Thailand risks growing old and poor

Thailand has made remarkable progress in reducing poverty over the past 50 years by attracting foreign investment and lifting productivity. But in the first of a series of three articles, Craig Keating examines how policy failures have contributed to the stalling of economic progress and the challenges that poses for an ageing society.

“Productivity isn’t everything, but in the long run it is almost everything” – Paul Krugman

Increasing productivity does not, by itself, guarantee higher living standards. Nor does it assure greater support for the vulnerable and the elderly. But these are very unlikely in the absence of rising productivity, and the economic growth that it brings. Unless Thailand can increase productivity markedly, its ageing population and associated increasing high age-dependency ratio will bear more and more on government coffers, and on Thai living standards.

Growing old before growing rich

Thailand has a developed country’s ageing population (Graph 1), but a developing country’s per capita income (Graph 2). Its neighbours aren’t in the same bind. Of the ten ASEAN members, only Singapore and Thailand are nearing the United Nations’ definition of an “aged society” (more than 14 percent of people are aged 65 or more). And Singapore is already on a par with wealthier regional states, eclipsing countries like Australia in many respects.

Graph 1: Proportion of population aged 65 and above in 2020

Data source: World Development Indicators.

Graph 2: GDP per capita in 2019 (constant 2010 US dollars)

Data source: World Development Indicators.

In common with most other countries, life expectancy at birth has risen markedly, in Thailand’s case, from 60 in 1971 to 77 in 2019. At the same time, its fertility rate has fallen more than other ASEAN states, akin to more productive regional countries. Thailand now has the lowest birth rate in ASEAN after Singapore – and Singapore’s per capita Gross Domestic Product (GDP)^[1] is more than nine times that of Thailand’s in real (inflation-adjusted) terms.

The net effect is Thailand has the highest old age dependency ratio (the number of people aged 65 years or more as a proportion of the working-age population, 15-64) in ASEAN (Graph 3). And it’s only going to grow. The United Nations estimates that, by 2050, 19.5 million Thais will be aged 65 or more, 30 per cent of the population. This will have increasing economic, social, policy, and political implications.

Graph 3: Old age dependency ratio (percent of working-age population) in 2020

Data source: World Development Indicators.

The traditional expectation that children — principally women — will look after their aged parents is becoming no longer viable for many. Although still high, the proportion of elderly Thais living with their children has fallen over the past 25 years. This will decline further, as the country’s rising age-dependency ratio raises the burden on working-age Thais, and the prospect of multi-generational aged relatives grows. At present, Thailand is ill-equipped to meet this challenge. The World Bank notes that it has just seven long term care workers for every thousand aged people, compared to 44 workers in Australia. Moreover, current levels of government support for the aged will not be enough for all Thais to fund these services themselves.

The World Bank forecasts the number of Thais aged over eighty who need assistance will increase six-fold to just under 2.5 million over the next two decades. But many Thai households have low levels of savings that are unlikely to meet their post-work living requirements, according to the National Economic and Social Development Council. In February 2019, the Thailand Development Research Institute estimated that elderly people in rural areas needed savings of THB 2.8 million or AUD 114,844 (for people in urban areas the figure is THB4.3 million). But in 2017 more than 80 percent of elderly households had less than THB 1 million, according to the National Statistical Office – the figure would not have been much different in 2019.

Budget burden

The need for government-funded aged care support will only continue to grow. Probably the most noticeable effect on the expenditure side will be rising health and aged care costs. The elderly are more susceptible to a range of non-infectious diseases and conditions. In 2001, Thaksin Shinawatra’s government introduced a universal health care scheme, which every subsequent government has continued. However, it does not cover long-term institutional care. And very few elderly Thais have private health insurance.

The Thai government funds or provides tax benefits for a multitude of schemes intended to support Thais who reach retirement age (See Table).

Table: Government funded and supported schemes for people of retirement age

[1] For public servants employed prior to 1997 with more than 25 years’ service.

Data source: Dr Roongkiat Ratanabanchuen, ‘The pension system in Thailand’, Nomura Journal of Asian Capital Markets.

However, most schemes are voluntary, and coverage is low. In 2017, just 22 per cent of workers in the formal sector participated in the voluntary Provident Fund. Of the 20.7 million workers in the informal sector, just 4.2 million participated in the Social Security Fund and only 500,000 were members of the National Saving Fund the same year.

What’s more, payments are difficult for most elderly Thais to live on. As Dr Roongkiat Ratanabanchuen notes, in 2017, the typical worker in the informal sector who had contributed to the Social Security Fund could expect to receive a monthly payment of THB 2,400 from the fund, supplemented by a 600 baht old age allowance. This was above the official poverty line (THB 2,686 per person per month). But it was much lower than the THB 8,000 to 9,000 that the National Statistics Office found Thais of retirement age spent on average per month. It also compares poorly to the minimum daily wage of THB 313 to 336 per day.

As the schemes stand, they are forecast to place an increasing demand on government coffers, rising from THB 246 billion (AUD 10.1 billion) in 2017 to THB 478 billion (AUD 19.6 billion) in 2035. This could be expected to be several factors more, were future governments to increase the level of support to something approaching the amounts Thais of retirement age are actually spending.

In the absence of significant productivity increases, future governments will find it increasingly difficult to fund levels of aged care that will provide an adequate standard of living for the growing number of elderly Thais.

Thailand’s ageing population will increasingly constrict government revenues, too. Its shrinking workforce (Graph 4) will progressively constrain revenue from personal income tax, which made up around 10 percent of total tax revenues in 2017. What’s more, this tax falls on a relatively small group of Thais. Due to the country’s large informal economy, 28 million people were not registered in Thailand’s taxation system in 2016 – a large number, especially when compared to the around 10 million who were.

Graph 4: Thailand’s labour force

Data source: World Development Indicators.

Thailand’s ageing society will eat into indirect taxation revenues, too. As in other countries, Thais consume less as they age. A study in 2017 found that Thais in their sixties spent 20 per cent less than they did in their 50s. This matters, as government revenue is dominated by consumption-based taxes: they accounted for 57 per cent of its revenue in 2014.

In the absence of significant productivity growth, these factors will likely compel future governments to consider unpopular policy responses, such as raising tax levels and coverage, hiking the official retirement age, and/or to wind back or end popular, but expensive, agricultural subsidy schemes. If the government follows through with its recent idea to woo highly-skilled foreigners to work in Thailand, it may help at the margins. But it won’t help improve agricultural productivity, and do little to raise the skills of Thai workers, or make the significant contribution to government revenues needed to provide an adequate level of support to the growing numbers of aged over the coming decades.

Craig Keating is a former senior analyst with Australia’s Office of National Assessments (ONA).

Banner image: Elderly men queue outside local restaurant, Bangkok, Thailand. Credit: Shutterstock.