[Op-Ed] Properly Reform the Government Employees Pension

[JoongAng Ilbo · Op-Ed · August 18, 2014]

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

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, the Government Employees Pension became a central axis of conflict in our society. This is due to sustainability and equity. Because the controversy is so great, the World Bank and the Organisation for Economic Co-operation and Development (OECD) have also suggested directions for reform. Recently, discussions on reform have begun in earnest as the deficit expands. What is the problem, and what kind of reform is necessary? The answer can be found in the "50-Year History of the Government Employees Pension" (Ministry of Public Administration and Security, 2011).

At the time the Government Employees Pension was introduced in 1960, the average benefit rate (the ratio of the pension to income before retirement) was 40%, and the eligibility age was 60. However, it rose to 76% by the early 1990s. The increase rate was as high as 90%. Survivor pensions also rose from 40% to 70% of the pension received by the spouse before death. The pension commencement age was significantly lowered so that those with a 20-year contribution period could receive pensions even in their 40s. With the introduction of the retirement allowance system in 1991, severance pay was also created, similar to the private sector. It is not that there is no severance pay, but rather that the average amount is small, at 40% of the private sector.

In 1995, contributions were increased by one percentage point and the system was changed so that pensions would be received from age 60. However, there was a limitation in that the age 60 regulation applied only to those who became civil servants after 1996. During the 2000 reform, contributions were raised by one percentage point and the eligibility age was partially adjusted. Instead, a clause was added stating that the state guarantees payment if a pension deficit occurs. Due to this clause, it has been criticized as "not reform but deterioration."

Relatively speaking, the 2009 reform was on the stronger side. The headline of the Ministry of Public Administration and Security's press release at the time was as follows. The Ministry explained that "employee contributions will be increased by 27% and pension amounts will be reduced by up to 25%, so the deficit subsidy for pensions over the next five years is expected to decrease by 51% compared to the current level." However, contrary to the expectations at the time, the deficit is widening. Contrary to the explanation that pensions would be significantly cut, pensions were not cut for those with more than 10 years of experience. It is specified that for those with more than 10 years of service, there shall be no reduction in the first pension amount.

For long-term employees, there is even a possibility that pensions will increase. This is because during the 2009 reform, the basis for calculating contributions and old-age pension amounts was changed from monthly remuneration to taxable income, similar to the National Pension. Monthly remuneration excluded various allowances and amounted to only 65% of taxable income. As the calculation basis changed, old-age pensions can increase by up to 54%, even for contribution periods prior to the reform.

Civil servants claim that they pay much higher contributions than the insured of the National Pension. The Government Employees Pension contribution rate rose stepwise from 2.3% of monthly remuneration in 1960 to 8.5% (based on employee contributions) in 2001, and was maintained until 2009. However, this is based on monthly remuneration. If calculated based on taxable income, as with the National Pension, it drops to 5.5%. Before the contribution increase in 2001, it was 4.9%. Until before 2010, there was not much difference from the National Pension (4.5%). Fifty-four years have passed since the introduction of the Government Employees Pension, and twenty-six years since the National Pension. For the claims of civil servants to be valid, the National Pension must not raise its contribution rate in the future, but looking at the financial situation of the National Pension, it will be difficult not to raise it.

The reason Government Employees Pension contributions feel high is that the income ceiling, which serves as the basis for imposing contributions, is high. As of 2013, it is 3.98 million won per month for the National Pension and 7.9 million won for the Government Employees Pension. Even if income is higher than this, contributions are levied only up to this amount. If the income ceiling is high, the pension is also high. With a monthly income of 5 million won, the Government Employees Pension is 3.13 million won per month, while the National Pension is 1.2 million won. This assumes a 33-year contribution period for the Government Employees Pension and a 40-year contribution period for the National Pension. If the National Pension contribution period is changed to 33 years, the pension amount decreases to 990,000 won. With a monthly income of 7 million won, the gap widens further, with the Government Employees Pension at 4.39 million won and the National Pension at 990,000 won. For those who joined before the 2009 reform, the gap is even wider.

If a civil servant who began their public service before 2010 dies, 70% is given to the spouse as a survivor pension. Even if the amount is reduced, there are many cases where it exceeds 3 million won. In such cases, there will be an increasing number of instances where the survivor pension of a civil servant's spouse is greater than the formal pension of a lower-ranking civil servant. This means that a fairness controversy within the public service community is inevitable. This is why a "more for the lower, less for the upper" style of reform is necessary.

To resolve such controversies, accurate factual data must be disclosed. The (expected) pension amounts by time of entry, rank, years of service, and age, which have not been disclosed until now, must be released as soon as possible.

To end the wasteful debate over "who receives more and who receives less," the Government Employees Pension must be overhauled into a system that allows for comparison. The pension system for U.S. federal employees, where severance pay is increased like in the private sector and the government supports part of the personal pension contributions, could be an alternative. Under this model, the government would support civil servants' contributions up to the National Pension contribution rate (4.5%), and only partially support amounts exceeding that. This method was also the reform plan proposed in January 2007 by the Government Employees Pension Development Committee, which consisted of representatives from various sectors. If the benefits of the Government Employees Pension are not excessive compared to the National Pension, there is no reason to oppose an overhaul in this manner. Only if the Government Employees Pension is properly reformed will the Military Pension and Private School Teachers Pension follow suit.

Source: JoongAng Ilbo (original article)