of two kids, we assumed that child allowance for the first kid would be paid from the 5th to the 10th year, and the allowance for the second kid from the 7th to 12th year.

(Source: Calculated by the author)

When Thailand’s pension scheme was designed in the boom years of the mid-1990s, it did not seem unrealistic to assume that the average rates of return of the pension fund’s investment to be 8% or more. As shown in Table 2, if the rate of return of the pension fund’s investment remains at 8%, the Social Security Office can keep paying a pension for about 26 years after our hypothetical worker retires without using any other resources than accumulated contributions and their yield, if he or she does not receive child allowance during their enrollment. Or in other words, if he or she retires at the age of 55 with no kids, the Social Security Office can keep providing a pension until he or she becomes 81 without running a deficit.

Even if this worker receives child allowance from the 5th to the 10th year, and retires at the age of 55, so long as the average rate of return of the pension fund’s investment remains at 8%, he or she can receive a pension until they reach the age of 77 without forcing the pension fund to rely on any other resources than the contributions accumulated for them and the yield made by those accumulated contributions.

If the rates of return decline to 4%, however, the prospect changes drastically. The contributions accumulated during the 35 years will be used up in 10.7 years. That means even if our hypothetical worker retires at the age of 60 without receiving child allowance, the Social Security Office needs to rely on other resources after he or she becomes 71 years old, which is lower than the average life expectancy in Thailand.

About three quarters of Thailand’s pension fund has been invested in government bonds and state-enterprise bonds (Social Security Office 2015a, 37). The yield on 25-year maturity government bonds, however, plunged to 3.2% at the end of 2015. Its six-year average now stands at 4.18%. The yield on shorter-maturity bonds is even lower. The 10-year maturity government bonds plummeted to below 2% in February 2016 (Bloomberg News 2016).

Some Thai researchers that specialize in social security programs have been warning against the financial unsustainability of the pension scheme repeatedly (for example, Worawan 2006).

However, because of the huge current surplus of the Social Security Fund, such warnings have not

been paid enough attention to by most government officials and politicians until very recently.

According to a newspaper article published in January 2014, when faced with such a warning by a scholar, a senior official at the Social Security Office played down the concerns by saying “the investments by the Social Security Fund have generated a profit of at least Bt10 billion a year”

(“Government pension scheme at risk of collapse: TDRI,” The Nation, January 4, 2014).

In February 2016, the Social Security Office finally came to admit that the existing returns might be insufficient for retirement payments and announced that it would lower domestic bond holdings and switch into stocks so that they can have higher returns (Bloomberg News 2016).

Such a shift to more “risky” assets, however, does not guarantee higher returns. Thailand’s stock price index has also shown a downward trend in the past two years.

Although all the other programs run by Thailand’s Social Security Office have a healthy financial sustainability, the danger of the pension scheme to accumulate a huge loss in the not-so-distant future is so immense that it threatens the financial sustainability of Thailand’s social security system as a whole.