The Aging Population and Sustainability of the Pension Scheme: Simulations of Policy Options for Vietnam

Abstract

Various population projections show that Vietnam’s population will age swiftly in the coming decades. As such, the operation of a pay-as-you-go financing mechanism would inevitably find the pension fund unbalanced as well as generate pension liabilities, which in turn would threaten financial sustainability and affect inter- and intra-generational inequities. To compare with previous studies, this paper provides calculations for the pension fund balance and close-group pension liabilities for Vietnam under new social insurance regulations. The simulated results show that the pension fund will be fully depleted in about 30 years, and pension liabilities – though small as a percentage of national income – would involve higher taxes for future workers. Based on these findings, the paper suggests an income security system in which contributory and noncontributory pensions would be supplementary to each other with clear roles in redistribution and consumption smoothing.