Vietnam Compulsory Social Security Participation Revealed Preferences

Abstract

Since 1947, the Vietnam Social Security has provided social insurance to public servants and armed forces personnel in Vietnam. In 1995, the system became mandatory to the employees of the newly developing private sector. The mandatory coverage of the private sector was first restricted to the enterprises with 10 or more employees. Since 2005, all the types of enterprises, whatever their size, have the obligation to register to VSS the employees with a labor contract of 3 months or longer.In recent years, participation to VSS has been increasing fast along the development of the private sector. Still, the number of contributors if compared to the number of people reporting being employed in Vietnam is relatively small. It covers 38.8% of the 17 464 thousand persons that report receiving wages equal or above the legal minimum wage. The reasons for this low coverage are unknown. It could be that these persons are not employed under a labor contract or that their employers are not well aware of their social obligations. It could be also that employers avoid register (with or without employees implicit agreement) to obtain higher enterprises revenues or to pay higher employee’s net wages. Using the information of the Census of enterprises of 2006, this paper shows that most of the enterprises in Vietnam pay contributions on lower wages than the wages they effectively pay to their employees. Several econometric analyses indicate strong evidence that employees that work in such enterprises receive higher net wages but there are no strong evidence that the avoiding enterprises obtain higher revenues per worker. The paper argue that the wide spread practice of under reporting wages to social security increasingly erodes public appreciation of the insurance role of social security and reassures employers and employees about the appropriateness of their behavior. It creates also unfair payments of the minimum pension to workers that are not low income earners.