The Government Employees Pension Ship Must Fill Its Ballast

[Seoul Sinmun · Open World · May 29, 2014]

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

At some point, our society developed a tendency to compare the Government Employees Pension with the National Pension whenever the issue of the former is mentioned. Because of this situation, it has devolved into a debate over whether there are differences between the Government Employees Pension and the National Pension, and it seems that both civil servants and the general public harbor significant dissatisfaction. In this context, the civil service community is in turmoil as reports of a 20% cut to the Government Employees Pension have been published in the media.

There are reasons why the civil service community may feel frustrated by the reality of comparing the Government Employees Pension using the yardstick of the National Pension. This is because they believe that various attributes—such as higher contributions than the National Pension (9% for the National Pension, 14% for the Government Employees Pension), severance pay, industrial accident insurance, and personnel policy considerations to attract excellent civil servants—are embedded in the Government Employees Pension. It seems they feel that only the Government Employees Pension is being criticized while the state's past negligence of its responsibilities is ignored, such as the use of the Government Employees Pension fund during the large-scale voluntary retirements of civil servants in 1998 and the liabilities arising from the privatization of the Korea National Railroad in 2005.

To understand the reality facing the Government Employees Pension, it would be helpful to look back at the path it has taken. The Government Employees Pension, which started in 1960 with an average of 40%, was gradually increased to 77% (based on a 33-year contribution period) by the 1980s. While it is called 77%, if converted to a 40-year contribution period—the same as for National Pension contributors—it exceeds 90%. Despite the pension reform in 2009, it still guarantees 76% (62.7% based on a 33-year contribution period). Furthermore, intensive reform measures are applied only to new hires after 2010. Due to these circumstances, a deficit subsidy of 2.5 trillion won from the public's taxes must be provided this year alone, and it is expected that an annual deficit of over 7 trillion won will occur 10 years from now.

At this point, let us also look back at the National Pension. This is not to compare the National Pension with the Government Employees Pension. It is to examine how much effort the National Pension has made to adapt to the changed social and economic environment. The National Pension, introduced 30 years (40 years for self-employed persons in urban areas) later than the Government Employees Pension, has already seen its benefits cut by 43% (from 70% to 40%). There is also no discrimination based on the timing of enrollment in the application of reform measures.

The reason why the Government Employees Pension issue continues to be mentioned in our society seems to be that there has not been enough reform to build a social consensus. After the 1997 economic crisis, the World Bank called for reforms to align Government Employees Pension benefits with those of the National Pension (The Korean Pension System at a Crossroads, p. 40, 2000). However, instead of accepting the policy recommendation, a payment guarantee provision stating that "the state guarantees benefit payment when a deficit occurs in the Government Employees Pension" was added to the Government Employees Pension Act at the end of 2000. The Organisation for Economic Co-operation and Development (OECD) also pointed out the need for fiscal stabilization measures for the Government Employees Pension and its integration with the National Pension (OECD Economic Reviews: Korea, p. 59, 2003).

The reason international organizations suggested that the Government Employees Pension be operated in integration with the National Pension is that they viewed the future of the Government Employees Pension as that bleak. It was also because they believed that operating it as an independent scheme would be difficult. Even if contributions were doubled from current levels (14% to 28%) in addition to cutting the Government Employees Pension by 20%, it would still fall short of the automatic adjustment mechanisms already adopted by Northern European countries. The massive scale of accrued pension liability that has already occurred for the Government Employees Pension also does not decrease.

Unlike us, Japan has recognized the need for a common pension policy to unify the National Pension and the Government Employees Pension since the early 2000s and has pursued overhaul efforts. As a result of these efforts, the Japanese Government Employees Pension is scheduled to be aligned with the level of the National Pension starting from the second half of next year. I am not citing the example of Japan to argue for the immediate integration of the Government Employees Pension with the National Pension. It is to emphasize that the Government Employees Pension itself must change so that it can be sustainable, as it is difficult to sustain independently.

The fact that the Government Employees Pension deficit is covered by the public's taxes means that someone unrelated to the Government Employees Pension must bear the burden of the deficit. Members of our society do not seem to think it fair that the Government Employees Pension deficit is resolved at the expense of someone other than its own members. The Government Employees Pension must take on the 'ballast of fiscal stability' so that it can resolve its deficit on its own. Only by adding the 'ballast of fairness' and topping up the missing ballast to the proper level as soon as possible will the Government Employees Pension ship regain its stability.

Source: Seoul Sinmun (original article)