What Strategies Can Vietnam Implement to Improve Social Protection Sustainability?

Vietnam’s social protection system faces challenges in developing a coherent system aligned with its aspiration to be a middle to upper middle-income country. The system consists of three strands: social assistance, social insurance, and poverty alleviation. Tax revenues fund social assistance and poverty alleviation, while compulsory contributions from workers and employers fund social insurance.

However, both coverage and funding of social assistance are well below regional and global comparators. Vietnam spends around 0.66 per cent of GDP on social assistance, excluding health insurance subsidies, compared to about 1% for East Asian and Pacific countries and 0.8 per cent for the South Asian Region.

Social assistance covers below 20% of the Vietnamese workforce and only represents 5% of the household average monthly consumption expenditure for the poorest quintile, compared to 19-20% for lower middle-income countries. There is also no indexation, meaning social assistance benefits diminish over time in both relative and real terms.

Vietnam has made significant strides in poverty alleviation, particularly among ethnic minorities in difficult terrains. The current social insurance system, which is primarily composed of compulsory contributions by employers and workers, is unsustainable for long-term retirement income protection. In 2018, around 76% of workers were in the informal sector with no employment contracts and mostly no social insurance.

This trend has increased in rural areas due to the COVID-19 pandemic, and urbanisation has not reduced informality in employment. By 2040, around 43% of Vietnam’s workforce is estimated to be in formal contracted employment.

To address this issue, the government introduced a voluntary contributory scheme in 2006, which covered only about 300,000 workers by 2018. However, the adoption rate has been low, and better incentives, such as tax-funded matching contributions, are necessary for such a scheme. Workers’ contributions to retirement income protection are crucial for the long-term financial sustainability of a retirement scheme in Vietnam as the population ages.

Social assistance and social insurance require higher tax commitments in the medium term and deeper pension system reforms in the long term. Given the overlap between economic and social policies and Vietnam’s relatively low tax spending on social protection compared to regional peers, there is good reason for such a commitment.

Vietnam has reduced its value-added tax (VAT) level from 10% to 8%, with potential to increase it to 11-12% in the medium term, similar to Indonesia and the Philippines. However, the country faces challenges in collecting personal income tax due to its high marginal rate of 35%, particularly from the large informal sector.

Despite this, Vietnam has a high level of digital access, which could make the coverage and delivery of social protection programs more targeted and efficient. The long-term goal is to build a social protection program that evolves with a country’s economic development and enhances its economic policy. Vietnam has made a promising start, but more work is needed.

Social assistanceSouth Asian RegionVietnamVietnam social protection system faces challengesVietnamese workforceWhat Strategies Can Vietnam Implement to Improve Social Protection Sustainability?