[Yun Suk-myung's Perspective] The Pledge of a Monthly Basic Pension of 400,000 Won Will Break the Backs of Future Generations

[JoongAng Ilbo · Yun Suk-myung's Perspective · April 4, 2022]

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

Pensions Trapped in Populism

An agreement on pension reform was reached during the first televised presidential debate. This occurred as the presidential candidates agreed to a proposal by Candidate Ahn Cheol-soo of the People's Party. Although an agreement of great significance was reached, it still feels unsettling. This is due to differences in the understanding of pension reform.

Under the name of pension reform, the Moon Jae-in administration submitted a plan to the National Assembly that further debilitates the National Pension and Basic Pension, which were already unsustainable. A deterioration was disguised as a reform plan. Meanwhile, actual reform plans were disparaged as deteriorations, falling prey to the criticism of interest groups that are loud in voice but lack a sense of responsibility.

If 400,000 won is paid monthly, 49 trillion won will be needed in 2030 and 160 trillion won in 2050—a representative unsustainable populist pledge... As fiscal deterioration accelerates, the Basic Pension should be provided as selective support focused on vulnerable older people, as in developed countries; surgery is also urgent for the National, Government Employees, Military, and Private School Teachers Pensions, which have fallen into incurable diseases

Following the derivation of the pension reform agreement among presidential candidates, the Justice Party, the People Power Party, and the Democratic Party of Korea announced their pension pledges. Candidate Sim Sang-jung of the Justice Party showed clear signs of deep deliberation. This was because strengthening public pensions by increasing the National Pension benefit rate, as advocated by the progressive camp, was deemed impossible. Instead, she mentioned the necessity of increasing contributions for fiscal stabilization of the pension. On the other hand, for the Basic Pension, which is operated with taxes, she presented a pledge to increase the monthly amount by 100,000 won to 400,000 won. Subsequently, Candidate Yoon Suk-yeol of the People Power Party and Candidate Lee Jae-myung of the Democratic Party of Korea also announced pledges to increase the Basic Pension by 100,000 won. It is evident that both major parties avoided solving the mountain of pension problems and only plotted ways to win votes.

The fact that the Government Employees Pension, Military Pension, and Private School Teachers Pension—which have already deteriorated into time-limited schemes—reached this state was due to the populism that occurred every election. The Government Employees Pension, which required one to be 60 years old to receive benefits even in 1960 when life expectancy was 52, was changed in 1962, just two years after the scheme's implementation, so that benefits could be received immediately upon retirement after only 20 years of contribution. In cases where high school graduates became civil servants, they could receive pensions starting from their early 40s. This was only the beginning. Until the early 1990s, the pension amount payable was nearly doubled.

National Pension unfunded pension liability exceeds 1,500 trillion won

The nature of pensions is that problems can be hidden when there are many contributors and few beneficiaries, but they erupt immediately as the number of beneficiaries increases. As fiscal instability in the Government Employees Pension—which had been consistently driven by populist policies—became full-scale after the mid-1990s, a state guarantee of benefit payment, a measure rarely found worldwide, was introduced in the early 2000s while pretending to take fiscal stabilization measures. The payment guarantee also introduced to the Military Pension means that all occurring pension deficits will be covered by national taxes. An unsustainable scheme has been dumped onto the state. The Private School Teachers Pension, which has become impossible to sustain after taking a direct hit from ultra-low fertility, has beneficiaries receiving pensions starting in their 30s. Even in this situation, it is constantly seeking the introduction of a payment guarantee provision.

In this way, pension schemes that were expanded indiscriminately have reached a point where they could bring about national collapse. National liabilities for the Government Employees Pension and Military Pension, which apply to approximately 2 million people including the insured and beneficiaries—4% of the population—stood at 1,045 trillion won in 2020. Even this figure was reduced by about 100 trillion won through a trick of changing assumptions during the calculation of national liabilities in 2019. The increase in national liabilities for the Government Employees Pension and Military Pension in the year 2020 alone exceeds 100 trillion won.

The National Pension's unfunded liability, which is not even announced on the grounds that the state is not the employer of the citizens, exceeds 1,500 trillion won even by conservative estimates. Since the amount already promised for payment exceeds 2,500 trillion won, it means that more than 1,500 trillion won is lacking, even considering the reserves of 950 trillion won. The cumulative deficit until 2092—70 years from now, the financial projection period for the National Pension—is a staggering 23,000 trillion won (in nominal terms), which amounts to 7,750 trillion won even when converted to present value. It is jaw-dropping. This contrasts with Canada, which will have no pension liability even 200 years from now, in 2222. Despite such a disastrous situation, the door to another catastrophe is opening. This is because of the Basic Pension.

In Japan, one must pay contributions to receive the Basic Pension

The Basic Pension first appeared in 1997 within the National Pension System Improvement Planning Group. This was as they sought an overhaul of the system because its sustainability had dropped significantly less than 10 years after the introduction of the National Pension. The overhaul plan proposed by the planning group was to lower the National Pension benefit rate from 70% to 40% (a reduction of 30 percentage points) and dualize it into a Basic Pension and an earnings-related pension. However, it was a plan to pay the Basic Pension only to contributors who had paid contributions.

Although the results of the 2003 National Pension financial projection showed that fiscal stabilization measures were urgent, the opposition party argued that the introduction of a Basic Pension, rather than fiscal stabilization, was urgent. Subsequently, the urgency of the National Pension's fiscal stabilization measures was diluted. Ahead of the general election, a Basic Pension TF was formed within the Grand National Party, which was then the opposition. Did Chairperson Park Geun-hye at the time properly understand the political and economic ripple effects of a Basic Pension paid through taxes? I believe not. Poly-professors seeking to align themselves with power likely told her to consider introducing the Basic Pension, claiming it would be good for older people and win votes in the election. The problem is that they reported to Chairperson Park Geun-hye after altering the nature of the Basic Pension so that it could be paid through taxes, rather than the contribution-based method discussed by the planning group. In contrast, the Japanese basic pension, from which we learned about pensions, is operated such that one must pay contributions to receive it.

Unlike the government, which maintained that fiscal stabilization measures were urgent, the ruling party at the time was favorable toward the introduction of a Basic Pension, and the opposition party was proactive. The pension discussions, which had been in a deadlock, broke through at a Korea Social Security Association debate held on February 26, 2007, at the Federation of Korean Industries building's international conference hall. After I gave a presentation on the theme "Korea's Pensions at a Crossroads," lawmakers from both the ruling and opposition parties participated as discussants. This happened as Representative Park Jae-wan of the Grand National Party (then Chief of Staff to Chairperson Park Geun-hye), who had been on the defensive, announced that the party would formally begin discussions on pension overhaul.

OECD Recommends Reducing Basic Pension Beneficiaries

After subsequent push-and-pull discussions, votes were held in the National Assembly on April 2, 2007, for two pension-related bills. These were the National Pension overhaul plan to lower the benefit rate and increase contributions, and the Basic Old-Age Pension Act to pay older people aged 65 and over using taxes. However, something like a comedy occurred. The Basic Old-Age Pension Act, which had been reluctantly agreed upon to pass the National Pension fiscal stabilization bill, passed, while the National Pension overhaul plan was rejected. "To get the bitter medicine of pension reform (the National Pension overhaul plan) passed, we put a sweet candy (the Basic Old-Age Pension Act) on the table, but they kicked away the medicine and only ate the candy." These were the words left by then Minister of Health and Welfare Yoo Si-min, who resigned taking responsibility for the rejection of the National Pension overhaul plan.

The Basic Old-Age Pension introduced in this manner was renamed the Basic Pension and has been increased by 100,000 won during every election. If the People Power Party's pledge of 400,000 won per month is implemented, couples would receive 640,000 won per month, even with the current 20% reduction. This is a larger amount than the average National Pension benefit of 550,000 won received by those who paid contributions. The Basic Pension even contains toxic provisions. This is because it reduces the Basic Pension by up to 50% for those who have been insured in the National Pension for 10 years or more. In any case, vulnerable groups have no incentive to faithfully contribute to the National Pension. It has become a patched-up system as tricks are used during every election to win more votes.

The Basic Pension, which is raised by 100,000 won every election, costs a great deal of money but has a small effect on lowering the elderly poverty rate. It is moving in the opposite direction of the OECD Secretariat's recommendation since 2010 to reduce the number of Basic Pension beneficiaries and provide more pension benefits to vulnerable older people in absolute poverty. Currently, one-third of Basic Pension beneficiaries are not poor older people even by the OECD's concept of relative poverty (less than 50% of median income, 970,000 won per month). An absurd situation occurs where non-poor older people receive the same amount of Basic Pension as those who struggle to solve even basic needs for food, clothing, and shelter (30% or less of median income, 583,443 won per month).

Those Born in the 1990s Must Demand Pension Reform

In a situation where the older population is increasing rapidly, since the Basic Pension is paid through taxes to 70% of older people aged 65 and over unconditionally, if 400,000 won per month is paid as pledged, 49 trillion won will be needed in 2030 and 160 trillion won in 2050. This is not the end. It increases to 233 trillion won in 2060 and 479 trillion won in 2090. Even these figures are based on the assumption that 400,000 won per month is paid in present value over the next 70 years. The Basic Pension expenditure of 49 trillion won in 2030, eight years from now, is an amount that could build 33 light aircraft carriers, or 7 medium-to-large aircraft carriers, every year. If the cycle of increasing it by 100,000 won every presidential election is not broken, it will become much larger than this.

A report by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) defines policies that are popular but unsustainable as populism. While neglecting the urgent reform of the Government Employees Pension, Military Pension, and Private School Teachers Pension—which are moving from intractable to incurable diseases—and the National Pension, which has already entered a state of intractable disease, pledges for the Basic Pension that will break the backs of the young and future generations were competitively presented to win more votes from older people.

Those born in the 1990s, who will be the greatest victims of this reality, must take an interest in pension issues. This is because it is a problem directly linked to their own lives. Major OECD countries have already introduced automatic adjustment mechanisms for pensions so as not to place a heavy burden on those born in the 1990s. They have also changed their basic pensions, which were previously paid universally through taxes, into a selective system centered on vulnerable older people. This is why those born in the 1990s must step forward and demand rapid pension reform.

Source: JoongAng Ilbo (original article)