[Reset Korea] The Time-Bomb Pension Liability — Let Us Begin Transparent Information Disclosure

[JoongAng Ilbo · Reset Korea · June 28, 2021]

Yun Suk-myung, President of the Korean Pension Association and Head of the Pension Reform Division of Reset Korea

The National Pension projections reflecting changes in the fertility rate, presented at a recent academic conference hosted by the Korean Pension Association, the Korean Population Association, and the Seoul National University Population Policy Research Center, are shocking. To achieve the fiscal stabilization goal for 2090 (accumulating one year's worth of pension benefits), the National Pension contribution rate must be raised to 19.38% (currently 9%) immediately next year, or increased gradually from next year until 2042 to as high as 22.4%. This is significantly higher than the appropriate contribution rate (16.02%) derived during the fourth National Pension financial projection in 2018. As it has been operated with a 9% contribution rate since 1999, the fiscal situation of the National Pension is worsening.

Pension Liabilities Accumulating in the Thousands of Trillion Won — The Responsibility of Our Generation, Not Future Generations

If the Government Employees Pension and Private School Teachers Pension, which currently have contribution rates of 18%, are left as they are, their contribution rates must be raised to over 30% for the Government Employees Pension and over 40% for the Private School Teachers Pension to achieve fiscal stabilization.

Last year, the National Pension accumulated unfunded pension liabilities of more than 140 billion won per day and over 50 trillion won per year. This is a conservative estimate. It is a total disaster when considering the Government Employees Pension and Military Pension, which generated 1,045 trillion won in national liabilities, and the Private School Teachers Pension, which will turn to a deficit between revenues and expenditures in 2029.

The fiscal burden of the Basic Pension, which covers 70% of people aged 65 and older, is projected to increase nearly threefold from 11.9 trillion won in 2018 to 29 trillion won by 2027, even excluding the burden on local governments. It is bleak to think how much they will propose to increase the Basic Pension in this presidential election, given that it has been raised by 100,000 won during every election. Privately managed retirement pensions collect contributions of 8.33%, the same level as the National Pension, yet their returns are only around 1–2%.

Despite the desperate situation, populist politicians unconditionally call for giving more. They even propose providing disaster relief funds and basic income to beneficiaries of the Government Employees Pension, Private School Teachers Pension, and Military Pension, whose benefits exceed the monthly salaries of young people.

The government is not much different in its shameless approach. It claims there is no need to worry because the 1,045 trillion won in national liabilities from the Government Employees Pension and Military Pension are not fixed liabilities. During the calculation of national liabilities in 2019, they used tricks to reduce the scale of the liabilities. If the 2018 assumptions were applied, national liabilities would increase to 1,150 trillion won. They also claim that the unfunded pension liabilities of the National Pension, which have exceeded 1,500 trillion won, are not national liabilities. Their reason: the state is not the people's employer. If there is no need to worry about the national liabilities of the Government Employees Pension and Military Pension, and if the National Pension's liabilities are not national liabilities, then who takes responsibility for this debt? Does it mean they intend to pass it on to young people and future generations?

The explanation that Germany operates by collecting taxes to cover pension deficits is a distortion of the facts. Over the last 40–50 years, the burden of pension contributions in Germany was two to five times our level, yet the pension amount payable was at the Korean level. In 2004, Germany introduced an automatic safety mechanism that automatically reduces pensions when negative factors occur, such as a decline in the fertility rate, an increase in life expectancy, or a decline in the economic growth rate. Because it is sustainable under any circumstances, it operates with two to three months of reserves. When temporary liquidity problems arise, the government lends funds and the principal is repaid. There are politicians who distort this by claiming that the pension amount payable is guaranteed by law.

Japan also introduced a pension automatic safety mechanism. The Japanese Employees' Pension Insurance will have enough money to pay one year's worth of pensions even in 2115. The Japanese Government Employees Pension, in which civil servants did not pay a single cent in contributions until before 1959, was overhauled in 2015 into a pension system where the burden and benefit payments are identical to those of the general public. Was there no opposition in Japan? The answer is on the website of the Japanese Ministry of Health, Labour and Welfare. Because all statements from important meetings are disclosed, it is difficult to use tricks.

This is a decisive point of difference from our situation, where only some civil servants know the results of the fifth Government Employees Pension financial projection in 2020. It is time to expedite the structural reform of public pensions and retirement pensions through transparent information disclosure.

※ Contributions by external writers may differ from the editorial direction of this publication.

Source: JoongAng Ilbo (original article)