Having introduced the Kingdom of Thailand’s first pension system more than a century ago, great King Rama V would probably be proud of recent reforms, although coverage remains inadequate by today’s standards.
Over the past 15 years, the Thai government has established the World Bank’s recommended three-pillar pension system and has extended pensions beyond government officials and military staff. Considering the more immediate threat of the 2004 Tsunami and the 2011 flooding, this is a notable achievement, especially among Thailand’s Asian peers.
Yet, rating the country’s pension system No. 41 out of 44 countries in terms of its sustainability, the Allianz Global Investors Pension Sustainability Index shows a system under extreme pressure.
In the first (public) pillar, the Social Security Fund (SSF) is a defined benefit-like scheme financed by both employers and employees, each contributing 3% of wages with the state paying an additional 1% into the pension scheme. A minimum of 15 years of contributions is required to receive a monthly pension income. In case of shorter periods, total contributions are paid out as a lump sum. Employment must cease as benefits are paid out.
But like other Asian countries, Thailand faces demographic changes that could see the nation age rapidly and threaten its pension system. The country’s fertility rates have almost halved since 1980, dropping to 1.5 children per woman in 2011, and the old age dependency ratio is expected to soar to 41.4 by 2050. With life expectancy at birth currently measuring 74.4 years, the SSF’s legal retirement age of 55 is very low. To improve the sustainability of state pensions, the OECD recommends that savers contribute much longer than the required minimum of five years.
The second (occupational) pillar consists of a defined contribution Government Pension Fund (GPF) and provides coverage for approximately 0.9 million civil servants. Together, the SSF and civil servant schemes cover 11.5 million of Thailand’s 34.5 million workers. With the introduction of the National Pension Fund (NPF) in May 2012, a mandatory defined contribution scheme for private sector employees, Thailand now aims to extend coverage of occupational pensions to 13 million workers in the private sector.
Finally, the third pillar consists of a voluntary mutual retirement savings fund that enjoys tax exemptions. However, the high threshold for income-tax payments means this is of limited value for the majority of low- and middle-income earners.
When King Rama V ruled Thailand at the turn of the 20th century, only government officials and military staff benefited from his new age pension scheme. Private sector workers are in a better position today, but reforms need to be continued to further strengthen the three pillars of the Kingdom.
PROJECT M local extract for Thailand for more details.