The Yoo Si-min Plan, the Saenuri Party Plan, and 'Vision 2030'

[Seoul Sinmun · Open World · March 11, 2015]

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

On February 26, I attended a public hearing hosted by the 'National Grand Compromise Body for Government Employees Pension Reform' as a witness. What I emphasized at this public hearing was the fact that both Dr. Moon Hyung-pyo (now Minister of Health and Welfare), then of the state-funded Korea Development Institute (KDI), and I opposed the government's reform plan at the 2008 National Assembly public hearing (for the 2009 Government Employees Pension reform). This was because the intensity of the reform was weak compared to experts' proposals, and the content of the reform was concentrated on new civil servants. The fact that the first pension payment for civil servants who served for more than 10 years was not reduced by a single penny—contrary to the promotion that pension amounts were cut by 9.5% (accrual rate 2.1→1.9%)—is another reason I evaluate the 2009 reform harshly.

Let us look at the discussion process thus far. Yoo Si-min, the Minister of Health and Welfare, who took the lead in cutting National Pension benefits, resigned from his post as Minister after the reform plan was rejected by the National Assembly in April 2007. Subsequently, in July, the National Pension reform plan (reducing the rate from 60→40%), which is evaluated as a half-reform due to the failure to increase contributions, passed the National Assembly. This was instead of the reform plan proposing a benefit rate of 50% and contributions of 15.9% (to be increased by 2030), which many experts had suggested since 2003. The political sphere, judging that increasing contributions would be difficult, chose to lower the benefits by an additional 10 percentage points to 40%. However, now that there are calls to reform the Government Employees Pension, arguments are being raised to return to a 50% benefit rate, claiming that the National Pension was cut too much—in other words, a claim for the 'upward equalization of public pensions.' This is despite the situation where contributions must be raised to 16% because they have not been increased for 10 years, even to ensure that the burden is not passed on to future generations at a 40% benefit rate.

The Yoo Si-min-style Government Employees Pension reform plan, proposed in November 2007 as a member of the National Assembly, was a radical plan to lower the benefit rate to 40% and increase contributions to 13%. He proposed a stronger reform bill than the 50% benefit rate that I had suggested at a debate hosted by Representative Yoo Si-min two months prior. In contrast, the Saenuri Party reform plan proposed last November is a plan to cut benefits differentially for current employees (54→50%) and new appointees (46→40%). The Saenuri Party reform plan is a weaker reform compared to the Yoo Si-min plan from seven years ago, which sought to lower the rate uniformly to 40% (based on 40 years) regardless of whether they were current employees or new appointees. The 60% recently proposed by the Ministry of Personnel Management is even weaker. This is because, as former Minister Yoo Si-min said, raising contributions by a moderate amount will not keep the system going, so there are limits to fiscal stabilization through contribution increases.

The project that the Roh Moo-hyun administration devoted its utmost effort to in 2006 was 'Vision 2030.' The core of the vision was to increase welfare spending—which was only 8.6% of gross domestic product (GDP) in 2005—to 20.6%, the 2001 average of the Organisation for Economic Co-operation and Development (OECD), by 2030, in order to address population aging and satisfy the public's welfare needs. Consensus was reached that the biggest obstacle to expanding welfare spending was "social insurance, such as pension systems where one receives more than what they contributed." It is deeply regrettable that the then-ruling party (now the opposition), which led this policy direction about ten years ago, is now showing a passive attitude toward pension reform.

Given these circumstances, I would like to present an alternative to revitalize the reform discussion. I propose a plan that provides a 50% benefit rate (providing a 1.25% accrual rate, which is a 26% cut in terms of the benefit rate) to both current and new civil servants, while requiring them to pay 20% in contributions. This is because, to avoid passing debt on to future generations, contributions of 20% must be collected to maintain a 50% benefit rate (based on a 40-year contribution period). I also propose the recognition of vested interests for the contribution period prior to the reform and the introduction of an income redistribution function to prevent a sharp drop in benefits for lower-ranking civil servants. The decisive difference from the Saenuri Party plan is that the contributions paid by civil servants remain at the current level (7%), while the agencies to which the civil servants belong pay 13% (an increase of 6 percentage points, or 85.7%, from now). This is intended to evaluate the reform plan from the perspective of total fiscal burden (the sum of contribution burdens, retirement allowances, and the deficit subsidy), rather than the deficit subsidy standard that has been used to evaluate Government Employees Pension reform plans until now.

This is to use a proper indicator called 'net transfer' for each reform alternative, rather than short-term deficit subsidy reduction indicators that act like morphine injections. I present this alternative based on the judgment that if it is a share the state must eventually bear, the wise choice would be to properly disclose the actual cost as soon as possible. If the only difference is whether the burden is borne early or late, the correct approach would be to bear the burden now while conditions are better and properly reveal the reality.

Source: Seoul Sinmun (original article)