Why is the minimum pension equal to the poverty line?

Low minimum pension to ensure the correct contribution-benefit principle, encourage workers to participate for a long time, high receiving level, and safe social insurance fund, according to experts.

According to current regulations, the minimum pension for employees participating in compulsory social insurance is equal to the basic salary. Currently, this level is 1.49 million VND per month and will increase to 1.8 million VND on July 1 (the time of adjusting the basic salary). Those who receive lower pensions will have their pensions raised to the minimum level. However, this amount after adjustment is still lower than the average monthly income of people identified as poor in the city (two million VND) and higher than in the countryside (1.5 million VND).

Workers at Pou Yuen Company, Binh Tan District after work, 2021. Photo: Quynh Tran — Workers at Pou Yuen Company, Binh Tan District after work, 2021. Photo: *Quynh Tran*

At the consultation sessions on the draft amendments to the Social Insurance Law held in Ho Chi Minh City, representatives of factories and grassroots unions wanted to raise the pension floor. The reason is that in big cities, the pension allowance of 2-3 million VND causes many difficulties for the elderly. The pension floor should be based on the regional minimum wage at the time of receiving the salary, for example, in Ho Chi Minh City, the applicable minimum wage is 4.68 million VND. This helps workers feel secure because their income is guaranteed when they retire, limiting the need to withdraw social insurance at one time.

Ms. Pham Thi Hong Yen, President of the Trade Union of Intel Products Vietnam Co., Ltd. in the High-Tech Park (Thu Duc City), said that the law clearly stipulates that the minimum wage is the lowest level paid to people doing simple work under normal conditions. This is to ensure a minimum standard of living for them and their families, in accordance with socio -economic development conditions. However, there are people who, when they retire, receive less than the regional minimum wage.

"This is one of the reasons why it is difficult to retain workers in the social insurance system. Therefore, when proposing to amend the Law on Social Insurance , it is necessary to calculate the salary floor to be equal to the regional minimum wage so that workers can feel secure in staying in the social security net," Ms. Yen said.

Mr. Nguyen Dang Tien, former Deputy Director of Ho Chi Minh City Social Insurance, said that the current minimum pension is only effective in special cases, with short insurance payment periods and low payment levels. For example, preschool teachers who taught under contract in some localities before 1999, when they retired, their monthly salary was only a few hundred thousand dong. This group needs to be raised to the basic salary level to ensure that their retirement income is not below the poverty line.

However, for employees participating in social insurance according to the regional minimum wage, the pension floor has no effect. The reason is that the regional minimum wage is often 2-3 times higher than the basic salary. The monthly salary contribution rate to the pension and death fund of the enterprise and the employee is 22%, but the lowest benefit rate is 45%, double the contribution rate.

For example, the salary used as the basis for paying insurance premiums for employees according to the region's minimum wage is 4.68 million VND. Each month, both employees and businesses only contribute nearly 1.1 million VND to the fund. With a benefit level of 45%, the pension will be more than 2.1 million VND. This level is 1.49 million VND higher than the basic salary, of course, without compensation.

"Higher than the floor but not able to live", Mr. Tien said and informed that workers want to raise the floor to get additional compensation, which is a legitimate need, but doing so will break the contribution-benefit principle of the policy, causing fund imbalance.

Prof. Dr. Giang Thanh Long, senior lecturer at the National Economics University, said that there are two important figures to calculate the pension level, including the number of years of contribution to the fund to convert to the rate of benefit. Those who contribute for 20 years will receive 45% and gradually increase to 75% if they contribute for 30-35 years. The policy always encourages long-term contributions to receive a high rate. The second factor is salary as the basis for contribution. The closer the contribution level is to income, the higher the average salary.

According to Mr. Long, if workers want to establish a minimum pension level that ensures they can live, they must go back to the elements that make it up. For example, if they want a pension floor of 4.68 million VND equal to the current minimum wage in Ho Chi Minh City, the regulation must require that the salary participating in insurance must not be lower than 10.4 million VND per month and the payment period must be at least 20 years, with a benefit rate of 45%.

"If the pension floor is set high without conditions, it will cause many consequences," Mr. Long said. The biggest risk is that workers and businesses will keep their contribution levels as low as possible because "they will be compensated anyway." Workers will continuously receive one-time benefits because they do not need to accumulate a long period of contributions to reach the maximum benefit level. When the compensation is too large, the social insurance fund will become unbalanced and the budget will not be able to bear it.

People withdraw Social Insurance at Thu Duc City Social Insurance in December 2022. Photo: Thanh Tung — People withdraw Social Insurance at Thu Duc City Social Insurance in December 2022. Photo: *Thanh Tung*

Professor Long said the state budget only supports vulnerable groups or those at risk in transitional periods. For example, those who, due to the nature of their work, have contributed for a short time, or have low contributions, have low pension benefits, far below international living standards. This is to support, and pensions are periodically adjusted to increase based on the consumer price index and economic growth.

According to experts, the pension policy is established on the principle of contribution - benefit to encourage workers to participate for a long time, with high contribution levels to receive the best pension. This not only keeps the fund safe but also ensures fairness among participants. Experience from other countries shows that the pension floor should not be too high. For example, in Thailand, the minimum pension is only equal to the social pension paid from the budget, currently 800 baht (nearly 550,000 VND). Those who receive pensions lower than this level will be raised to equal, and those higher will not be raised.

Mr. Nguyen Dang Tien said that it is impossible to raise the minimum pension level, but the policy needs to be adjusted so that the pension of workers is not too low. One technical factor that can be implemented is to recalculate the social insurance inflation coefficient. In theory, this coefficient helps create a balance in monetary value at the time of receiving pension and at the time of payment. The coefficient is calculated based on the average annual consumer price index announced by the General Statistics Office.

According to the former leader of the Ho Chi Minh City Social Insurance, the pension calculated based on the contribution-receipt principle is correct, but it is necessary to consider whether the inflation compensation level is appropriate for reasonable adjustments. For example, a person retiring in 2023 has a social insurance contribution salary of 200,000 VND in 1996. The inflation coefficient calculated by the Ministry of Labor, War Invalids and Social Affairs for this year is 4.09. Thus, the salary determined to receive pension is 818,000 VND (200,000 VND x 4.09).

"After 27 years, such an adjustment level is really difficult to ensure current life. Therefore, the government needs to recalculate appropriately," Mr. Tien proposed.

Le Tuyet

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