The Welfare Debate — Let's Do It Properly

[Seoul Sinmun · Op-Ed · August 17, 2020]

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

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

Unlike economic growth, where effects appear immediately, a considerable period is required for social security schemes to be properly established. A prime example is pensions. This is because pensions are not paid to all older people as soon as a pension scheme is introduced. Unlike the National Health Insurance, where benefits are received immediately upon enrollment, one must contribute for at least 10 years and be over 62 years old to receive National Pension benefits.

The primary reason our social security expenditure is lower than that of the Organisation for Economic Co-operation and Development (OECD) member countries is the short history of pension introduction. The National Pension amount payable, which is 30 trillion won this year, will rise to 164 trillion won in 20 years and to 1,120 trillion won by 2088, a 40-fold increase. After fund depletion in 2057, the cumulative deficit until 2088 will reach 17,000 trillion won. This is why a cross-sectional approach that evaluates the scheme based on current standards is dangerous. This is also why more attention must be focused not on the 750 trillion won in National Pension reserves but on the unfunded pension liability of 1,500 trillion won—the shortfall in pension payments that arises from collecting too little in contributions.

A representative example of how a cross-sectional approach has exacerbated the problem is the special occupational pension schemes, such as the Government Employees Pension. Even excluding the Private School Teachers Pension, which will face the most serious problems in the long term, the liabilities of the Government Employees Pension and the Military Pension reach 944 trillion won. If the unfunded liability of the National Pension, estimated at 1,500 trillion won, is added, it already far exceeds one year's gross domestic product (GDP) (1,919 trillion won as of 2019). But that is not all. Because these are schemes where recipients receive far more than they contribute, the liabilities increase every year.

Despite this situation, some argue that these are not confirmed national liabilities because there will be future contribution revenue. They say this even though national liabilities would keep growing even if the Government Employees Pension contribution rate were 28%, 10 percentage points higher than the current 18%. This is also why the Finnish Government Employees Pension, despite bearing contributions of over 28%, pays benefits only at the level of our National Pension, far less than our Government Employees Pension pays on a contribution of 18%.

On the other hand, there are growing voices calling for the National Pension income replacement rate to be increased further than it is now to strengthen public pensions. While omitting the fact that OECD member countries contribute twice as much as we do to maintain schemes at the level of our National Pension, they criticize urgent fiscal stabilization efforts as "fear marketing".

They claim that the National Pension scheme is problem-free and that people are being made anxious. They cite Germany as the basis for their "fear marketing" argument. They ask why we should worry about the National Pension, which has secured 750 trillion won in reserves, when Germany operates well while holding only two to three months' worth of pension expenditure.

They argue that if reserves disappear, future generations can simply bear the burden, questioning whether we fail to understand the obvious principle of intergenerational support. This is while ignoring the reality that intergenerational support has become impossible because more than 8 million future economically active people were not born due to decades of ultra-low fertility. By citing the example of Germany while omitting the fact that Germany's pension scheme has not suffered internal decay because it has been collecting contributions two to six times higher than ours since before 1970, most citizens fail to feel a sense of crisis.

Despite this situation, the introduction of a universal basic income for all citizens is emerging as a hot topic in the political sphere. This is while misleading people into believing that the majority of citizens will lose their jobs due to the Fourth Industrial Revolution. Even with the welfare schemes already introduced, the very existence of the state is at risk, yet they propose introducing a basic income that requires astronomical financial resources.

Although welfare expenditure is increasing most rapidly among OECD member countries, Korea is the country where the income redistribution effect through government transfer payments and social security schemes is the lowest. This is because a significant portion of welfare expenditure is attributed to those who are well-off. This occurs because high-income earners who worked in stable jobs receive benefits several times greater than what they contributed.

While leaving this reality unaddressed, can a basic income—that is, a 1/n split that pays the same amount to everyone—be the solution? I believe not. At least for welfare schemes funded by taxes, resources should be distributed preferentially to vulnerable groups so that various social indicators, which are at the highest levels in a negative direction, can be improved even slightly.

Fortunately, there is still one year and eight months left until the presidential election. Through the basic income debate that has surfaced early, it is necessary to create a forum for public discussion where citizens can properly understand what problems exist in our welfare schemes. National competitiveness can be strengthened only if we build a social safety net that provides more benefits to those most exposed to risk and minimizes the fear of failure for young people's creative business ventures.

Source: Seoul Sinmun (original article)