Thailand: Selected Issues

Abstract

Thailand: Selected Issues

Population Aging and Its Fiscal Implications1

Thailand is rapidly aging. Already the second most aged country among ASEAN, the share of elderly population is increasing while the working age population will soon start to shrink. Thailand achieved universal health coverage in 2002, but pension benefits remain low, particularly for its still large informal sector. In this context, Thailand will face the dual challenge of increasing the coverage of the social security system and ensuring its long-term sustainability. The paper offers a menu of policy options to address these challenges.

A. Context

1. Thailand is rapidly aging. The fall in fertility, combined with rising life expectancy, has resulted in the rapid increase of the proportion of the elderly people (Figure 1). The contraction in the working age population will have implications for the social security system. In addition, it depresses Thailand’s potential growth rate. Assuming employment shrinks in proportion to the working age population (ages 15-64),2 the labor input will decline by 3 percent between 2015 and 2025 and by more than 1/3 by 2065 (Figures 2 and 3).

Figure 1.
Figure 1.

Thailand: Fertility Rate, Life Expectancy, And Population Over 65

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: United Nations.
Figure 2.
Figure 2.

Selected Asian Countries: Old-Age Dependency Ratio

(In percent of population over 65 per opulation aged 15-64)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: United Nations.
Figure 3.
Figure 3.

Selected Asian Countries: Working Age (15-64) Population

(Index, 2015=100)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: United Nations

2. The changing demographics have been accompanied with a gradual expansion of the public social security system, particularly with universal health coverage since 2002. Going forward, Thailand faces the double challenge of further expanding the public pension system, particularly for informal workers3 such as farmers that account for more than 30 percent of employment, while ensuring long-term fiscal sustainability (Figures 4 and 5).

Figure 4.
Figure 4.

Thailand: Composition of Informal Workers in 2014

(In percent of total informal workers)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: National Statistics Office, The Informal Employment Survey 2014.
Figure 5.
Figure 5.

Selected Asian Countries: Agricultural Employment in 2015

(In percent of total employment)1/

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Sources: Haver Data Analytics; and World Bank.1/ 2012 data for Vietnam.

B. Health Sector

3. Thailand achieved universal health care coverage in 2002. However, the public health insurance system remains fragmented, with wide differences in benefits and contributions (Table 1).

Table 1.

Thailand: Public Health Insurance System

(Major schemes)

article image
Sources: National Health Security Office, Annual Report, FY 2013; and IMF staff.

Employees of State enterprises are covered by a separate scheme.

Total public health expenditure, including other schemes and health promotion, amounted to 3.5 percent of GDP in 2013.

4. Thailand’s public health expenditure is already the highest among ASEAN countries (Figures 6 and 7). IMF (2010) showed that public health expenditure could increase by 2.4 percent of GDP between 2010 and 2050, due to the combined effects of aging and excess cost growth (excess of growth in real per capita health expenditures over real GDP growth after controlling for the effect of demographic changes) (Figure 8).

Figure 6.
Figure 6.

Selected Asian Countries: Public Health Expenditure

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: World Bank
Figure 7.
Figure 7.

Population 65 and Above and Public Health Expenditure, 2013

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: World Bank
Figure 8.
Figure 8.

Selected Asian Countries: Projected Increase in Public Health Expenditure, 2010-2050

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: Clements and others (2010)

5. Thailand could consider several policy actions.

  • First, a comprehensive review of the system could be undertaken, accompanied by long-term projections of each scheme. The three major schemes have differences in terms of benefits, coverage of dependents, financing and payment models. A recent report produced by a committee established under the Ministry of Public Health constitutes an important step in this direction (Box 1).

  • Second, to monitor the overall fiscal cost, the authorities could consider establishing a central unit within the Ministry of Finance.

  • Third, there is scope for efficiency gains. Possible measures include, but are not limited to, reducing the fee-for-service payment method under the public sector scheme and expanding co-payments by beneficiaries.4 Further coordination across the schemes could enhance efficiency, such as more collective purchase of medicines and medical devices at both the national and provincial levels. The 2012 Cabinet approval of measures to contain the cost of drugs is a welcome step.5

  • Fourth, the authorities could look into the long-term financial sustainability of the public health insurance systems while paying due consideration to social equity. Contributions under the private sector scheme could be reviewed, as the income ceiling for assessing contributions has been kept intact (B 15,000/month) since 1991, while the minimum wage has increased three-fold from B 100/day to B 300/day.

  • Furthermore, alternative revenue sources could be considered to finance the increasing spending pressure, including an increase in VAT which is less distortionary and more growth friendly than income taxes or social contributions, while compensating the most vulnerable households (Figure 9).

Figure 9.
Figure 9.

Thailand: Composition of the General Government Revenue in FY 2014/15

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: Authorities

Thailand: Findings of the Authorities’ Recent Health Study 1/

To ensure long-term sustainability of the health system, the Government of Thailand assigned the Ministry of Public Health to conduct a study to ensure the long-term sustainability of the universal health coverage. The study by a group of experts, including policy makers and practitioners from various government offices (Budget, Finance, NESDB, Labor and Public Health), think-tanks and NGOs calls for pursuing four goals of SAFE (Sustainability, Adequacy, Fairness and Efficiency).

Thailand: Summary of the Report by the Committee on Resource Mobilization for Sustainable Universal Health Coverage

article image
1/The Committee on Resource Mobilization for Sustainable Universal Health Coverage (2016).

C. Pension System

6. The public pension system in Thailand is highly fragmented (Table 2). Replacement ratios (the proportion of a worker’s pension against the pre-retirement income) vary significantly (Figure 10). Informal workers are covered by the Old-age allowance, which also provides pension to private sector employees who do not receive a public sector pension (i.e., central government/local authorities’ pension, and pension from state enterprises). Benefits of the Old-age allowance remain modest (below the nationally defined poverty line).6 To provide complementary income for the informal worker retirees, a new voluntary scheme (National Savings Fund) was introduced in 2015. Thai pension schemes are not equipped with an automatic indexation system, a common feature for public pension schemes in advanced economies. Inflationary pressures, if any, will result in the loss of real value of the pension benefits unless discretionary measures are taken by the authorities.

Table 2.

Thailand: Mandatory Pubic Pensions

(Major schemes)1

article image
Sources: Thai authorities; and IMF staff.

Includes lump-sum payment provided at the end of the employment.

State enterprises are covered by voluntary provident funds (contributions by employers and employees, with each contributing between 3-15 percent).

A voluntary provident fund is available (contributions by government and employees, with each contributing 3 percent).

Private sector employees also receive the Old-age allowance (beneficiaries of the Old-age allowance are those without public sector monthly pension, i.e., central government pension, local authorities pension and pension from state enterprise).

These contributions cover both old-age pension benefits and child allowance. Government contribution (1 percent) goes only to child allowance.

More than 15,000 companies offer voluntary provident funds (contributions by employers and employees, with each contributing between 2-15 percent).

Figure 10.
Figure 10.

Thailand: Replacement Ratio of Pension Schemes

(In percent of the average salary of the last 5 years before retirement)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: Authorities and IMF staff estimates.1/ Excludes benefits under the defined contribution pillar. Starting at age 25 and retiring at 60 (retirement age).2/ Starting at age 25 and retiring at 55 (pensionable age), with average salary of the last 5 years before retirement at B15,000/month or less. Does not include Old-age allowance (B600/month for aged 60-69) provided to those without public sector monthly pension.3/ Old-age allowance for ages 60-69. Compared against the minimum wage (B 300/day).

7. Support from family remains the mainstay of the elderly, though its role seems to be declining over time (Figures 11 and 12). Less than 10 percent of the elderly people are receiving a pension (excluding the Old-age allowance without public sector monthly pension); this is because the private sector pension scheme, introduced in 1990, has started to pay out pensions only from 2014 due to the minimum contribution period requirement.

Figure 11.
Figure 11.

Thailand: The Most Important Source of Income among Persons 60 and Over

(In percent of persons aged 60 and over)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: Knodel and others (2015).
Figure 12.
Figure 12.

Thailand: Sources of Income among Persons Aged 60 and Over

(In percent of persons aged 60 and over receiving any of the following incomes)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: J Knodel and others, (Population Studies Center Research Report 15-847).1/ 2011 figure of Interest/savings/rent is used for 2014.

8. Thailand’s public pension expenditures are projected to increase by 1.2 percent of GDP between 2010 and 2050 (Figure 13). However, data constraints hinder making appropriate pension projections, including actuarial immaturity of the private sector scheme and lack of information regarding the newly established National Savings Fund for informal workers.7

Figure 13.
Figure 13.

Selected Asian Countries: Projected Increase in Public Pension Expenditure, 2010-2050

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 140; 10.5089/9781484376003.002.A002

Source: Clements and others (2012).

9. Several steps can be considered to reform the pension system.

  • First, a comprehensive review of the fragmented pension schemes should be undertaken, accompanied by long-term projections of each scheme.

  • Second, to monitor the overall fiscal burden arising from the highly fragmented pension schemes, the authorities could consider establishing a central unit within the Ministry of Finance. Coordination across the various schemes should enhance operational efficiency.

  • Third, once a comprehensive view has been done, the authorities could look into the long-term financial sustainability of the public pensions while paying due consideration to social equity.

  • Fourth, parametric reforms should be carefully calibrated. The pensionable/retirement age (currently 55 for the private sector scheme and 60 for the public sector) could be extended while reviewing the pension benefit levels. Pension benefits could be indexed automatically to inflation. At the same time, the authorities could consider introducing an automatic adjustment mechanism that links pension benefits and/or contributions to demographic variables (Box 2).

  • Furthermore, alternative revenue sources could be considered to finance the increasing spending pressure, including an increase in VAT which is less distortionary and more growth friendly than income taxes or social contributions, while compensating vulnerable groups.

Automatic Adjustment Mechanisms in Pension Systems

Declining fertility rates and increasing life expectancy are posing challenges to public pension systems around the world, as they imply fewer contributors with more beneficiaries. At the same time, reforms to pension systems face increasing difficulties as they envisage unpopular measures such as cuts in pension benefits, increases in contributions and the extension of the pensionable age. Against this backdrop, a number of countries are adopting an automatic link between demographic and economic developments and the public pension systems.

Four types of instruments are available for designing an automatic adjustment mechanism in pension systems: (1) adjustment in the benefit level, such as (a) changes to benefit levels, (b) adjustments through indexation of benefits to existing retirees, and (c) valorization of past earnings for current workers; (2) adjustments in pension eligibility age; (3) adjustments in contribution rates; and (4) drawing on a reserve fund, provided one exists.1

Pension reforms in recent years have resulted in declining pension benefits, giving rise to concerns about a possible resurgence of old-age poverty. This is particularly so in countries where contribution rates are fixed while pension benefits are adjusted automatically in line with demographic variables and some measure of the pension system’s financial health. To address such a concern, some countries have adopted a tax-funded minimum pension while others have introduced an escape clause in the automatic adjustment system. For example, Sweden is providing a tax-funded minimum pension (Guaranteed Pension about US$ 11,200/year maximum for a single pensioner) for those that have low pension entitlements or no income. Japan’s automatic (downward) adjustment to the pension benefits will be suspended once the projected replacement ratio over the next 5 years falls below 50 percent—an event that triggers a comprehensive review of the pension system, including of benefits and contributions (Article 2, Supplementary provisions to the 2004 public pension reform law).

Automatic adjustment mechanisms are not a panacea in itself for ensuring the long-term sustainability of pension systems. They are often complex and difficult to understand. A clear information strategy will be indispensable prior to their introduction. Adequacy of the pension benefit level would also play an important role in securing a lasting acceptance of the system by the general public.

1 OECD (2012).

References

  • Clements, B., Coady, D., Eich, F., Gupta, S., Kangur, A., Shang, B. and Soto, M., 2012, The Challenge of Public Pension Reform in Advanced and Emerging Market Economies, IMF Occasional Paper No. 275 (Washington: International Monetary Fund).

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  • Clements, B., Coady, D., Jenkens, E., Karpowicz, I., Kashiwase, K., Shang, B., Soto, M. and Tyson, J., 2010, Macro-Fiscal Implications of Health Care Reforms in Advanced and Emerging Economies (Washington: International Monetary Fund).

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  • Committee on Resource Mobilization for Sustainable Universal Health Coverage, 2016, “National Health Financing for Sustainable Universal Health Coverage: Goals, Indicators and Targets” (Bangkok).

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  • Klyuev, V., 2015, “Structural Transformation: How Does Thailand Compare?,IMF Working Paper No. 15/51 (Washington: International Monetary Fund).

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  • Knodel, J., Pothisiri, W., Prachuabmoh, V. and Teerawichitchainan, B., 2015, “The Situation of Thailand’s Older Population: An update based on the 2014 Survey of Older Persons in Thailandin Population Studies Center Research Report 15-847 (Ann Arbor: University of Michigan Institute for Social Research).

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  • National Health Security Office, 2014, Annual Report Fiscal Year 2013 (Bangkok).

  • Organisation for Economic Cooperation and Development, 2012, “Putting Pensions on Auto-pilot: Automatic-adjustment Mechanisms and Financial Sustainability of Retirement-income Systemsin OECD Pensions Outlook 2012 (Paris).

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  • Social Security Office, 2008, Annual Report 2007 (Bangkok).

  • World Health Organization, 2015, “The Kingdom of Thailand Health System Review,Health Systems in Transition, Vol.5 No. 5 (Geneva).

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1

Prepared by Yasuaki Yoneyama.

2

See Box 3 of the Staff Report.

3

Informal workers are defined as those whose employment is neither protected nor regulated by the social security system. The share of informal employment in total employment has been around 60 percent. Of the informal employment, the agricultural sector accounts for about 50-60 percent, followed by the services and shop sales sector that accounts for about 20 percent.

4

The fee-for-service payment method used under the public sector scheme tends to give rise to higher cost(s), as it is prone to overutilization (treatments with inappropriately excessive volume).

5

World Health Organization (2015). These measures include the creation of a national mechanism to negotiate prices of high-cost medicines, stricter control of nonessential and brand name drugs, and the development of a central financial audit system, among others.

6

The Old-age allowance was expanded in 2009 to all elderly without public sector monthly pensions from a means-tested scheme. Under the old scheme, only 25 percent of the elderly were beneficiaries (people at least 60 years of age with inadequate income to meet expenses, lacking a supporter or who is abandoned or unable to work).

7

According to Social Security Office (2008), the private sector scheme, which had a reserve equivalent to about 5 percent of GDP in 2007 is likely to face negative cash flows by the 2040s; the reserve would deplete in about 50 years without an extension of the pensionable age and/or an increase in the contribution rate. The Report was prepared soon after the revision of the pension formula that resulted in an increase of the replacement ratio by 5 percent without adjusting other parameters such as contribution rates and pensionable age.

Thailand: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept
  • View in gallery

    Thailand: Fertility Rate, Life Expectancy, And Population Over 65

  • View in gallery

    Selected Asian Countries: Old-Age Dependency Ratio

    (In percent of population over 65 per opulation aged 15-64)

  • View in gallery

    Selected Asian Countries: Working Age (15-64) Population

    (Index, 2015=100)

  • View in gallery

    Thailand: Composition of Informal Workers in 2014

    (In percent of total informal workers)

  • View in gallery

    Selected Asian Countries: Agricultural Employment in 2015

    (In percent of total employment)1/

  • View in gallery

    Selected Asian Countries: Public Health Expenditure

    (In percent of GDP)

  • View in gallery

    Population 65 and Above and Public Health Expenditure, 2013

  • View in gallery

    Selected Asian Countries: Projected Increase in Public Health Expenditure, 2010-2050

    (In percent of GDP)

  • View in gallery

    Thailand: Composition of the General Government Revenue in FY 2014/15

  • View in gallery

    Thailand: Replacement Ratio of Pension Schemes

    (In percent of the average salary of the last 5 years before retirement)

  • View in gallery

    Thailand: The Most Important Source of Income among Persons 60 and Over

    (In percent of persons aged 60 and over)

  • View in gallery

    Thailand: Sources of Income among Persons Aged 60 and Over

    (In percent of persons aged 60 and over receiving any of the following incomes)

  • View in gallery

    Selected Asian Countries: Projected Increase in Public Pension Expenditure, 2010-2050

    (In percent of GDP)