The Fate of the Sailing Battleship 'Temeraire' and the Welfare Debate

[Seoul Sinmun · Open World · September 21, 2015]

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

The painting 'The Fighting Temeraire' by William Turner, a master of British Romantic landscape painting, features a sailing ship that played a major role in the Battle of Trafalgar in 1805. The 'Temeraire' was a primary sailing battleship of Admiral Nelson's British fleet, which thwarted the attempt by the French and Spanish allied fleet led by Napoleon to invade Britain. As the era of steamships arrived with the Industrial Revolution, it possesses symbolism announcing the end of the era of sailing ships. This is because the subject of the painting is 'the battleship Temeraire being towed to its final anchorage for scrapping' by a much smaller steamship. It is like a funeral procession for the 'Temeraire,' which was once deeply loved by the people (Economics in Paintings, p. 141).

The starting point of Western social security schemes emerged as traditional support systems collapsed due to the massive influx of population into cities caused by industrialization. Now, more than 200 years after their introduction, original social security states are implementing fundamental reforms to ensure the sustainability of their systems amidst rapidly changing social and economic conditions, such as life expectancy, which has increased to a degree that makes comparison with the time of introduction difficult.

Since Germany was the first country to introduce social security schemes during the Industrial Revolution, it is inevitable that there is great interest in Germany. As is widely known, Germany has operated generous social security schemes to the extent that a single male worker's employment could sufficiently support a family after retirement. The German system, known as the Bismarck model, has long been established as an important welfare model. Because this generous German model formed the foundation of our country's social security schemes via Japan, it is natural to be attentive to institutional changes in Germany.

After several trials and errors, Germany implemented fundamental reforms in 2004. Because public pension schemes are long-term insurance, problems only emerge after a considerable period, making them susceptible to political exploitation; thus, Germany fundamentally blocked the intervention of political judgment. As life expectancy increases, the period of receiving pensions lengthens and the support burden grows, but if the capacity to support declines due to falling economic growth rates and fertility rates, an automatic safety device was introduced to automatically reduce pension amounts in proportion to the decreased national support capacity.

Instead of wasteful political debate, pension amounts are automatically adjusted each year based on the performance of the national 'Ship of Germany.' It is a 100% pure automatic safety device that includes beneficiaries already receiving pensions. By operating the system in this manner, the once-high income replacement rate (the ratio of pension amount to monthly salary during the working period) has fallen to the low 40%s before anyone noticed, even though contributions exceed 19%.

Our National Pension, which was introduced at a level similar to Germany during its past generous era, saw its income replacement rate lowered to 46.5% in 2015 through two reforms. It is decreasing by 0.5 percentage points every year and will drop to 40% by 2028. Given this situation, arguments are being raised that the income replacement rate of the National Pension is too low, making it inevitable for people to suffer from poverty in old age even if they receive the National Pension. While Germany's average contribution period for male workers is already 35–40 years, ours is projected to be only about 25 years even 30–40 years from now; thus, it is argued that poverty in old age is inevitable because the actual contribution period is only half that of Germany's.

How should we interpret these arguments? There is already no significant difference between the average life expectancy of Germany and our country. If life expectancy is similar, but the period of work—that is, the contribution period as a pension contributor—remains only half even 30–40 years from now, can the 'Ship of the Republic of Korea' survive in the age of the centenarian? Should we not view the past German pension system, which is familiar to us, as the sailing battleship 'Temeraire' destined for scrapping, pushed aside by steamships? Would it not be the correct approach to set the direction of our society's development so that people work as long as their increased life expectancy allows, thereby increasing the actual contribution period to adapt to a new era?

I believe we should view our reality more with concern, where the income replacement rate is higher than Germany's, yet the contributions actually paid are only half of Germany's. This is why arguments to raise the income replacement rate back to 50%, which was lowered with difficulty, without mentioning the level of contributions, are concerning. I hope that future-oriented discussions considering these concerns will take place within the 'Social Body for Strengthening Public Pensions and Resolving Poverty in Old Age,' which has been in full operation since September.

Source: Seoul Sinmun (original article)