1. Criteria for Evaluating Social Security Systems in Thailand By Estelle James

2. How should we evaluate social security systems? Is it sustainable? System should be able to pay promised benefits for at least 75 years-- the future lifetime of young workers today Is it equitable--are contributions, benefits and risk distributed fairly? Is it good for broader economy? Now I will talk about economic growth and distribution; later today about sustainability

3. Populations Are Aging By 2030 the proportion of the world’s population that is > 60 will nearly double, from 9% to 16% Developing countries are aging fastest of all And the family system of old age support is breaking down, due to urbanization, etc. In Thailand % > 60 is 7.4% today, will be 18% in 2030

5. When Populations Age, Public Pension Spending Increases Many industrialized countries now spend more than 10% of their GDP on pensions Public spending on health and pensions now exceed 20% of GDP in some countries Thailand: Little pension spending now but this will escalate sharply in 21st century. How much and in what form depends on policies you choose now

7. With such large sums, social security affects entire economy. It influences: Peoples’ incentive to work (espec. near retirement) Employers’ willingness to hire labor Labor allocation between formal-informal sectors Level of national saving and its allocation Financial market development Government’s fiscal position Therefore, the quantity and productivity of labor and capital and level of GNP We should choose an old age security system that increases size of the pie--good for old and young

8. Impact of payroll tax on employment and wages If employers bear tax, this raises labor costs, lowers competitiveness, employment, output: employers less willing to hire If workers bear tax in form of lower take- home pay: less willing to work, exert effort May shift labor to informal sector--lower productivity--in developing economies Distortions increase exponentially with tax

9. Impact on employment (cont’d) Payroll tax ranges from < 5% in many Asian countries to 35% or more in Singapore, some European countries (UnE) Old age security likely to cost 10-15% in well run system in long run Payroll tax in Thailand now 25% in your lifetime under current policies Important to choose system that provides benefits at lowest possible payroll tax and avoids peak rates--rationale for pre-funding

10. Impact on work--retirement age Workers retire early if can receive benefits without penalty (Gruber-Wise) Yet, many systems permit early retirement without actuarially fair decrease in pension (6-7% decrease per year of early retirement) Longevity increases require periodic hikes in retirement age--but politically difficult So experienced labor supply declines; less productivity and output Thailand--early retirement (55), no penalty, and no reward to postponing benefits Important to choose system that encourages continued work--rationale for DC plan

11. Impact on national saving New PAYG system decreases national saving – due to increased consumption of first generation covered and expectation that government will pay on-going benefits Mandatory pre-funding can increase saving –builds up fund of investable resources, providing not offset by decrease in voluntary savings or increase in public dissaving (deficits) This is an issue in Thailand, where household saving has been falling, capital is needed

12. Impact on capital productivity More important, pension funds shift type of saving--committed for long term--can be used for equity investment, venture capital, infrastructure, long term government debt Productivity of savings depends on how funds are managed and allocated--rationale for private management with regulation Thailand: how will funds in GPF and new DB plan maximize productivity?

13. Impact on financial market development Privately managed funds stimulate stock markets, secondary bond markets, new financial instruments, credit rating agencies, info disclosure (Chile, OECD). Aid in corporate governance, minority rights, accountability--if regulated to avoid conflicts of interest Thailand: financial market development important--synergy with pension reform

14. Impact on government’s fiscal position Pension deficits may lead to general revenue finance, less money for important public goods May induce inflationary deficit finance Deficits can be avoided by planning and prefunding; prefunding also permits long term funding of debt

15. Impact on income distribution-- intra- and inter-generational Many people think social security should avoid old age poverty and redistribute to low earners-- but many DB plans don’t do this In PAYG schemes largest redistribution is to first generations covered, future generations lose Reduced savings, capital hurts future generations Thailand: in new DB scheme redistribution goes to high earners, first cohorts of retirees. But non- contributory means-tested pension is targeted to rural poor. What redistribution do you want?

16. Conclusion Important to choose system that –is sustainable so promises can be kept, –distributes tax burden and benefits fairly –maximizes size of GNP pie Pre-funding, defined contribution, good fund management and social safety net help to satisfy these criteria. In next few days we will discuss how.