[Op-Ed] The Government Employees Pension — The Reality Must Be Properly Disclosed

[JoongAng Ilbo · Op-Ed · February 23, 2015]

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

The Special Committee on Government Employees Pension Reform is picking up speed, with its subcommittees examining foreign cases and other matters. Given the committee's short schedule, productive discussion seems possible only if the points at issue are properly understood and wasteful debate is kept to a minimum. Let us start with the concept of the accrued pension liability, a representative point of contention. Some claim that the accrued pension liability (the shortfall not currently secured when the total amount of pensions to be paid in the future is converted to present value)—which would pose no great problem if our Government Employees Pension scheme is understood as a pay-as-you-go (PAYG) system (a method of raising each year the funds needed to pay that year's pensions)—is being misrepresented as if it were actual debt in order to justify pension reform. They argue that the Government Employees Pension's accrued liability, estimated at 484 trillion won at the end of 2013 (513 trillion won if retirement allowances are included), is not an accrued liability when considering the revenue from the contributions (7% of monthly salary) paid every year by civil servants and the government contributions (7%) borne by the government. Since contribution revenue will keep coming in, they say, booking it as a liability only creates an atmosphere of fear.

For such claims to be valid, the annual revenue of the Government Employees Pension must exceed expenditures. It is not solved simply by revenue exceeding expenditure. To not be considered a liability, it must be paid down annually so that the accrued liability disappears at some point in the future. However, the Government Employees Pension is structured such that the accrued pension liability increases over time. This is because more money goes out than comes in. This is also the reason why tax injections under the name of the deficit subsidy increase every year.

Currently, the contributions paid by 1.07 million active civil servants are insufficient to pay the pensions of 370,000 retirees, so the deficit is being covered with taxes. In 20 years, 1.18 million civil servants must support 890,000 retired civil servants (including survivor pensions). In 25 years, by 2040, they must support 960,000 people. The so-called dependency ratio (the ratio of pension beneficiaries to active civil servants) reaches 81.4%, meaning the structure is such that approximately one active civil servant must support one retired civil servant. This figure is based on the assumption that the number of civil servants is not reduced despite the decrease in total population. If the number of civil servants is reduced in proportion to the population decline, the dependency ratio will exceed 100%.

This is why the annual deficit subsidy, which is 3 trillion won in 2015, will surge to 8.2 trillion won in seven years, and even if the Saenuri Party's reform plan is passed, the annual deficit subsidy from 2016 to 2080 will reach 12.9 trillion won. Looking at foreign cases, the accrued pension liability is likely to increase even if contributions, currently at 14%, are doubled to 28%. This is why one cannot help but be concerned about the Ministry of Personnel Management's plan, which is a step backward from the Saenuri Party's plan in terms of fiscal stabilization.

The advanced countries we should emulate have already taken action. U.S. federal employees are paying down their accrued pension liability over 30 years. A significant portion of expenditures is used to reduce the burden on future generations rather than current retirees. The Notional Defined Contribution (NDC) system introduced by Sweden and Norway also has the primary goal of suppressing accrued liabilities. The automatic adjustment mechanisms introduced by Japan, Germany, Austria, and others also aim for the control of accrued liabilities as their end goal. Our reform plan is a weak reform that does not even come close to these advanced countries.

The claim that Government Employees Pension expenditures are low compared to OECD member countries is also exaggerated. European countries such as Sweden have a higher proportion of civil servants relative to the economically active population than we do. Since there are more targets, it is natural that expenditures are high. The high ratio of beneficiaries must also be considered. Many OECD member countries are in a situation similar to ours 20 to 30 years from now, with dependency ratios reaching 80 to 90%. Even if they operate the same system, their expenditures would become more than twice our current amount. In Japan, the influence of the past generation of civil servants under the onkyu system (where pensions were paid entirely by taxes) is also significant.

The claim that the government's role has been small must also be examined closely. There was a time when the government failed to fulfill its role. During the International Monetary Fund (IMF) economic crisis, because the nation lacked funds, Government Employees Pension funds were diverted to pay for early retirements. Of the approximately 20 trillion won used by the government, 10 trillion won has already been repaid as deficit subsidies. If deficit subsidies are provided for a few years after 2020, the diverted amount will be fully repaid. Japan also diverted part of its civil servant pension fund to resolve the fiscal instability of the JR (Japan Railways) Mutual Aid Pension. While we did not do well, Japan went a step further by diverting civil servant pension funds for occupations other than civil servants. Nevertheless, from this October, the Japanese civil servant pension will be subject to the same pension system as the general public. How should we interpret the Japanese case?

We are a country where the economically active population will decrease by 10 million in the future, and the proportion of the core working-age population (ages 25–49) will fall to the lowest in the world. Due to the surge in the older population, the annual deficit of the National Health Insurance is projected to be 47 trillion won by 2030. We must quickly enter a downsizing system to cope with the "core economic population cliff." I emphasize reform not out of envy or jealousy toward the Government Employees Pension, but because the Government Employees Pension is the system that must first adapt to the approaching downsizing system. For the sake of additional reforms to the National Pension, where beneficiaries will outnumber contributors starting in 2060, the reform of the Government Employees Pension is urgent and must be a proper reform. This is why environmental changes that could shake the very existence of the state must be properly, quickly, and widely disclosed.

Source: JoongAng Ilbo (original article)