Academic journal article The Journal of Social, Political, and Economic Studies

Sustainable Social Security Systems: A Case Study from Thailand

Academic journal article The Journal of Social, Political, and Economic Studies

Sustainable Social Security Systems: A Case Study from Thailand

Article excerpt

Financial Sustainability of Social Security Schemes Around the World

Financial sustainability has been the primary concern for social security programs around the world. The costs of social security provision have become too high for the next generations given projected population aging. Most countries have considered social security reforms to maintain or restore financial sustainability of social security systems. Nevertheless, the retirement income adequacy to reduce old-age poverty has increased the tension between the policy makers and insured persons. The recent economic crisis that caused government deficits and debts has urged social security reforms in many countries.

After a decade of debate, social security reforms were undertaken with various approaches across countries under two main agendas. The first agenda is aimed to improve financial sustainability of pay-as-yougo social security system by postponing retirement age and to modify the automatic adjustment mechanisms. A retirement age of 67 is now common among OECD countries. By 2050, retirement ages will be at least 67 years in most OECD countries. Some countries link retirement ages to the evolution of life expectancy of their population. The extreme example is the Czech Republic that decided to increase the retirement age by two months per year.

The automatic adjustment of pension cost in line with demographic evolution is considered in many countries. To do so, the government must be able to ascertain intergenerational fairness. Such automatic adjustment usually raises the concern over the adequacy of retirement income. To this extent, social security system should not be perceived as the only source of retirement income to solve all the problems of old-age poverty, but rather the policy for labor market that provides minimum social safety nets. Most countries provide low income pensioners with minimum pensions and old-age safety nets. Middle and high income pensioners rely on other sources, including private pension, personal savings and investments, in addition to their public pension. Therefore, private pension and other schemes should be reviewed and taken into account when measuring retirement income adequacy.

The second agenda is to transform unfunded pay-as-you-go defined benefit social security system to private funded defined contribution system. The Czech Republic, Israel and the United Kingdom have introduced defined-contribution pension system. Ireland considers either soft compulsion or mandatory participation in private pensions because voluntary participation in private pension will not lead to sufficient contributions to achieve adequate retirement income. However, Poland and Hungary have reduced or closed their defined-contribution pension system mainly due to the high administrative cost of private pensions. Thus, if the workers are to be mandated to participate in the private pension scheme, the high administrative cost has to be controlled. In addition, the defined contribution pension scheme has been voted against because it does not contain income redistribution to the poorer insured persons, which may increase inequality among retirees.

To maintain or restore financial sustainability of social security schemes without reducing pension benefits, the contribution rates must inevitably be increased. However, social security contribution rates in OECD countries have remained stable over the past two decades. The average social security contribution rate in the 25 OECD countries increased slightly; during the past 20 years, from 19.2% in 1994 to 19.6% in 2012. Most governments tend to avoid social security tax increase for political reasons, but rather face more pressures from both solvency issue and increasing government expenditure for social security benefits arisen from aging populations and maturity of social security schemes. The relevant evidence is the dramatic increase of government expenditure on old-age pensions in OECD countries from an average of 6. …

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