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Economic Sector

Last updated: Thursday, August 16, 2018

 

Benefits of Social Insurance

Posted: Saturday, July 28, 2018


Several social networking sites have recently compared pension benefits of social insurance with life insurance and with savings. First and foremost, it is illegal to directly compare a product of a company with another’s as per Article 43 and Article 45 of the Law on Competition of Vietnam.

According to international practice, in many economically developed countries where industrial modernisation is the most advanced, the market economy is full-fledged, operated with all intrinsic rules. The question is whether people in those countries compare products as we do in Vietnam. Although there are a series of big commercial insurers, life insurers and commercial banks, why is social insurance maintained sustainably and seen as a crucial policy of the government in addition to private and commercial insurance systems in those developed nations? More importantly, pensions received from social insurance are still the primary income source for the elderly in developed countries and revenues from commercial insurance or bank savings are never sufficient for the well-being of every citizen.

It must be made clear that it is completely wrong to calculate that pension benefits of social insurance are lower than benefits gained from savings and life insurance accumulated in 20 years because they have substantial differences:

The biggest difference lies in the purpose. Social insurance is a form of non-profit insurance and the Social Insurance Fund is protected by the State, meaning that it is never bankrupt. Meanwhile, banks operate for profit and banking is the most profitable business, but can go bankrupt as well. In case of bankruptcy, savings can be lost completely.

When depositing savings, depositors get a return interest for a given term. After about two to three decades, the principal value is very little. This is the opposite to social insurance as social insurance is paid back in proportion with annually adjusted consumer price index (CPI) according to Government regulations and used as the basis for calculating pensions. In case of death, the socially insured is given death benefits.

When you are retired, your pensions will be adjusted periodically to CPI and economic growth. In fact, the government revises up pensions almost every year. Since 2003, the government has adjusted pension rates many times (7.5-9.3 times higher, depending on target groups). In addition, pensioners are paid for social insurance policies by the Social Insurance Fund and entitled to fair medical examination and treatment benefits as all other people regardless of insurance rate or disease type. In case of death, persons responsible for funerals shall be entitled to funeral allowances equal to 10-months' base salary at the time of death and family members shall be entitled to death allowances (paid on monthly basis or one-time settlement). These are superior advantages of social insurance. Deposits carry a given interest rate and the interest value will shrink by time due to inflation.

To make a comparison of benefits of voluntary social insurance with bank savings, we do a math with the following assumptions:

- Social insurance payment and savings deposit in 20 years starting from 2008 (2008 is the first year of applying voluntary social insurance) with the savings value equal to that social insurance premiums maintained in 20 years and social insurance premiums are calculated by the percentage of regulatory value during that time. The base value is VND5 million.

- Savings interest rate: 7 per cent per annum. Interest is added to the principal on annual basis.

- CPI-adjusted social insurance premium index is 5 per cent per annum, calculated from year t-1 (CPI rose 8.1 per cent a year since 2008)

- Pensioners receive pensions when their ages reach 55 (female) and 60 (male) with their pension rates of 55 per cent and 45 per cent, respectively

- Average pension increase: 7 per cent a year (taken the lower rate than the lowest increase from 1993 to 2017).

- Expected years of living in retirement: 20 years;

- Base salary in 2048 is VND10 million, an annual increase of 8.27 per cent (from 2008 to June 2017, the base salary growth is 13.7 per cent per year)

- Lump sum death allowance: 3-months’ salary

- Pension benefit rate is calculated in line with the current regulations. Result: With the investment value of VND249.6 million, joining social insurance, you are entitled to lifelong social security of VND2,160,690,000 if you are women and VND1,786,019,000 if you are men, much more than the savings deposit of VND973,333,000 (women) and VND598,303,000 (men). In case of compulsory social insurance, benefits are enormous as insurance premiums are largely paid by employees, while the insured needs to pay just VND90,763,600. In addition, pensioners are covered by health insurance. As known, medical cost is huge when you are old.

H.T








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