Financial stability for the pension system in some european countries and lesssons for Vietnam

ury with strong adjustments in the social security system of many countries and the world, facing new social problems such as aging population, changes in employment due to rapid technological development, globalization and deep integration. 4. Methodology and research methods 4.1. Methodology The topic approaches the socio-economic interdisciplinary perspective from the perspective of international economics, welfare economics and public finance. With such approach, the dissertation applies secondary document analysis methods such as statistical analysis method, synthetic analysis method; Comparative analysis method. Data for analysis are collected from a variety of sources, mainly the researches of domestic and foreign authors; reports of related agencies and organizations and some information in the press. 4.2. Research methods - Statistical analysis method: using statistics, synthesizing, analyzing, calculating data - growth values, average values, density values ..., recovery information for the process of analyzing and evaluating the research contents 5 - Comparative method: The dissertation is a case study in 3 the UK, German and Swedish pension systems and suggestions for Vietnam. Therefore, the method of comparison is very important to clarify the similarities and differences between financial stability for the pension system in the 3 countries analyzed. In addition, comparisons were used to analyze the pension system before and after the time of reform and adjustments. Comparative analysis method is widely applied in chapters 3 and 4 of the dissertation. - General analysis method: exploiting secondary information related to financial stability factors of the pension system to provide a theoretical and practical basis in applying the appropriate pension model for Vietnam. - The dissertation applies case analysis, representing different models in Europe, that is the case of the UK, Germany and Sweden. 5. Expected new contributions of the dissertation In term of theoretical contributions Developing the assessment framework on financial stability of pension system under three aspects of payments, benefits, and the usage management of the pension system. Revealing the characteristics of financial stability of the pension systems in the UK, Germany and Sweden; and comparing some similarities and differences of these above mentioned countries’ systems to Vietnamese one. In terms of practical contributions Showing results in securing the finance of the pension systems in the UK, Germany and Sweden. Using the research results to provide solutions, propose experience for Vietnam in securing the finacial state of the pension system. 6. Theoretical and practical significance of the dissertation 6.1. Theoretical significance 6 The dissertation contributes to clarify the theoretical basis on the financial stability for pension systems. The analytical framework that the dissertation proposes can be applied to the analysis of financial stability for the pension system in different countries and can be used as a reference for future studies. 6.2. Practical significance The dissertation builds a comprehensive database of theoretical and practical analysis of financial stability for the pension system in the UK, Germany, and Sweden. This database can be used as references for different interested subjects to apply in their work practices. In addition, the experiences that the dissertation draws for Vietnam will be a useful reference for social managers and policy- makers to refer and apply. 7. Structure of the dissertation Chapter 1: Literature Review Chapter 2: Theoretical framework on financial stability for the pension system Chương 3: Current situation of financial stability for the pension system in the UK, Germany and Sweden Chương 4: Some comparative assessments and lessons for Vietnam 7 Chapter 1: LITERATURE REVIEW 1.1. Publications related to the topic 1.1.1. Publications on the foundation of the pension system and the finance of social security In the study of Ipek Eren Vural (2011) and Johannes Hagen (2013) showed that countries around the world have built their social security system according to two models: the Beveridge social security model and the model Bismark social security. Michael Cihon & authors (2012) pointed out that there are many sources of financial income for the social security system, including taxes, contributions by employers and employees, income from investments. and a number of other sources of income, depending on the nature of the different social security programs and the goals of each social security system. 1.1.2. Publications on pension system and pension fund in general Publications on factors affecting the sustainability of the pension system According to the study of Heinz P. Rudolph and Richard Hinz, financial market robustness has a strong influence on pension fund finances, a typical example is the economic crisis in the US that caused the financial market to plunged, leading to a serious deficit of investment funds. Research by Stefan Engstrom & Anna Westernberg (2003), emphasizes the role of the state in providing retirement financial information to people. Accordingly, research shows that people who have financial knowledge tend to be more proactive in retirement investment decisions. Publications on the need of the private pension fund in the pension system Ignazio Visco (2005) affirms the importance of promoting the use of private capital, managing and monitoring pension fund operations to ensure the sustainability of the social security system. 1.1.3. Publications on the social security and the financial stability of pension systems in Europe Studying social security policy adjustments in Nordic countries when the global economic crisis unfolded, authors Dinh Cong Tuan and Dinh Cong Hoang studied the effects of the financial crisis and global 8 economic downturn to social security system in Nordic countries such as Sweden, Denmark, Finland and Norway in the period 2008-2011. 1.1.4. Publications on the issue of financial stability for Vietnamese pension system For the Vietnamese pension system, there have been a number of studies, notably by Giang Thanh Long (2004), and Nguyen Khac Tuan (2017). In addition, there are many articles in the form of articles analyzing the problems of the Vietnamese pension system. 1.2. Research gap and research direction Research gap Through the literature review, the issue of financial stability for the pension system is a topic that has been mentioned in different angles. Firstly, many authors and organizations such as World Bank (WB), Asian Development Bank (ADB) have studied from the current retirement models as well as built an ideal one for countries. Apply the same elements to analyzing the success of a retirement system. Secondly, domestic and foreign studies have built up a fairly complete theoretical system of social security, financial stability for social security and the pension system. Besides, in theory, there are ideal retirement models that are proposed for countries to build along with current retirement financial models and the advantages and disadvantages of these models. Thirdly, studies on this topic have used a variety of methods, such as case studies, comparisons, and different data models to find a suitable retirement model as well as what factors have can affect the sustainability of the pension system. From those studies, the works have given many solutions as well as policy recommendations for governments of countries. Fourthly, on the factors affecting the sustainability of the pension system, there have been many in-depth studies analyzing and understanding these factors, through research in some typical countries. However, studies have not built a complete and comprehensive research framework on financial stability for the pension system, especially in the UK, Germany and Sweden, which are three typical models with three 9 different directions for the development of the pension system. In Vietnam, there are many publications on the social security system of EU countries, however, the research focuses on analyzing the financial stability problem for the social security system, typically the financial stability of the pension system has not yet covered. Research direction The dissertation will focus on researching the following aspects, through the study of 3 countries: the UK, Germany and Sweden and then draw lessons for Vietnam: (i) Ideal financial stability model for the pension system; (ii) Factors affecting the sustainability of the pension financial system: including factors such as population aging, economic development, people's perceptions, the role of homes country, employers and the development of private pension funds; (iii) Different modes to finance the pension system of a developing country at the risk of population aging, including adjusting the current model and the other necessary solutions. This will contribute both theoretically and practically for Vietnam. Summary of chapter 1 10 Chapter 2: THEORETICAL FRAMEWORK ON FINANCIAL STABILITY FOR THE PENSION SYSTEM 2.1. Definitions and roles of pension system 2.1.1. Pension definition, pension plans, pension funds The pension system is a system in which there is a system of state agencies, businesses, individuals and organizations and unions operating under policies and decrees to ensure stable income for people whose age is over the working age in accordance with the regulations and in addition, the expenses for the disabled and those with below minimum income towards the goal of equity for all. and in addition, are expenditures for the disabled and below minimum income towards the goal of equity for all. The pension system is a system in which state agencies, businesses, individuals and organizations and unions operate under policies and decrees to ensure stable income for people. the end of the working age in accordance with the regulations and in addition, the expenses for the disabled and those with below minimum income towards the goal of equity for all. and in addition, are expenditures for the disabled and below minimum income towards the goal of equity for all. In the research scope of this study, only the financial issues of the contributory pension scheme are focused on research. 2.1.2. Definition of financial stability for pension system Financial stability for the pension system is the securing of planned retirement payments from the collection and use of pension funds. In other words, to ensure that the value of the fund's revenues is always greater than or equal to the pension fund's expenditures. More broadly, the financial stability of the pension system is the implementation of measures to ensure that the average growth of the average net income of the working age population and the retirees' incomes are the same over the long term (about 30-50 years). 2.1.3. The role of the pension system 11 The model of the pension system in countries varies widely, depending on the socio-economic conditions and development goals of that country. However, the primary goal of the pension system is to set out to protect the elderly from the risks of poverty, while at the same time ensuring that they maintain a steady consumption ability in retirement compared to when they were still working. 2.2. The pension system structure 2.2.1. Components of the pension system The pension system has many activities to protect people from the dangers of life in old age and thus involves participation of many sectors. The pension system also has components similar to the social security system, including: the State; private companies, individuals and; associations and charities. 2.2.2. Pension schemes 2.2.3. Contents of financial stability for pension system 2.3. The financial stability measurements for the pension system 2.3.1. Securing revenue from contributions 2.3.1.1. Maintaining and expanding contribution levels 2.3.1.2. Changing contribution composition and structure 2.3.2. Securing revenues from the fund's investment 2.3.2.1. Superannuation fund monitoring mechanism 2.3.2.2. Pension fund risk management 2.4. Factors influencing financial balance of the pension system 2.4.1. National social security policies 2.4.2. Economic growth and employment issues 2.4.2.1. Macroeconomic factors 2.4.2.2. Social factors 2.4.3 The demographics issue 2.4.4. Pension fund management issues 2.5. Criterion for evaluating financial stability for the pension system Summary of chapter 2 12 Chapter 3: THE CURRENT SITUATION OF FINANCIAL STABILITY FOR THE PENSTION SYSTEM IN THE UK, GERMANY AND SWEDEN 3.1. Financial stability for the pension system in the UK 3.1.1. Factors influencing financial stability for the UK pension system The UK economy has shown signs of decline in recent years. However, as the world's first industrialized country, the UK was also one of the first countries to "struggle" through the post- industrialization crisis. According to Eurostat's population forecasts, currently the UK's population is growing rapidly, from 66 million (2018) to 71 million (2030) and 80 million (2060) (Eurostat), becoming one of the most populous region in Western Europe. This also has multi- dimensional impacts on the maintenance of the pension system in the UK. 3.1.2. Structure of the UK pension system 3.1.2.1. Pension schemes Pillar 0 – Social welfare Pillar 1 – Social insurance Pillar 2 – Occupational pension Pillar 3 – Savings Pillar 4 – Healthcare and housing The UK system of social protection for the elderly Basic State pension (BSP) State second pension (S2P) Occupational schemes - Stakeholder pension Private pension NHS The UK has been operating a "mixed" pension system, which means that the state will pay a minimum pension, the rest will be 13 accumulated by the funds that employees have participated in. responsible for payment. The UK job market is quite special when the majority of workers work in the private sector. According to 2003 statistics, only 18% of workers work in the public sector. 3.1.2.2. The UK pension fund balance The pension fund balance is reflected through the pension fund's revenues and expenditures. Revenues Employers in 2017-18 contributed to the local government's pension Funds amounted to £ 9.5 billion, an increase of 27.7% compared to 2016-17, and the employee contribution was 2.1 billion pounds. Employer contribution increases due to some large up-front pension contributions made by a number and a regulatory increases in contribution rate. The fund's revenue in the UK in 2017-18 was £ 16.5 billion, an increase of £ 2.9 billion, or 22%, from 2016-17. Expenditures Expenditures on insurance payments in 2017-18 were £ 9.8 billion, an increase of £ 0.3 billion or 2.9% from 2016-17. Of which, spending on pension and annuity was £ 8 billion, up 0.3 billion pounds (4.1%) and spending on insurance premiums when officially retired was £ 1.5 billion, down 37 million pounds (equivalent to 2.4%) compared to 2016 -17. 14 Figure 3.4: Total spending and income of local insurance funds in England and Wales from 2013-2014 to 2017-18. (Unit: million pounds) Source: Ministry of Housing, Communities and Local Government (2018). 3.1.3. The measures of financial stability for the British pension system 3.1.3.1. Measures to increase revenue from contributors Although each ruling party has different ways of implementing it, in general, the UK government has two policies that affect the pension system in the UK: (1) cut spending on the home pension fund. water by gradually reducing its interest in national programs; (2) encourage the development and efficiency of the private pension system. 3.1.3.2. Measures to ensure investment returns of the fund In addition to increasing revenue from contributions, one 15 of the most effective ways to finance the pension system is to ensure the return on investment of the retirement fund. In November 2000, the Accounting Standards Board (ASB) issued a new Financial Reporting Standard for retirement insurance plans (FRS17) under current accounting standards for reporting retirement expenses. in the DB pension regimes. 3.1.3.3. Fund management measures A pension fund is financed on each of the two types: a Defined- benefit (DB) or a Defined-contribution (DC) fund. DB and DC funds are managed in different directions to suit the nature of each fund. 3.1.4. Evaluation and reviews on financial guarantees for the UK pension system The UK was one of the first countries in the world to develop formal private pensions (starting in the 18th century) and was also one of the first to begin a process of how to systematically invest in state pension funds and instead direct investment to private pension funds (starting in the 1980s). This is the main reason why the UK is one of the few countries in Europe that do not face a serious pension crisis. Currently, the pension system in the UK is considered to be complex as well as discriminatory against certain subjects such as low-income employees, freelancers and workers in smaller companies and from the number of groups in society such as women, the unemployed, those working in the informal sector. The main reason for the lack of social inequality is the mismatched link between the state pension system (BSP, Retirement Credit and S2P) and private retirement systems (which will enjoy the higher but the premium is higher). 3.2. Situation of financial stability for the pension system in Germany 3.2.1. Factors affecting financial stability for the pension system in Germany 16 Germany is the leading economy in the world and plays a leading role in the economy of the European Union. Germany is one of the countries recovering well from the economic crisis and global recession in the euro area. Regarding the labor market in Germany, the German unemployment rate has decreased significantly in the past 10 years thanks to the active labor market policies of Germany. Accordingly, Germany is facing a labor shortage as an older generation of workers starts to retire while Germany has the lowest birth rate in the world, which means a decrease in the working age rate and the proportion of the population suffering from Aging increases rapidly. 3.2.2. Structure of German pension system 3.2.2.1. Pension schemes The German pension system is the world's first official pension system, designed by Bismarck almost 120 years ago. The German pension system following the 5-pillar model of the World Bank Pillar 0 – Social welfare Pillar 1 – Social insurance Pillar 2 – Occupational pension Pillar 3 – Savings Pillar 4 – Healthcar e and housing Old-age allowan ce Public pension Occupational pension Voluntary private pension Housing and healthcare programs for the elderly 3.2.2.2. German pension fund balance Through many reforms, the German pension system is a combination of two pension schemes, a sponsored pension scheme and an unsubscribed pension scheme. This is a combination aimed at 17 minimizing the existing limitations of the previous PAYG program under the influence of population aging. At a given point in time, the worker will not be protected by the effects of the rapid increase in the number of the elderly relative to the working population. Unfunded programs also involve government intervention when funds have solvency problems, which are completely unaffected by sponsored programs (WB). 3.2.3. The measures of financial stability for the British pension system The German pension system has made many adjustments throughout its formation and development to maintain and expand the levels of contributions to the pension fund. - Increasing retirement age - Ensuring high coverage - Adjusting the contribution level - Adjustments to pension formula - Change in components 3.2.3.3. Promote private pension funds - New funding pillar: Introduction to additional pension funds - Direct savings allowance - Tax withholding special expenses - The State encourages the retirement benefits according to groups (by occupation). - Voluntary retirement insurance in financial retirement planning 3.2.4. Evaluation and reviews on financial stability for German pension system 18 The pension system in Germany in general and the financial stability of retirement have had some successes and exist as follows: First, the German multi-pillar pension system is one of the most successful model in preventing poverty for the entire population. Second, one of Germany's other successes has been tackling the problem of the aging population, as other countries are still struggling with the effect of aging populations on the sustainability of social security systems. Germany has made appropriate adjustments to solve this problem. Third, in addition, Germany has also successfully adjusted the pension system to balance the burden between generations, reducing costs for public pension funds through the provision of bonuses / deductions. for those who retire later / earlier by law, as well as the application of real wage pensions and the use of a sustainability factor formula to stabilize public pensions. The remaining problems: Currently, the German pension insurance system is facing the challenge of balancing the fund between the insurer (the employee) and the pensioner on the other. While generosity in the German public pension system is seen as a great social achievement, the negative effects and aging population threaten the very core of the German pension system. 3.3. Situation of financial stability for the pension system in Sweden 3.3.1. Factors affecting financial stability for Sweden's pension system Sweden is one of the countries with the highest standard of living in the world and a developed and sustainable social security system. Before the economic crisis in 2008, Sweden's economy developed stably due to increased domestic demand and increased exports. However, since the end of 2008, affected by the global economic recession, leading to a decline in foreign demand, 19 Sweden's GDP growth has declined rapidly in the following years, leading to the increase in unemployment rate and inflation. 3.3.2. Swedish pension system structure Sweden has built a highly ambitious retirement system that will achieve a form of social pension insurance and save money economically and sustainably in the long run. The goals of the Swedish pension system in recent years include ensuring social and intergenerational equity as well as the financial stability of the system. The Swedish NDC system calculates the benefits based on the individual's contribution throughout their lives, including the contributions made by the government on behalf of that individual during their time of unemployment, care children, sickness ... As noted above, the use of NDC is said to have a self-stabilizing mechanism in the pension formula in which changes in the external environment such as increasing average life expectancy or salary change. 3.3.2.1. Pension schemes Pillar 0 – Social welfare Pillar 1 – Social insurance Pillar 2 – Occupationall pension Pillar 3 – Savings Pillar 4 – Health and housing Insurance pension Income pension Occupational pension Voluntary private pension Healthcare for the elderly Table 3.9: The Swedish pension system following to the 5-pillar model of the World Bank 3.3.2.2. Swedish pension fund balance Sweden's pension system is the only country to use a multi-fund structure. The purpose of structuring various pension funds in Sweden is to achieve goals such as reducing market impact, diversifying management risk, enabling competition to reduce costs and improve efficiency. But there is also a limitation in the increase 20 in fund management costs. Therefore, in recent years, Swedish public pension funds have more closely linked and exchanged. 3.3.3. The measure of financial stability for the Swedish pension