Good foundations: The development of the nation’s social security system

The social security system in Mongolia is surprisingly well developed. While health care benefits are low, the country offers a good range of support to almost all its citizens. Payouts for retirement are quite substantial. Still, improvements certainly are required, such as increased medical benefits and better funding of the programme. But a good foundation has been established, one off of which a modern social security system can be built.

The Constitution of 1940 guaranteed the right to retirement benefits, while social security rules were established and a relevant department was formed in 1942. By 1950 the country had its own pension law, which was revised in 1979 to increase benefits and to cover those who had previously missed out (such as people working in cooperatives).

After 1990

 After the 1990 democratic revolution, the system collapsed but was pieced back together. In the early 1990s several laws were passed in quick succession that together created a social security system for the country: the Citizens’ Health Insurance Law (July 1993); Social Security Law (May 1994); Law on Pensions and Benefits (June 1994); Workers’ Compensation Law (June 1994); Unemployment Compensation Law (June 1994); Law on Benefits of Military Servicemen (June 1994); Law on Application Procedure of Social Security Laws (July 1994); and the Law on Minimum Living Standards (August 1998).

The raft of legislation had an immediate and beneficial effect. Health insurance coverage, for example, went from 0% in 1994 to almost 100% by 1998. (Since 2006, social health insurance has been compulsory for all Mongolians.) The pension benefits have been quite substantial. At this point, the replacement rate is above 40% and the maximum payout is some MNT1m ($600) per month. The retirement age is 60 for men and 55 for women, although women are able to retire at 50 if they have raised four or more children, and men who have worked in hazardous conditions or underground can retire at 50 or 55. Other benefits are also generous. Survivors receive anywhere from 50% to 100% of the deceased’s wage, depending on the number of dependents. Up to 66 days of sicknesses benefits are provided, disability is paid out at 45% of last wage, and maternity benefits are equal to up to 100% of the insured’s wages and are paid out for four months.

Overall and on paper, Mongolia’s social insurance fund has been in surplus. In 2012 it brought in MNT918.5bn ($551.1m), while total expenditures were MNT798.8bn ($479.3m).

Health Care Gap

 While overall the system is quite good, especially for a developing country, it has its share of problems. Health care is one major issue.

The WHO notes that the Citizens’ Health Insurance Law has been amended five times and that this has created confusion and a number of unintended consequences. It writes, for example, that a 2006 amendment took primary health care out of the social health insurance benefits package and made it the direct responsibility of the government. The idea was to ensure universal access, but the end result was that it reduced participation in social health insurance by herders and the self-employed as there was little incentive to pay in.

GIZ, the German aid agency, says that increased out-of-pocket costs have made the system less effective and pushed more people to pay their own way and seek treatment abroad. It also notes that some hospitals have trouble getting reimbursed by the social insurance fund due to the complexities of the rules and the classification of conditions, and it warns that the high rates of participation in social insurance, which hit 98.6% in 2011, are largely the result of one-time payments to herders, students and the unemployed. In 2012 the participation rate was back down to 92.2%. This raises a longer-term concern about the sustainability of the system. The people who are most in need of the programmes, those most likely to get sick or hurt, are also those least likely to sign up. The solution has been to keep the contribution rates low (MNT8040, $4.80, per year for herders), but while this helps to increase enrolment, it raises very little money.

Payments are on average quite low. According to the Social Insurance General Office, the minimum pension is MNT145,200 ($87) per month, while the average pension is MNT222,000 ($133) per month. The health care benefits are especially weak. The maximum payout is MNT1.33m ($798) per person per year. While medical costs are low in the country, this sum is far too small for the proper treatment of serious medical conditions.

Funding Worries

 As with most social security systems, the big question overhanging Mongolia’s is one of funding. While it brings in more money than it spends, that is not the whole story. The state actually provides much of the funding, as it pays for the benefits of a number of classes of recipients (such as military personnel and the indigent). Transfers from the government equal to around 2.5% of GDP go to subsidise the pension and social insurance systems. The low payouts, poor benefit design – whereby support is not always justified given the contributions made – unpredictability as well as inconsistency of benefits adjustments lead to a poor set of incentives and credibility issues. For example, the drop in total employee-employer contributions from 19% to 14% in 2008 may have been good public policy, as it improved enrolment, but it brought into question the long-term viability of the system.

Mongolia is also facing issues with respect to ageing. While it is a relatively young country, the World Bank warns that it is not exempt from the problems faced in many countries: not enough working people to support the retirees. In the 1970s women were having on average 7.5 children; now they are having two. In 1950 life expectancy was 43.5.

It is now almost 70. In 2010 67.1% of the population was of working age, while the percentage of those of retirement age was 7.7%. The World Bank forecasts the former will fall to 51.6% and the latter will rise to 28.6% by 2050.

DB To DC

One of the solutions is to transition from defined benefit to defined contribution, and that is what the country has been trying to do. In 1999 the Notional Defined Contribution (NDC) scheme was introduced. Under the plan, people born after January 1, 1960 have accounts that are be paid a theoretical interest rate, and these form the basis of retirement payouts. The hope was that a surplus would build up and that, within a few years, the principal would be growing as the returns were reinvested. That did not happen, however.

According to the World Bank, Mongolians who are being paid under the new system will be receiving payouts substantially lower than those under the old system and notes that the replacement ratio will drop from the current 40-50% rate to 32-35%. It adds that the minimum pension under the NDC programme (which is designed to provide a floor of benefits for those who have not paid in enough) creates the wrong set of incentives, encouraging people to underreport wages.

Indeed, the World Bank is suggesting the adoption of a three pillar-type retirement system. This would retain the NDC programme kept but modify its parameters, including a higher retirement age and a higher contribution rate, as well as a robust private component at the higher end. Public health insurance would also benefit from similar reforms.