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(Vietnam) Voluntary social insurance is less attractive compared to compulsory social insurance – Not only because of the higher contribution rate

Voluntary social insurance, compared to compulsory social insurance, is somewhat less attractive in terms of attracting participants. The fundamental reason identified in society is that individuals participating in voluntary social insurance have to pay higher insurance contributions than those participating in compulsory social insurance. However, is it really that simple when delving deeper into the issue?

The monthly contribution for voluntary social insurance will be chosen by the participants themselves, unlike the compulsory social insurance system based on the agreed-upon salary between employees and businesses, lowest being the minimum regional wage.

For voluntary social insurance, the minimum level is equal to the standard for poor households in rural areas, which is 1,500,000 VND, while the maximum is 20 times the base salary, which is 36,000,000 VND, starting from July 1, 2023, when the base salary increases from 1.49 million VND to 1.8 million VND.

It is expected that in the coming years, this maximum contribution will undergo significant changes when the officially effective salary reform policy eliminates the current base salary regime in Vietnam.

Based on Clause 1, Article 9 of Circular 01/2016/TT-BLDTBXH, the formula for calculating the monthly contribution of voluntary social insurance for employees is as follows: Monthly contribution = 22% x Monthly income chosen by the participants in voluntary social insurance.

Comparing employees working at businesses who contribute the minimum social insurance salary of 491,400 VND per month (10.5% of the minimum wage in Region 1, which is 4,680,000 VND per month), employees who choose to participate in voluntary social insurance with a similar income level will have to contribute 1,029,600 VND (22% of the chosen salary of 4,680,000 VND per month).

Furthermore, although employees contributing to compulsory social insurance only have to pay 491,400 VND per month, they will have the right to fully enjoy a total contribution of 1,497,600 VND, including the employer’s contribution, which means an additional benefit of 1,006,200 VND per month.

However, apart from the tangible benefits in terms of money and income, employees participating in voluntary social insurance also face various other factors that discourage them, including:

Unattractive benefits

The 22% contribution by employees to social insurance only includes two regimes: retirement and survivorship benefits.

Clause 3, Article 3 of the Social Insurance Law 2014 stipulates: “Voluntary social insurance is a type of social insurance organized by the State, in which participants can choose the contribution level and method that suits their income, and the State has policies to support the payment of social insurance for participants to enjoy retirement and survivorship benefits.”

As a result, participants in the voluntary social insurance regime will not have access to sickness and maternity benefits, occupational accidents and occupational diseases, as well as unemployment and health insurance.

Therefore, although they have to contribute 22% compared to the total contribution of 32% for employees participating in social insurance (of which 2/3 is supported by the employer), employees are restricted from accessing these four social insurance regimes.

If we look at it from a statistical perspective, is that 10% difference proportional to the loss of access to these four regimes? Obviously, many employees have recognized the shortcomings, leading to a decreasing number of participants in voluntary social insurance over the years.

For female employees, the right to access maternity benefits is particularly important.

Update on the 2-million support for maternity benefits in the Draft Amendment to the Social Insurance Law

Recognizing the shortcomings in the current social insurance schemes, the Draft Amendment to the Social Insurance Law, drafted by the Ministry of Labor, Invalids, and Social Affairs, proposes that employees who voluntarily contribute to social insurance for at least 6 months out of the 12 months before giving birth can receive a subsidy of 2 million VND for each child.

This is the first time the Draft Law has proposed additional provisions for the benefits of employees participating in voluntary social insurance, which is seen as a positive move to support informal employees and attract more people to join the social insurance system.

In the unfortunate event of the mother’s death after giving birth, the father or the person directly responsible for nurturing the child is entitled to a fixed maternity subsidy of 2 million VND, funded by the state budget.

However, the 2-million maternity subsidy has been evaluated by many experts and long-term employees as infeasible and inadequate, despite being a positive step forward.

Firstly, for employees to qualify for the 2-million maternity subsidy, they must contribute at least 1.98 million VND (the minimum level) if they participate in voluntary social insurance. Even if supported by state funds, they still have to contribute at least nearly 1.4 million VND.

With such a substantial contribution but receiving only 20,000 VND in return, it is certain that no one would be willing to participate, especially considering the complex administrative system of social insurance in Vietnam.

Furthermore, providing a fixed 2 million VND support would be unfair to employees who have participated in voluntary social insurance for many years, contributing much more than those who only participate for the minimum requirement of 6 months to receive maternity benefits.

Therefore, although the policy is introduced in a positive direction, the 2 million VND support needs to be reconsidered and adjusted in accordance with the number of years and contribution levels of voluntary social insurance, similar to the maternity benefits for employees participating in compulsory social insurance, which are granted for 6 months based on the preceding 6 consecutive contribution months before leaving work for labor.

Risk of Social Insurance Fund depletion

The risk of Social Insurance Fund depletion in Vietnam is a serious issue that requires special attention and has been repeatedly warned by relevant authorities. This situation occurs when the Social Insurance Fund does not have enough money to meet the insurance claims of participants or to pay monthly payments such as pensions. Some contributing factors to the risk of Fund depletion include:

  1. Imbalance between revenue and expenditure: One of the main causes of the risk of Fund depletion is the imbalance between revenue and expenditure. When the number of insurance participants decreases or the number of people leaving the Fund increases, or the contribution amount is not sufficient to meet the payment demands, the Social Insurance Fund will face financial pressure and the risk of insufficient funds for full payment.
  2. Ineffective management: Ineffective management of the Social Insurance Fund also contributes to the risk of Fund depletion. Waste, asset loss, or inappropriate use can reduce the fund’s available assets, leading to insufficient money to fulfill insurance claims.
  3. Economic and demographic conditions: The economic and demographic conditions of a country also significantly impact the risk of Social Insurance Fund depletion. An aging population surpassing the economic growth rate, increasing unemployment rates, or economic recessions, whether domestic or global, can create significant financial pressures and push the Social Insurance Fund to the brink of depletion.

When news and analysis about the increasing risk of the collapse of the social insurance fund or news about restrictions and reductions in social insurance benefits become more apparent, it creates a snowball effect as employees become more aware of the clear risk. This leads to an increasing number of people opting out of the system, which in turn serves as motivation for others to do the same.

This phenomenon applies not only to mandatory social insurance but also to voluntary social insurance. Employees who participate in voluntary social insurance also have the right to withdraw their lump sum social insurance benefits, with the amount depending on the number of years of contributions and the contribution levels during different periods.

The trend of abandoning the social insurance system

Finally, with the strong economic and financial development in recent years, Vietnamese citizens and employees have gained access to more effective investment opportunities than social insurance. Therefore, it is beneficiary for them to choose more transparent and efficient investment channels over the social insurance fund.

For example, according to surveys conducted by reputable newspapers in Vietnam, one of the most popular alternatives sought by employees outside of mandatory and voluntary social insurance is life insurance. Life insurance policies offer advantages such as favorable terms, the potential for capital and interest gains after a fixed period as stipulated in the contract between the two parties.

Additionally, the funds deposited into these schemes are also insured by a separate entity, ensuring a high level of safety and alleviating concerns about the risk of fund collapse. Besides life insurance, individuals can still choose relatively safe investment channels such as savings deposits, gold investment, or more risky options like stocks, bonds, fund certificates, digital assets, and others.

The only notable advantage of the Vietnamese social insurance system compared to these funds is the health insurance aspect, with support ranging from 80% to 95% of medical expenses. Participants in health insurance only need to pay a very low cost-sharing amount. However, since voluntary social insurance does not include health insurance coverage, it becomes another reason for people to distance themselves from this system.

Currently, the trend is that if employees invest in funds outside of the social insurance system that do not offer similar health insurance coverage, they will opt for separate health insurance, such as family health insurance, rather than necessarily participating in the entire social insurance fund.

When the ability to maintain attractiveness as other investment products surge has reached an alarming level, could it be too late for the Vietnamese social insurance system to increase benefit levels and reduce contribution rates as the room for improvement is virtually non-existent?

ASL LAW is the top-tier Vietnam law firm for Employment and Labor Law. If you need any advice, please contact us for further information or collaboration.

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