The Pension Romance of the Three Kingdoms in Northeast Asia

[Seoul Sinmun · Open World · November 30, 2015]

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

As pension experts from the Asia-Pacific region gather every year to discuss the current status of pension system operations and directions for reform by country, there is great interest in what discussions are taking place in which countries. The impression from the Organisation for Economic Co-operation and Development (OECD) Asia-Pacific pension experts meeting held in Jeju a few weeks ago was quite different from previous years. This is because China's steps toward pension reform have been faster than expected. Until recently, there was pride that we had more experience in operating systems and had put more thought into the direction of system development in the field of Western-style social security schemes, such as welfare issues, than China. This was because, although we adopted the basic framework of the pension system from Japan—which introduced the Government Employees Pension immediately after the Meiji Restoration in 1867 and public pensions for the general public in 1942—we took pride in having made efforts to establish a relatively stable system.

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

However, I feel that this year's OECD seminar gave the impression that we are the least capable of keeping up with the trends of the times among the three Northeast Asian countries. Japan has already introduced a sustainable pension system through its 2004 reform, ensuring sustainability even as the older population increases and the economic growth rate falls.

This is because they introduced an automatic adjustment mechanism that automatically links pension amounts to changes in the socio-economic environment. This is the background that allowed Japan's Employees' Pension Insurance to secure fiscal soundness for up to 100 years into the future. A more important point is that political judgment can now be excluded from the operation of the pension system.

The implications of an automatic adjustment mechanism are significant in a society where the proportion of older people among the total population is increasing rapidly. This is because it can fundamentally block the political influence of the older population, who have high voting cohesion in a democratic society where decisions are made by vote. Due to this necessity, we too once raised the introduction of an automatic adjustment mechanism.

That was in 2008, when the National Pension's fiscal status was being reviewed for the second time. Although a small number of experts, including me, mentioned the necessity of introducing an automatic adjustment mechanism, it could not even be properly discussed as it was pushed back by opposing logic that it was premature at the time.

However, following Japan, China is now considering the introduction of an automatic adjustment mechanism. At this OECD meeting in Jeju, it was confirmed that the Chinese government has agreed to introduce an automatic adjustment mechanism—namely, a Notional Defined Contribution (NDC) pension system—with only slight disagreements on details between government ministries. It has been confirmed that we, who have more experience operating Western-style social security schemes than China and are experiencing population aging faster than any other OECD member country, are the most lagging among the three Northeast Asian countries in preparing for aging.

The three Scandinavian countries seem to be as competitive a region as the three Northeast Asian countries, including Korea. Sweden was the first country to introduce an automatic adjustment mechanism into its state-run public pensions to adapt to environmental changes. That happened already 16 years ago. It was a major event that drew immense criticism from social welfare scholars who emphasized generous pension systems that enable a comfortable life in old age.

This is because the core of the automatic adjustment mechanism is to add interest equal only to the economic growth rate to the contributions one has paid, instead of maintaining the previously generous pension system. If the period of receiving pensions increases due to longer life expectancy and the economic growth rate decreases, the pension amount decreases accordingly. However, safeguards for vulnerable groups were established. This is through a minimum guaranteed pension, where the state uses taxes to cover the difference if the pension amount falls below the minimum cost of living. Finland and Norway also introduced similar systems. Yet, when turning one's attention to the three Northeast Asian countries, it is difficult to shake the feeling that we are the only ones among our neighbors lagging in preparing for aging.

In three years, in 2018, the fiscal status of the National Pension will be checked for the fourth time. Given that previous financial projections of the National Pension failed to properly prepare for population aging, it is now time to make proper preparations. In-depth consideration is required to properly address the various problems we face. To do so, preparations for the financial projection of public pension systems, including the National Pension, must be made with sufficient time. This is because there are too many issues that have not been addressed for various reasons, and effectively addressing these issues requires thorough preparation along with the time and effort to properly communicate the reality.

Source: Seoul Sinmun (original article)