Aging, Inadequacy and Fiscal Constraint: The Case of Thailand

Over the coming decades, many developing countries are set to face unprecedented challenges. While their population is aging extremely fast, the old-age income supports are inadequate and fiscal resources are limited. This study develops an overlapping generations model (OLG) with formal and informal sectors for a middle-income country. Besides aging population structure overtime, the model incorporates common features of developing countries—a sizable informal sector, a connectedness between the formal and informal sectors, and inadequate pension provisions. The households are heterogeneous with respect to their education, formality status, and survival probabilities. The model is calibrated to Thailand’s economy where the government budget structure is based on the country’s fiscal historical data, and the basic universal pension scheme and Social Security scheme are realistically specified. We assess the costs of these two schemes under three long-run scenarios: (i) introducing indexation to the currently non-indexed schemes; (ii) triple increasing the basic pension scheme; and (iii) specifying the basic pension to proportionally decrease with the Social Security benefits. Using a consumption tax to quantify the costs, the consumption tax must be increased by three, eleven and nine percentage points from the current level, respectively. The Social Security scheme is projected to be unsustainable, with its fund depleted in 2045. Without any reform and benefit cuts, the scheme requires a drastic increase in the contribution rate. Welfare gains and losses across household types and redistributive impacts of the reforms are discussed.