Two Perspectives on the Accrued Pension Liability

[Seoul Sinmun · Open World · April 23, 2014]

Yun Suk-myung, Director of the Pension Research Center at the Korea Institute for Health and Social Affairs (KIHASA) and Adjunct Professor of Economics at Korea University

Since the publication of the "national settlement report for fiscal year 2013," accrued pension liability (liability arising from collecting fewer contributions than the amount of pensions to be paid) has been drawing attention. This is because the accrued liability of the Government Employees Pension and the Military Pension reached 596 trillion won out of the 1,117 trillion won in national liabilities last year. Although it is a bit late, it is welcome that the national settlement report explicitly states the accrued liability of public pensions. The key will be how the accrued pension liability is interpreted.

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA)

First, it must be taken into account that not all pension liabilities with the attributes of accrued liability were included in the "2013 national settlement report." The Private School Teachers Pension was excluded from the calculation of accrued pension liability on the grounds that the state is not the employer. While there is room for debate, given that it has payment provisions similar to those of the Government Employees Pension, the Private School Teachers Pension liability, which exceeds 60 trillion won, should also be viewed as part of the national liabilities. The latent liabilities of the National Pension (Implicit pension debt) should also be considered, as it was concluded after a legislative debate over payment guarantees last year that the state would do its best to ensure pension payments. This is because the state cannot stop the payment of the National Pension as long as the state exists. Despite the short history of the scheme, the latent liabilities of the National Pension, which has taken intensive fiscal stabilization measures, have already exceeded 400 trillion won.

This is the background for judging that accrued pension liability in a broad sense should be viewed as exceeding 1,000 trillion won, regardless of whether there is an official state payment guarantee or whether the accrued pension liability is included in the national settlement report. Given this situation, it seems urgent to establish appropriate control measures for the accrued pension liability. Citing the rapid increase in accrued pension liability, some pension experts, including myself, have long emphasized the urgency of pension reform. On the other hand, a counterargument has been steadily raised that only a portion of the accrued pension liability is a national liability, because a significant amount of the accrued pension liability will be paid using contributions to be collected in the future. When such conflicting claims are raised, the public cannot help but be confused.

Due to the nature of defined benefit (DB) pension schemes, where it is promised that "the promised pension amount will be paid regardless of how much contributions are collected," accrued pension liability inevitably increases if fewer contributions are collected than the promised pension amount. In a situation where all public pension schemes in Korea adopt the defined benefit method, for the announced accrued pension liability not to become entirely national liabilities, no deficit must occur each year, and at the same time, the already accumulated accrued pension liability must decrease. However, the projection that the deficit subsidy for the Government Employees Pension and the Military Pension will reach 3.8 trillion won in 2014 suggests that since pension expenditure exceeds collected contributions, accrued pension liability will inevitably continue to increase. The situation is similar for the Private School Teachers Pension and the National Pension, differing only in degree.

Sweden and Norway, which are widely known to us as exemplary welfare states, introduced an automatic adjustment mechanism (Built-in-stabilizer) so that accrued pension liability would no longer increase. Sweden introduced it 15 years ago, and Norway introduced it three years ago. Germany, on which our attention has recently been focused due to the unification issue, and Japan, which is suffering from aging, also introduced automatic adjustment mechanisms about ten years ago.

In this situation, an email sent a few days ago by Team Leader Randall Jones of the Organisation for Economic Co-operation and Development (OECD), who is in charge of Korea and Japan, weighs heavily on my mind. This is because it stated that despite Japan's introduction of an automatic adjustment mechanism, the increase in pension expenditure due to population aging is deteriorating government finances, and he will visit Japan this June to seek a solution. According to a recent Bloomberg report, Japan's national liabilities at the end of 2014 are expected to be 242% of GDP. However, it should also be noted that the proportion of foreign investors among the massive national liabilities is only 8%. This is because although the scale of government liabilities is large, most of the liabilities are absorbed within Japan.

Given this situation, we seem leisurely in debating the nature of accrued pension liability, arguing whether it is "a national liability or not." This is because countries such as Sweden and Japan are considering additional pension reforms even though they have already introduced automatic adjustment mechanisms to prevent further increases in accrued pension liability. Korea is the very country where expenditures on social insurance and the Basic Old-Age Pension, currently at around 7% of GDP, will reach 19.7% in 2040, 26 years from now, due to population aging. What path should we take, as our proportion of older people will be similar to Japan's after 2040? It seems time to hurry in forming a national consensus on the intensity of pension reform along with its direction.

Source: Seoul Sinmun (original article)