Saturday, March 12, 2016

Need for Reforms in Pension and Pension Systems in Bhutan

Introduction
Well-being is the fundamental value of our country as a GNH striving state, and therefore improving welfare is a step towards reflecting this societal value. In light of this, although Bhutan has instituted several modern social welfare schemes over the past few decades, the national pension system is passing through a crisis of confidence. There are several problems with the current arrangements on pension systems. The increasing number of retirees, un-sustainability of pension by 2042, inheritance of financial burden of current pay-as-you-go system by younger generation, and low returns from schemes, demands urgent needs to avert the looming pension crisis and promote better economic security. In the midst of all these, there is a need for a fresh look to design an alternative option to improve pension coverage, benefits, make its operation simpler, and ensure its sustainability into the future. Better pension system shall complement our GNH values and address the challenges of changing social cores and demographic shift of population (ageing). It will also foster aggregate rate of saving and accelerate capital market development.

Brief history about the retirement benefit schemes in Bhutan
The modern social welfare schemes were first introduced in Bhutan in 1962, which is one year after the country started to embrace modern development.  Today, the existing schemes can be categorized into: a) retirement benefits (pension, provident fund, transfer grant and gratuity); b) benefits upon death in service; and c) benefits upon disability in service. These benefits are provided by three institutions: the Ministry of Finance (MoF), the National Pension and Provident Fund (NPPF) and the Royal Insurance Corporation of Bhutan Ltd. (RICBL). The pension and provident fund is typically run on a pay-as-you-go basis with defined benefit (pension) and defined contribution (Provident fund). The entire pension expenditure is charged in the annual revenue expenditure account of the government.

Some of the key problems that have emerged in the pension system are as follows:

Demographic aging: The age structure of the population is changing drastically with increasing life expectancy and declining birth rates. The result of such a demographic transition will be a larger proportion of older people. It is projected that Bhutan will enter into ageing population by the year 2029[1].

Changing social mores: The pressures of urbanization and migration have eventually led to collapse of extended family system and deterioration of traditional means of support to the elderly.

Limited and skewed coverage: Existing welfare schemes covers only the organized sectors, which includes regular employees of civil and public service. Unfortunately, the bulk of the workforce which are from the semi or unorganized sectors has little access to formal system of old age income security guaranteed by a pension system. The pension coverage is further diminishing due to stronger growth in unorganized employment.

Inheritance of financial burden of pay-as-you-go system by younger generation: The senior employees of the government who have enrolled into the pension and provident fund before 2002 has made very less contribution to the pension accounts and will be receiving generous benefits when they retire. And their pension annuities will be paid from the contributions of young employees. There lies an inherent systemic issue with this pension system.

Low returns from provident funds: The employees are worse-off by putting money in provident fund accounts as the NPPF pays only an average accrued interest rate of 4.5% per annum which is a meager amount as compared to 8.75% interest rate offered by the banking sector even for recurring deposits.

Rising financial burden of public pension schemes: The rising number of retirees poses the potential to jeopardize the long-term financial sustainability of the NPPF. In view of the increasing annual trend of government employees retiring from civil service, the sustainability of pension fund is becoming questionable. According to a recent study conducted by Dasho karma Ura[2], the pension fund is projected to become unsustainable by the year 2042[3].

[1] Population Perspective Plan 2010- GNHC
[2] Bhutan’s Chief Economist and Head of Centre for Bhutan Studies
[3] Dasho Karma Ura (2014), “Size and Cost of Bhutanese Civil Service”, p. 34-36, Centre for Bhutan Studies, Thimphu

4 comments:

  1. Dear Tashi,

    I really enjoyed reading your blogs, especially the Need for Reforms in Pension and Pension Systems in Bhutan.

    Currently, pension and provident schemes were targeted to only those who are working in formal economy. The scheme covers salaried employees. While pension and provident schemes are contributory in nature (pay-as-you-go system), it excludes majority of non-contributing population in the country. In fact, it only benefits about 20 per cent of the population. I think it is high time to re-look into the current pension system as most of the people work in unorganized and/or informal sectors. This is just my rudimentary views.

    Kinley
    PO,Zhemgang

    ReplyDelete
  2. Dear Kinley
    You are my first commenter. My heartfelt gratitude for commenting on my blog and breaking the ice. Hoping to open the flood gates of comments on my blog.

    As rightly indicated by you... We need to relook into our current pension system... The better retirement alternative. that is free from issues of unsustainability; the provides maximum gains to the contributors; and more importantly SMOOTHEN's CONSUMPTION to all those who contribute taxes to our economy

    ReplyDelete
  3. Pertinent concern shared. I think the policy is being drafted now.

    You may like to get on RSSC baseline survey 2012 on senior citizens. May be first of its kind from Bhutan Population Stats.

    ReplyDelete
    Replies
    1. Thanks wai... Is this the survey?
      http://www.bt.undp.org/content/dam/bhutan/docs/Pov_Baseline%20Survey%20of%20Senior%20Citizens%20of%20Bhutan.pdf

      Delete

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