The Cowardly Pension Debate of Korean Society

[Hankook Ilbo · Opening the Morning · June 16, 2022]

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

Since the second half of last year, pension reform has emerged as a major issue. There are too many mountains to climb for proper reform to take place. This is because obstacles to reform persist throughout society. The Government Employees Pension and the Military Pension, which do not disclose their financial projection reports, are completely opaque. Their fiscal states are far worse than that of the National Pension, so they should inform the public of proper financial projection results, yet they continue this way.

Even in this situation, we are still emphasizing the amount of pension benefits. A comparative indicator commonly used by welfare specialists is the ratio of pension expenditure to gross domestic product (GDP). This is the background for the emergence of arguments asking why we talk about fiscal stabilization when our country will not reach the current pension expenditure ratios of major Organisation for Economic Co-operation and Development (OECD) countries even 50 years from now.

The reason our pension expenditure share relative to GDP is low is that the history of the system is short. Because one must pay contributions for at least 10 years and reach age 62 to receive a pension, there are still few beneficiaries. However, our number of beneficiaries is now increasing rapidly. Only six years ago, it took four years and eight months for the number of National Pension beneficiaries to increase by 1 million. Recently, this has been shortened to two years, and the total number of beneficiaries has exceeded 6 million.

The problem is that this is not the end. While the total population is decreasing, the number of beneficiaries will increase to 8.77 million by 2030 and 16.28 million by 2050. Accordingly, pension expenditure will surge. The ratio, which was less than 2% of GDP in 2020, is projected to be 6.1% in 2050 and 10.8% in 2080. Even if the Basic Pension is frozen at 300,000 won per month, it is expected to reach 2.5% of GDP by 2050 and 3.5% by 2080. Combined, the National Pension and the Basic Pension will increase up to 14.3% of GDP by 2080. This figure excludes the Government Employees Pension, the Military Pension, and the Private School Teachers Pension.

The first baby-boom generation, numbering over 7 million, is larger than the entire populations of countries such as Norway and Denmark. They are entering as National Pension beneficiaries. Last year's total fertility rate (0.81) means that a generation of 260,000 newborns must support generations that had 700,000 to 1 million births per year. In this situation, how long will we continue to call for giving more pensions under the pretext of strengthening public pensions? Citizens who do not understand how pensions work believe that the claims of some experts that more pensions can be given are feasible.

If that were possible, why would Germany have borne contributions up to six times higher than ours over the last 50 years, and more than twice as high even now, while paying pensions at our level? Why does Japan's Employees' Pension Insurance, which requires contributions more than twice those of our National Pension, target a benefit rate of 50% (per household), which is lower than ours even when including the basic pension received by both spouses? By operating in such a manner, Japan will still have enough funds to pay for one year even in 2122, 100 years from now. In contrast, for our National Pension, the cumulative deficit will reach 22,650 trillion won in nominal terms and 7,752 trillion won in present value by 2092, 70 years from now.

The Japanese Government Employees Pension, which achieved pension integration in 2015, requires higher contributions yet pays far less than our Government Employees Pension. The Finnish Government Employees Pension, which requires contributions more than 10 percentage points higher, pays far smaller pensions despite not having the retirement allowance that we provide. This is why the pension debate must start from proper facts. I say this because the failure to properly communicate facts while confusing desires with reality is becoming a source of populism.

Source: Hankook Ilbo (original article)