ARTICLE
22 February 2023

Consequences Of Applying The Proposal To Divide The Lump-Sum Social Insurance Allowance According To The Contribution Rates Of Vietnamese Employees And Employers

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In 2022, the Minister of Labor, Invalids and Social Affairs of Vietnam had a proposal on the lump-sum social insurance category in the next revised Law on Social Insurance regarding the careful...
Vietnam Employment and HR

In 2022, the Minister of Labor, Invalids and Social Affairs of Vietnam had a proposal on the lump-sum social insurance category in the next revised Law on Social Insurance regarding the careful consideration of the division of lump-sum social insurance allowance according to the contribution rate of Vietnamese employees and employers. Specifically, according to this proposal, employees will only be able to withdraw their social insurance contributions of about 8%, the 14% ratio paid by the employer will remain in the fund. Immediately, this proposal aroused strong protests in Vietnam, creating many serious consequences for the social insurance system.

According to the Vietnam Social Insurance Portal, between 2016 and 2021, Vietnam has more than 4 million people registered to withdraw lump-sum social insurance. On average, 800,000 people apply to leave the social insurance regime each year, an average increase of 11.6% per year.

In 2022, Vietnam has nearly 900,000 people withdrawing lump-sum social insurance, an increase of 3.7% compared to the same period in 2021. According to this trend, it is expected that by the end of 2023, Vietnam will have more than 900,000 people leaving the social insurance regime, even reaching the milestone of 1 million people.

Causes of the increase in the number of people withdrawing lump-sum social insurance

The increase in lump-sum withdrawal and approval of social insurance records in Vietnam in recent years comes from many reasons.

During the period from 2020, the number of lump-sum social insurance records increased sharply due to the impact of the Covid-19 pandemic. People no longer have money to cover their lives, get medical treatment, and take a 'quick test' at the request of the Ministry of Health to move within the country, so they have to withdraw lump-sum social insurance to have a relative amount of money for daily necessities.

Currently, an interesting opinion in the Vietnamese community is that the number of applications to withdraw Vietnamese social insurance has increased because people and employees no longer trust the Vietnam social insurance system.

They believe that the system has too many inadequacies, is not transparent, the administrative system is complicated and inefficient, tends to 'only receive money, not allow to withdraw money', for example, receiving and requesting to review the payment of social insurance takes place regularly every month, but when the payer wants to enjoy social insurance regimes such as sickness regime, unemployment insurance, lump-sum social insurance, etc., it is highly complicated.

There are many cases where employees have reported that they have applied for a valid Covid-19 sickness benefit for more than a year but have not yet received any benefits due to the unresponsive system, the Social Insurance Department of Vietnam does not provide actual assistance.

Regarding retirement benefits, the average salary of 45% of the current social insurance premium payment according to many employees is too low, not enough to cover life in old age. In addition, they are concerned that they save money in the fund for a lifetime but would not be able to enjoy it for a long time, cannot recover the money contributed or being able to leave it to children and grandchildren, etc. These are the reasons why people are no longer passionate with the system.

That is why there are many cases where the employee who has paid the full 19.5 years has decided to withdraw the lump-sum social insurance instead of waiting to enjoy the pension.

From another perspective, to answer the reason why the number of people withdrawing lump-sum social insurance increases sharply in Vietnam, in addition to the above analysis, the representative of Vietnam Social Insurance Department said that the current policy of lump-sum social insurance is too convenient, providing many benefits to people who decide to withdraw it.

Due to the convenience and high benefits of the lump-sum social insurance withdrawal mechanism, individuals participating in social insurance have chosen to withdraw lump-sum social insurance without continuing to pay and enjoy retirement when old age and other benefits to be enjoyed during the insurance participation period.

Thereby, the proposal to divide the lump-sum social insurance allowance according to the contribution rate of Vietnamese employees and employers is proposed with the aim of reducing the benefit that the partipants feel that they can receive if they decide to withdraw lump-sum social insurance, thereby reducing the need to withdraw and retain the participants in the system.

Consequences of passing the proposal

If the proposal is approved, it is likely that the consequences for the Vietnamese economy and social insurance system will be negative, not positive according to the purposes of the drafting committee.

There are many opinions that if employees have decided to withdraw social insurance because of difficulties and do not have enough money to live, even if the rate is 22% or 8%, they will still withdraw with the mind of 'something better than nothing'. According to them, if they starve to death, the money left in the system will also be stuck in there forever, unable to help anyone, only enriching the system.

In addition, if the proposal is approved, the period before the proposal goes into effect will be a particularly difficult time for the system. It is almost certain that a large number of people participating in social insurance system will apply to withdraw lump-sum social insurance before the date of the decree or circular changing the regulation of lump-sum social insurance took effect because the National Assembly and/or the Government of Vietnam cannot pass the law overnight.

Right now, with the consideration and proposal of this benefit division, a large number of social insurance participants feel abnormal, worried that they may lose 14% of the lump-sum social insurance ratio they deserve.

After the proposal comes into effect, the withdrawal rate will decrease because exactly according to the recommendation of the Vietnam Social Security Department, too low benefits will discourage the majority of Vietnamese people. If they weren't in a particularly difficult situation, they most likely wouldn't have withdrawn.

However, instead of relying on the insurance system and constant policy changes in the direction of suppressing the benefits of the insured, employees that are in the working stage (especially in manufacturing and exporting companies) will likely negotiate with the employer about not paying social insurance through legal or illegal means.

The legal way is for employees to perform many short-term contracts without paying social insurance such as labor contracts with a term of less than 1 month, oral labor contracts without written documents, etc.

Clause 1, Article 2 of the Law on Social Insurance 2014 clearly stipulates that employees who work under labor contracts for a full 1 month or more are eligible to participate in social insurance. Thereby, the number of short-term contracts or informal contracts will increase more than the present when the proposal is approved.

Regarding illegal measures, enterprises will not pay social insurance premiums for employees by failing to sign a legally valid labor contract in any form approved by the competent authorities.

Instead, the enterprise through an agreement can pay part of the payable amount to the employee's salary. For example, if the two parties usually have to contribute about 1.5 million VND per month to the social insurance fund, after the agreement, the employer can transfer about 750 thousand VND to the employee's salary each month. The other half will be kept by the business for other purposes.

Logically, the division of benefits according to the contributions of employees and employers is unreasonable because current regulations clearly state that the employer's contribution of 14% to the fund is their responsibility, not their enjoyment.

Employers themselves will not have the right to access or use the amount they have contributed. Accordingly, the division of two parties, assigning to retain such part of the employer's contribution is not suitable for the interests of both the employee and the employer.

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While the proposal is currently at the drafting stage, there are no specific regulations on how to implement it nor what the 14% of employers' retained earnings will be used for, and how it will be allocated. However, it is likely that the proposal to divide the lump-sum social insurance allowance according to the contributions of Vietnamese employees and employers will not be approved due to the backlash of the community.

This policy is proposed not in the direction of social security in favor of employees but is issued with the purpose of intimidating and forcing employees to conform to the perspective and overall planning of the Vietnam Social Insurance Department though such planning could have the opposite effect, causing more damage to the social insurance system, which has many questions about how it actually works and thereby, is likely to create new negative consequences for the whole economy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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