[Yun Suk-myung's Perspective] The New Administration Must Prepare a Plan to Integrate the Four Major Public Pensions

[JoongAng Ilbo · Yun Suk-myung's Perspective · April 21, 2022]

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

Public Pensions No Longer Sustainable as They Are

In Korean society, pensions are a "hot potato." This is because the pension issue has become the starting point of a frame war. A significant number of National Pension contributors find it puzzling that the National Pension is mentioned first as a priority for pension reform. They ask why the National Pension is brought up first while leaving the Government Employees Pension and Military Pension, which receive taxes as deficit subsidies, alone. They argue that the government could simply collect taxes to fill the deficit of the National Pension as well, questioning if the National Pension is being targeted because it is an easy mark. They claim that if reform is to be done, the Government Employees and Military Pensions should be reformed first, followed by the National Pension.

Opposition from the Government Employees and Military Pensions is also fierce. Although their numbers are small, they are organized groups, so the intensity of their response is violent. Most people on the Government Employees Pension side believe that since the 2015 overhaul, new appointees are worse off than National Pension contributors. Because they pay twice as much in contributions and receive less severance pay (about 39% compared to private sector severance pay), they feel it is natural to receive more benefits; consequently, conspiracy theories have emerged suggesting that periodically mentioning the Government Employees Pension is driven by political intent.

"Pensions are blessed money, the money of a lifetime stained with blood and sweat, fragrant money, respectable money, noble money, and the money of life." This is a piece by poet Cho Byeong-hwa included on the last page of "Fiscal Status and Outlook of Public Pensions." "The current contribution rate falls far short of the balanced contribution rate required for the fiscal stabilization of the Government Employees Pension. ··· The government is to fully subsidize the deficit in the pension's fiscal balance, and the government's subsidy amount is expected to continue increasing as the scale of the Government Employees Pension's fiscal deficit grows."

National liabilities for the Government Employees and Military Pensions stand at 1,138 trillion won, and the National and Private School Teachers Pensions are also in serious condition. Fiscal instability of public pensions is expanding due to secrecy and opaque system operation. A consensus is needed on the necessity of integrated pension operation for a transparent pension system. The new administration must derive an integration plan using neutral experts, excluding stakeholders.

Government Employees and Military Pensions That Protected Vested Interests With Taxes

Knowing how precious pensions are in our lives and how serious fiscal instability is, two system overhauls were conducted, but the situation is worsening. As of 2021, national liabilities for the Government Employees Pension and Military Pension stood at 1,138 trillion won, increasing by 93.5 trillion won in one year. Pension liability reacts sensitively to interest rates, namely the discount rate. While it is true that pension liability has increased rapidly recently due to low government bond interest rates, this is fundamentally a problem arising from the excessive gap between contribution burdens and benefit levels. Despite system overhauls that were claimed to have involved immense pain-sharing, national liabilities continue to expand over time. The National Pension and Private School Teachers Pension, which are not announced as national liabilities because the state is not the employer, are in similar situations, differing only in degree. Even in this situation, there is no self-reflection, only finger-pointing. A fundamental solution is needed to break free from this endless vicious cycle.

During the IMF foreign exchange crisis in 1997, the nation suffered humiliation to obtain a World Bank restructuring loan. The conditions for the 3 billion dollar restructuring loan included an overhaul of old-age income security. One of the conditions for providing the loan was the publication of a white paper on reforming the pension system in a sustainable direction.

The World Bank report "The Korean Pension System at a Crossroads" suggested that the Government Employees Pension be aligned with the National Pension's benefit rate of 60% (annual accrual rate of 1.5) at the time. The benefit rate of the Government Employees Pension was 84% (annual accrual rate of 2.1) then. In 2000, 22 years ago, the sum of the National Pension's unfunded pension liability (30% of GDP) and the Government Employees Pension's unfunded liability (25% of GDP) was estimated at 55% of GDP. Since then, the National Pension cut its benefit rate by 33.3% (lowering the benefit rate from 60% to 40%). On the other hand, the Government Employees, Military, and Private School Teachers Pensions underwent system overhauls that were woefully insufficient to resolve fiscal instability; in particular, they introduced the payment guarantee provision that covers deficits with taxpayers' money while thoroughly protecting vested interests.

The Problematic Government Employees Pension

Let us look back at the process of the 2015 Government Employees Pension overhaul, which was the most recent system overhaul. In mid-February 2014, I received a phone call from Park Jun-woo, Senior Secretary for Political Affairs under the Park Geun-hye administration, asking if we could have a tea time. In a meeting attended by a secretary and a senior administrative officer, Senior Secretary Park Jun-woo mentioned a column. He asked me to explain the contents of my Op-Ed, "The Time Bomb: Government Employees Pension," published in the JoongAng Ilbo on December 13, 2013. It was an Op-Ed evaluating the 2010 Government Employees Pension overhaul. It seemed he was verifying the content because it was a matter of interest to the president. "The intensity of the reform is too weak. I believe problems will arise in less than five years. This is the honest evaluation of someone who makes a living from pensions. ... It has proven the limits of pension reform led by stakeholders. To prevent both the Government Employees Pension and the National Pension from becoming time bombs, pension reform discussions are needed through an objective body that excludes stakeholders of the Government Employees Pension." Following this meeting, media reports originating from the presidential office poured out, stating that the Government Employees Pension would be reformed.

After a debate over who would host the pension reform discussions, the National Assembly took the lead. Through the "National Grand Compromise Body for Government Employees Pension Reform," which was launched after many twists and turns, the 2015 Government Employees Pension overhaul plan was derived. The political sphere and stakeholders were full of pride. They claimed that they had prepared a successful system overhaul plan through a social discussion body for the first time in our country. To see if that was truly the case, let us examine my Op-Ed, "The Deeply Flawed Government Employees Pension Agreement Cannot Stand as It Is," published in the JoongAng Ilbo on May 4, 2015, immediately after the announcement of the agreement.

"The fact that Government Employees Pension reform was inevitable less than five years after the 2009 reform was because the three previous reforms were so-called 'reforms in name only.' In 2000, it was due to the deficit subsidy provision, and in 2009, it was because the pensions of those with over 10 years of service, who accounted for more than 50% of civil servants, were not cut by a single penny. ... If you add the accrual rate of 1.7 to 0.25%, which is the retirement allowance (39%) converted into an accrual rate, the accrual rate of our country's Government Employees Pension after the reform becomes 1.95%. If it were operated like Germany, they would have to contribute 38%." They agreed to a contribution of 18% for a system that would require a 38% contribution to prevent further increases in national liabilities, and then they praised themselves.

Integrated Operation of Government Employees and National Pensions is the Trend of the Times

The agreement that received such negative evaluations was legislated as is. A more serious point is that the legislation process of the agreement itself is a black box. Usually, the devil is in the details. This is because even if the outward appearance is made to look similar, significant differences can arise during the legislation process. Even if various factors determining the pension amount (the revaluation standard for the average monthly income used to calculate pensions, the method of income redistribution, etc.) are applied differently from the National Pension, there are almost no people who know the detailed contents. These are top-secret matters known only to a few stakeholders of the Government Employees Pension involved in drafting the bill. This is typically why the announced contents and the actual effects of the system overhaul appear different.

In this way, opaque system operation has further exacerbated the problems of the Government Employees, Military, and Private School Teachers Pensions. Despite having sufficient time, they have grown the lump of problems through opaque system operation. This contrasts with the transparent system operation cases of the United Kingdom and Germany, which operate as separate systems independent of the general public after properly informing the people of the problems and obtaining their consent. This is because the efforts of civil servants and the government to share the burden, and the process of making that transparent, are the guarantees for the successful operation of the Government Employees Pension systems in those countries. Except for a few countries that have maintained transparent system operation, the integrated operation of the Government Employees Pension and the National Pension is the trend of the times.

Turbid Pension Systems Will Lead to National Collapse

For the past several decades, the Republic of Korea has failed to operate its pension systems cleanly according to the law. The fiscal instability of the Government Employees Pension is the price paid for failing to operate transparently. It is merely the result of secrecy and opaque system operation. Despite being given sufficient opportunities in the meantime, they failed to make the relevant regulations transparent. Because it is operated turbidly, the public does not agree to the operation of the Government Employees Pension as an independent system. The claim that the benefit-to-contribution ratio of the Government Employees Pension is lower than that of the National Pension is a prime example. The benefit-to-contribution ratio is the same whether a person who contributes 1 million won receives 10 million won or a person who contributes 8 million won receives 80 million won. While hiding the 70 million won difference in pension amounts, they are misleading people by claiming the benefit-to-contribution ratio is lower than that of the National Pension. This is an example of how it is done.

Until now, the pension systems have been operated while hoping for luck. Because wishes and reality were confused, systems with zero possibility of functioning are being misrepresented as functional. Consequently, society has become one where no one takes responsibility and everyone blames others. The Government Employees, Military, and Private School Teachers Pensions have lost their capacity for self-purification, and the National Pension is following a similar path, differing only in degree; they must be operated integrally so that it becomes our collective responsibility rather than blaming others. Pensions, which are 'imbued with blood and sweat and are the money of noble lives,' have come to cause national collapse due to turbid system operation. It is urgent to build a consensus that the solution for operating pension systems transparently is none other than integrated operation. In the last presidential election, a plan for the integrated operation of public pensions—namely, 'identical pensions'—was presented as a pledge by candidate Ahn Cheol-soo. Even if integrated operation has been made difficult, there is a way. That is why neutral experts are even more necessary. To avoid further wasteful debate, a plan for integrated operation must be brought to the public forum as soon as possible.

Source: JoongAng Ilbo (original article)