Most economists and policymakers believe the national savings rate is an important long-term determinant of economic growth and that, over the years, tax incentives can be used as the primary tools to stimulate household saving. The resulting set of tax incentives for registered provident funds, Retirement Mutual Funds (RMF), Long-Term Equity Funds (LTF) and a variety of life insurance products that are also savings vehicles have turned these funds into a multi-billion-baht pool of savings.
On the surface the large pool seems like a success story, but upon closer analysis, one could argue the vast majority of Thais are still struggling to make ends meet and affluent taxpayers are the ones most likely to take advantage of the incentives, which contribute to income and wealth inequality. The tax holiday for LTFs is slated to end in 2016, so there has been a lot of debate about whether the 500,000 baht annual tax deduction should be discontinued or modified.
Tax benefits aside, the Thai pension system is facing multiple challenges ranging from a rising old-age-dependency ratio, a low retirement age (55), a longer average life expectancy (75) and sporadic coverage of its citizens. Together the Social Security Fund (SSF) and Government Pension Fund for civil servants provide coverage for only 11.5 million of Thailand's 34.5 million workers. Voluntary employer-provided provident funds cover only 2.6 million workers.
There are also concerns about the sustainability of the SSF. While the fund is currently in surplus as it has not begun payouts, back in 2000 the World Bank calculated a contribution rate of 13% would be required for the fund to meet its promises. The current contribution rate is only 7%.
A recent research paper by Pakorn Peetathawatchai at the Stock Exchange of Thailand surprised me by reporting that on average provident fund members have less than 300,000 baht in their accounts. Investors in RMFs and LTFs have an average amount only slightly higher at 380,000 baht per account. In other words, people have on average about 1 million baht in their combined long-term savings earmarked for retirement purposes. One can assume by the time these people reach their retirement age, even with a best-case estimate, they will have no more than 2 million baht for retirement.
Most people will live about 20 years in their golden years, from age 60 to 80. With only a 2-million-baht nest egg, this translates to 8,333 baht a month. If you throw in a monthly Social Security cheque of 4,125 baht, the total is about 12,400. If you can survive on 12,000 baht a month, you have nothing to worry about. Chances are most people can't.
What to do? I am a believer in the oft-used metaphor to describe retirement preparation, the "three-legged stool". The seat of the stool is retirement security, which is supported by three legs: the compulsory public SSF (first leg), employer-provided provident funds or the Government Pension Fund (second leg), and private savings such as RMF and LTF.
In my opinion, the key priority is to save more. As a rule of thumb, you need to sock away at least 20% of your pay in order to have a realistic chance of reaching your retirement target. For guidance, in Singapore and Malaysia, people have to contribute 16% and 11% into their Central/Employee Provident Funds, while employers are required contribute 20% and 13% into these funds, respectively. In Thailand, the average contribution rate is only 8% (4% from employees and 4% from employers).
Understandably, Thai employers are reluctant and many are in no financial position to match the neighbours' contribution rates. This is why LTFs and RMFs are so important in Thailand. Self-reliance is key. At current rates, these two types of funds will make up about 60% of most people's retirement savings.
The case for tax incentives for savings rests on two questions. First, are Thais under-saving for retirement? The answer is a resounding yes. The second is whether tax incentives can stimulate private and national savings at a reasonable cost. What other choice do we have? The Social Security Office is unlikely to keep its pension promises. Civil servants' defined benefit schemes are on the ropes too with unfunded liabilities. Provident funds are in a tight spot with only 13% of the assets invested in stocks, which is way below the OECD average of 36%.
When 2016 comes around, I strongly urge the Revenue Department to do the right thing and extend the tax incentives for LTFs. While the more affluent appear to be benefiting the most from LTFs now, everyone, especially those who are less affluent, need to utilise this tool to build their savings. Pulling the plug on this 200-billion-baht industry now is equivalent to throwing the baby out with the bath water.
Teera Phutrakul is the chairman of the Thai Financial Planners Association