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The Aging population and sustainability of the pension scheme: Simulations of policy options for Vietnam

The Aging population and sustainability of the pension scheme: Simulations of policy options for Vietnam. 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. | Journal of Economics and Development, Vol.19, No.3, December 2017, pp. 40-51 ISSN 1859 0020 The Aging Population and Sustainability of the Pension Scheme: Simulations of Policy Options for Vietnam Long Thanh Giang National Economics University, Vietnam Email: longgt@neu.edu.vn Cuong Viet Nguyen National Economics University, Vietnam Email: cuongnv@neu.edu.vn 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. Keywords: Aging; pension fund; pension liability/debt; retirement; Vietnam. Journal of Economics and Development 40 Vol. 19, No.3, December 2017 1. Introduction the pension fund in particular and the national budget in general. Positive or negative impacts of an aging population on the pension fund balance will depend on how the pension scheme is designed (World Bank, 1994; Kunieda, 2002; ILO, 1998, 2013). There has been a widespread recognition that the financial viability of the pay-as-you-go defined benefit (PAYG DB) pension system will deteriorate in an aging population since it is mostly unfunded, and such a pension scheme will