Thailand is sitting on a demographic timebomb. One that has yet to be defused or be treated seriously.

It is the second-fastest-aging country in Southeast Asia, only trailing Singapore. By 2035 more than one third (34.1%) of Singapore’s population will be over 60, while this figure will sit at around 30.2% for Thailand, according to United Nations statistics. 

The two markets couldn’t be more dissimilar in terms of their preparation. Investment consultant Mercer’s latest rankings on the robustness of pension systems, released in October, placed Singapore at the front of all regional peers. 

Thailand sat dead last. 

Out of the 37 retirement frameworks assessed by the Melbourne Mercer Global Pension Index (MMGPI), the country received a grade D. That means its pension system has “major weaknesses” that need to be addressed or its “efficacy and sustainability are in doubt”. 

In other words, Thailand must rapidly improve its efforts to provide country-wide retirement support, or the impact of its aging population could soon begin to make itself felt. 

Thailand will become a “super-aged” society in about 15 years’ time, according to the UN. Large percentages of elderly people in any population hamper potential economic growth and vitality, as they produce very little and cost more than average to sustain. 

“Thailand is faced with an old-age society, so the revenue the government will collect from the people will be smaller in the future, but the spending budget for the retirement will be larger and larger,” said Man Juttijudata, chief risk officer at the country’s Government Pension Fund. But he noted that the government can expand the tax base to alleviate the burden.

However, there is no individual silver bullet that can solve this issue. The government and pension providers need to tackle the ongoing demographic shifts, the coverage of available pension funds and encourage more assertive investing among traditionally conservative pension fund investment teams. Achieving that requires revamping Thailand’s existing retirement system, which will demand cooperation among multiple organisations. 

Doing so is becoming urgent. The country’s old-age public pension fund, the Social Security Fund (SSF), is expected to run out of funds by 2036 as future payouts for a “super-aged” population outweighs dwindling contributions from the private sector. 

PLUGGING THE COVERAGE GAPS

As with most retirement systems, Thailand’s has three pillars of pension funds. The first pillar consists of the SSF, which is overseen by Thailand’s Social Security Office. A set of voluntary provident funds are in the second pillar, of which the General Pension Fund, which covers government officials, is the most obvious example. The third is constituted of individual savings products. 

It’s worth noting that the SSF covers not just retirement, but also maternity, sickness and unemployment payments for the private sector. It is also the only mandatory pension fund for the majority of Thailand’s labour market, meaning its role is critical to support their retirement plans. It had assets under management of THB2 trillion ($67.6 billion), as of the end of September. 

The SSF is exploring ways to keep the fund above the water. One of the possibilities is for it to increase employee contribution rates. Ananchai Utaipatanacheep, secretary general of the SSF, said the current contribution rates are barely sufficient to support all members over the long run amid a rapid rise in the country’s elderly population. 

The Social Security Office has proposed increasing the maximum pension threshold at which payments can be deducted from monthly payrolls from THB15,000 ($493) to THB20,000 ($656), and raising the maximum monthly deduction from THB750 ($25) to THB1,000 ($33). The fund believes this would secure the SSF’s ability to meet the old-age pension payout requirements for the next 47 years. 

The fund has also considered raising the age at which workers become eligible for pension payments from 55 to 60. However, this proposal received resistance from labour unions representing industrial plant workers. According to the Bangkok Post, Chalee Loysoong, vice-chairman of the Thai Labour Solidarity Committee, said that workers want to retire at 55 instead of being exposed to chemicals for another five years. However, the need to balance Thailand’s retirement books makes an increase to the country’s retirement age an inevitability. 

Another issue stems from the fixed contribution rates to the SSF, which are capped at 5% from both employees and employers.

“Pension funds could use behavioural finance tools...to encourage people to voluntarily save for retirement through the power of human inertia, or the tendency to do nothing,” said Wina Appleton, Asia Pacific retirement strategist for JP Morgan Asset Management. 

She believes it would make sense for Thailand to introduce an automatic escalation of contributions to boost voluntary savings, which kicks in after a few years once employees have become more comfortable with the initial rate. It’s likely that most people would let voluntary increases to automatic pension deductions take place, rather than taking steps to actively prevent them.

INFORMAL ISSUES

Even if some of these steps are introduced, it wouldn’t solve all of Thailand’s demographic problems. The existing system mostly supports civil servants and workers in the formal sector; it has largely failed to provide cover for employees employees without a labour contract or self-employed workers (such as the country’s numerous street hawkers).

Thailand’s formal workers totaled about 16.8 million at the end of 2017, while it had 20.7 million informal workers, according to the Office of the National Economic and Social Development Board. While informal workers have the choice of signing up as members of the SSF, just 4.2 million people are included in the scheme. 

“Rural or informal workers are [largely] not covered, so [one important step is] extending this mandatory national pension fund to cover them as well or using automatic programs to help them better prepare for retirement,” said Appleton.

Fixing these issues is important, but not easy. Broadening the SSF’s worker coverage would eventually require bigger retirement payments under its defined benefit operating model. But pursuing this under the current setup would bankrupt the SSF faster than current projections suggest. That would require the government to step in with cash injections, which could ultimately erode its fiscal integrity.

Man of GPF believes it makes sense for retirement funds in Thailand to transition to a defined contribution model, under which employees would contribute a fixed amount or percentage of their salaries.

That would require changing how SSF operate. Currently GPF has a defined contribution model under which its members contribute between 3% to 15% of their salaries, with the government topping up a further 5% to 8%.   

This story was adapted from a feature that originally appeared in AsianInvestor's Winter 2019 edition.