Pensions — The Heavy Burden Those Born in 1990 Will Bear

[Hankook Ilbo · Opening the Morning · February 24, 2022]

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA) and former President of the Korean Pension Association

Lapland in Finland, where Santa's village is located, is currently a land of snow. This is evident from the scenic photos that my co-researcher Mika (Mika Vidlund), who was being pressed for his manuscript, sent along with it from his vacation spot in Lapland. The vast expanse of conifers and the snow piled around the lakes are quite exotic. Another co-researcher, Ismo (Ismo Risku), also sent his manuscript. Along with worries about his twin sons serving in the military and concerns over the situation in Ukraine, as Finland shares a border with Russia...

I first met them during the Korean delegation's visit to Finland for the 'Joint Meeting on Low Fertility and Aging Measures' in 2006. It was while I heard a tall Finnish expert sitting next to me say, "That makes no sense," in response to someone from the Korean side. When I asked why it made no sense, he replied that it obviously did not. This was his reaction to the claim that Korea needs to introduce a universal, tax-financed Basic Pension.

The visit to Finland was intended to gain implications for the operation of the pension system in a situation where the fertility rate had plummeted. In the early 1990s, Finland provided the Basic Pension to approximately 93% of older people aged 65 and over, but just ten years later, in the early 2000s, it reduced this to below 45%, a decrease of more than half. Even this percentage includes beneficiaries who receive only a portion of the Basic Pension amount. The number of full-amount beneficiaries—those who receive the entire monthly sum, as we do with 300,000 won—was drastically reduced to below 8%. Instead, they ensured income security specifically for vulnerable older people. This is the background behind such a reaction to the claim that in Korea, where the fertility rate has plummeted, the Basic Pension should be paid to all older people using collected taxes.

The Roh Moo-hyun administration, for whom the introduction of the Basic Pension was a presidential campaign pledge, focused on the fiscal stabilization of the National Pension after taking office, abandoning the Basic Pension. It pursued a policy opposite to its pledge—which had been to leave the National Pension as is and introduce a new Basic Pension because cutting the National Pension would reduce it to a mere "pocket-money pension." Following the opposition party's claim that fiscal stabilization of the pension was not the urgent issue and that the Basic Pension should be introduced to alleviate elderly poverty, the Basic Old-Age Pension was eventually introduced for 70% of older people aged 65 and over. Subsequently, the pension amount was increased by 100,000 won during every presidential election.

Unlike the National Pension, where one receives a pension after paying contributions, the Basic Pension is 100% funded by taxes. In a situation where the older population is increasing rapidly, the Basic Pension could become a disaster for the younger generation and future generations. This is because the pension amount is raised every election, and the number of eligible recipients is increasing rapidly due to aging.

My Finnish friends often ask about our situation. I have nothing to say. Regarding the reality we face... it is because while they say pension reform is difficult, there are only presidential campaign pledges to give an additional 100,000 won in Basic Pension.

In addition to drastically reducing the Basic Pension, Finland introduced an automatic adjustment mechanism. An automatic adjustment mechanism is a measure that automatically reduces the pension amount if it becomes no longer sustainable. Despite having secured sustainability to a degree incomparable to ours, they still worry about sustainability, calling it a half-measure of an automatic adjustment mechanism.

Our Basic Pension has more than one or two problems. One-third of the beneficiaries are older people who are not poor even by OECD standards, yet they receive the same amount as vulnerable older people exposed to absolute poverty. While costs are snowballing rapidly, the actual effect on reducing the elderly poverty rate is very small. Even though the OECD Secretariat has recommended for several years that we reduce the number of Basic Pension recipients and pay more to older people in absolute poverty, it has fallen on deaf ears.

Those born in 1990, who will be the greatest victims, must bear the burden of the Basic Pension in addition to the fiscal instability of the National Pension. This is why the interest of the younger generation is needed regarding presidential candidates' pension pledges.

Source: Hankook Ilbo (original article)