The compensation and reduction system of pension benefits is a crucial concept in the social insurance system in Vietnam, aiming to maintain the balance of the system and contribute to the social welfare of laborers. It is designed to ensure a stable life based on pensions after a lifetime of labor and dedication to society. However, the current compensation and reduction mechanisms exhibit several shortcomings, significantly impacting the motivation and participation of workers in the social insurance system and, consequently, affecting the integrity and stability of Vietnam's social insurance fund.

According to the current regulations on compensation and reduction mechanisms in Vietnam, there is a paradox where workers bear a significant loss when contributing to social insurance either less or more than the prescribed framework. While it may be understandable that contributing less results in a higher reduction rate, the current situation is perplexing. Even when workers contribute more than the maximum limit, the proportional benefits they receive do not correspond adequately to the reduction rate applied if they had contributed less.

This diminishes the motivation for workers to continue participating in Vietnam's social insurance system after reaching the maximum contribution period of 35 years for men and 30 years for women, as stipulated by current regulations. Simultaneously, if a worker becomes unemployed after reaching the 'job age' but before reaching the retirement age, being eligible for pension benefits, they tend to be willing to accept a certain reduction rate to enjoy early retirement.

These trends highlight the urgent need for a revision of the current regulations. This would provide workers with additional incentives to participate actively in the social insurance fund within the stipulated period and encourage continued participation even after reaching the maximum contribution limit.

Contributing fewer years results in a higher deduction

According to Clause 3 Article 56 of the 2014 Social Insurance Law in Vietnam, each year a worker retires before the official retirement age, as specified, incurs a deduction of 2%. In cases where the retirement age has an odd duration, up to six months, the deduction is reduced to 1%, and beyond six months, there is no reduction in the percentage due to early retirement.

Before 2016, the annual deduction rate for workers retiring before the official retirement age was 1%. It was only from 2016 that this rate increased to 2%, primarily aimed at encouraging workers to contribute the required number of years and retire at the designated age.

However, it's noteworthy that the legislative focus on market factors affecting job availability for those retiring early is limited. Currently, many workers choose early retirement not because of job market conditions but due to being underqualified for physically demanding jobs, which typically require labor-intensive or cognitive tasks and have a maximum age range of 35 to 40 years. The retirement age, however, is set at 62 for men and 60 for women.

When there are no employers willing to hire workers beyond their job age, these workers lack a sufficient income source to sustain their livelihoods. Faced with pressure, they often have no choice but to request early retirement to secure income, regardless of the deduction rate.

In contrast to uncontrollable market factors, the emphasis is placed on the diminishing labor capability, influencing the decision for early retirement. According to legal provisions, a worker in normal conditions wanting to retire early, aside from contributing the mandatory 20 years to social insurance, must have an assessed decline in labor capability of 61% or more.

The allowed early retirement period is less than 5 years for those with a decline from 61% to below 81%, and not exceeding 10 years for those with a decline of over 81%. If the decline is below 61%, even if practical employment conditions or their actual ability to work are challenging, workers are ineligible for early retirement.

Viewing the issue objectively, the diminishing labor capability is an uncontrollable circumstance, not the worker's intentional choice. Therefore, workers should not be penalized for this. Legislators should supplement mechanisms for workers retiring early due to health reasons, specifically those with a decline of 61% or more. In such cases, the deduction rate should be reduced to show understanding and care for workers near retirement age.

In instances where a worker's health decline is less than 61%, instead of denying them early retirement and waiting until the official retirement age for pension benefits, a mechanism should be implemented to increase the deduction rate to encourage them to continue contributing until reaching the retirement age. This could involve reducing the deduction rate to 1% for those with a decline of over 81% and 1.5% for those with a decline from 61% to 81%, fostering fairness and demonstrating a compassionate approach to workers approaching retirement.

In the case of workers with a health decline of less than 61%, instead of denying them early retirement, forcing them to wait until the official retirement age to receive a pension as per current regulations, there should be a mechanism to impose a higher deduction rate to encourage them to continue contributing until reaching the retirement age.

Contributing more years than the maximum results in fewer additional benefits

Currently, the Social Insurance Law has adjusted the calculation of pension rates for workers. Before 2018, for each year of social insurance participation, female workers received an additional 3%, while males received 2%, until reaching a maximum of 75% of the average salary used for social insurance calculation. From 2018 onwards, both males and females receive an additional 2%.

The upcoming draft of the Social Insurance Law proposes that, from the 15th to the 20th year of contribution, male workers will be credited with 2.25% instead of 2%, aligning with the new requirement of contributing for 15 years to be eligible for retirement. From the 20th year onwards, the pension rate will remain at 2% for each year of social insurance contribution.

Regardless of the upcoming changes or the current regulations, male workers will reach the maximum pension rate of 75% with 35 years of contribution, and females with 30 years of contribution. For male workers contributing more than 35 years and females contributing more than 30 years, in addition to the maximum pension rate of 75%, they will also receive a one-time allowance for each year of contribution exceeding, calculated at 0.5 times the average salary used for social insurance calculation.

For example, if a female worker, H, contributes for 35 years to social insurance, in addition to the 75% pension rate for the first 30 years of contribution, she will also receive 2.5 times the average salary used for social insurance calculation for the 5 years of contribution exceeding.

As the current rate for contribution exceeding is only 0.5 times the average salary used for social insurance calculation, and considering that each year a worker must contribute 2.64 months' salary to the social insurance fund, the latest proposed amendment to the Social Insurance Law suggests increasing this rate from 0.5 times to 2 times for each year of contribution exceeding, ensuring the workers' benefits.

If approved, this change is expected to stimulate and provide motivation for workers who have contributed the maximum 75% to continue contributing to the social insurance fund. Currently, the low benefits received after reaching the maximum contribution level discourage workers, especially those at a very advanced age, leading to a very low number of workers contributing beyond the maximum.

Most workers who have contributed the maximum years often negotiate with their employers to stop contributing and receive the 10.5% they are required to contribute monthly. This illegal behavior stems from the fact that the benefits workers receive are disproportionately low if they continue contributing to the social insurance fund after reaching the maximum, compared to stopping contributions, engaging in informal work, or not contributing.

Recommendation for exchanging excessive contribution years to increase pension rates

At one of the workshops providing feedback for the proposed amendments to the Social Insurance Law, a suggestion was made to consider establishing a mechanism that allows workers with surplus insurance years to exchange them for a higher pension rate and vice versa, for those with surplus retirement age but lacking the required number of years.

If implemented, this mechanism could positively impact the integrity of the social insurance fund while addressing some challenges faced by workers, helping them achieve a balance between the number of years contributed and the pension rate.

Given the current job market dynamics, most workers start employment around the age of 23 and may contribute to social insurance for approximately 35 to 40 years before reaching the retirement age. Consequently, the situation of having surplus insurance years may be more prevalent than the case of insufficient years and surplus retirement age.

Additionally, some opinions suggest considering specific mechanisms, such as allowing workers who have contributed enough years to qualify for the maximum pension rate of 75% to retire even if they haven't reached the official retirement age. This is proposed to address the issue of a one-time allowance for exceeding contributions, which is currently perceived as too low.

Other suggestions propose examining retirement eligibility conditions based on which criterion comes first between the age of the worker and the maximum contribution years. This means that if a worker reaches the age of 60 or 62 first or reached the maximum number of years first, they should be eligible for retirement, even with a reduction.

Another proposal is to utilize the unused portions in other funds, such as the unemployment insurance fund, to convert them into a higher pension rate or provide a one-time payment to the worker. This differs from the current regulation where this amount is forfeited if the worker does not actively retire or loses their job.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.