[Yun Suk-myung's Perspective] The Basic Pension — Reduce the Number of Beneficiaries and Provide More to Vulnerable Older People

[JoongAng Ilbo · Yun Suk-myung's Perspective · June 30, 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

The Basic Pension: A Subject of Much Debate and Trouble

Controversy over the Basic Pension is growing. This is due not only to the rapidly increasing pension amount payable caused by the surge in the older population, but also because of the payment method linked to the National Pension. What story led to this situation?

In 1997, during the Kim Young-sam administration, discussions on a basic pension took place within the 'National Pension System Improvement Planning Team.' This was because the government planned to expand the National Pension to urban self-employed persons in 1999 but lacked confidence in income identification for the self-employed. If high-income self-employed persons reported low incomes, dissatisfaction could grow among employee contributors—whose wallets are transparent—due to the income redistribution function designed to benefit low-income groups. It was decided to dualize the system into a basic pension and an earnings-related pension, while limiting income redistribution to the basic pension. Unlike now, the basic pension discussed at that time required contributions to be paid for a certain period to receive benefits.

Pension reform emerged as a major issue during the 2002 presidential candidate TV debates. Candidate Lee Hoi-chang's pledge to "lower the National Pension benefit rate from 60% to 40% to reflect reform trends among OECD member countries" clashed with Candidate Roh Moo-hyun's pledge that "if the National Pension benefit rate is lowered, it will become little more than pocket money; therefore, I will leave the National Pension as it is and introduce a basic pension." The TV debate viewership ratings were quite high at the time. Professor Ahn Jong-bum, who was an aide to Candidate Lee Hoi-chang—who lost by a narrow margin of votes—lamented that Candidate Lee had lost because of him.

The Basic Pension, received by 70% of older people, has limits in alleviating elderly poverty. Due to populism in the political sphere, benefits have been increased during every presidential election. The problematic linked operation of the National Pension and the Basic Pension should be abolished, and the selection criterion for Basic Pension beneficiaries should be changed to a recognized-income threshold.

After the launch of the Roh Moo-hyun administration, a roundtable was held presided over by Lee Jung-woo, the presidential office Chief of Policy. The majority of the meeting attendees were scholars from Candidate Roh Moo-hyun's camp who had created the basic pension pledge. As the meeting between the President and the Chief of Policy grew longer, the experts waiting in the Chief of Policy's office began to bring up the pension issue. Heated debates ensued, and this trend continued even after Chief of Policy Lee Jung-woo joined. The atmosphere became so intense, with voices being raised, that a secretary present remarked to the Chief of Policy that he had never seen such rude people before.

A Conservative-Progressive Alliance for the Introduction of the Basic Pension

After the launch of the Roh Moo-hyun administration, a nuclear-bomb-level issue erupted from the pension problem, which had been in a lull. A strange document titled 'Eight Secrets of the National Pension' circulated online, shaking public sentiment to the extent that it threatened the very existence of the National Pension. Eventually, a countermeasures meeting was held at the Policy Planning Committee located in the Ministry of Foreign Affairs building in Doryeom-dong, Seoul. Chairman Lee Jung-woo of the Policy Planning Committee, who had left the presidential office after resigning as Chief of Policy, led the meeting. Vice Minister Song Jae-sung of the Ministry of Health and Welfare handled National Pension issues, while I was in charge of the Basic Pension. I emphasized, "If we introduce a tax-financed Basic Pension, the country will reach the brink of ruin. Therefore, we must nip it in the bud entirely." The reactions of the presidential office aides, who were favorable to the introduction of a tax-financed Basic Pension, seemed cold.

A reversal occurred while moving locations for lunch. "I understood Dr. Yun's presentation today. However, the atmosphere at the presidential office is different. I will try, but I do not think I can change the mood. Please send me the research materials." These were the words of Chairman Lee Jung-woo, who had been listening calmly. I still do not know what happened at the presidential office afterward. What is certain is that the position of the Roh Moo-hyun administration changed after that. It set fiscal stabilization of the National Pension as the top priority and pivoted to the impossibility of introducing a Basic Pension.

However, a problem erupted elsewhere. This happened when the opposition Grand National Party put forward a tax-financed Basic Pension as a pledge for the general and presidential elections. It became the exact opposite situation of the 2002 presidential debates. In October 2003, the Roh Moo-hyun administration submitted a fiscal stabilization plan to the National Assembly that lowered the National Pension benefit rate by 10 percentage points while increasing contributions by 6.85 percentage points (9% → 15.85%). The reason this fiscal stabilization plan was repeatedly revised and resulted in only a cut in the benefit rate—a half-measure reform where the contribution increase failed—in July 2007, was due to opposition from the opposition parties (the Grand National Party and the Democratic Labor Party), who argued that introducing a Basic Pension was more urgent than the fiscal stabilization of the National Pension. A policy alliance was formed between the conservative and progressive parties.

Due to populism in the political sphere, the number of beneficiaries increased

In response to the opposition's claim that a Basic Pension should be provided to all older people using tax revenue, the Roh Moo-hyun administration proposed a plan to provide it only to 35% of older people. This was because results from a survey on the status of older people showed that 35% of them were in desperate need of government assistance. Not only the opposition but also the ruling party, which was emotionally favorable to the introduction of a Basic Pension, did not accept this plan. As part of negotiations with the opposition, the Roh Moo-hyun administration accepted a plan to increase the beneficiaries to 45%. However, excluding the government, the ruling and opposition parties agreed to further increase the beneficiaries to 60%. The Minister of Health and Welfare visited the ruling party headquarters to protest.

These are the events that unfolded until the Basic Old-Age Pension Act was passed by the National Assembly on April 2, 2007. But this was not the end. Something akin to a black comedy occurred. The Basic Old-Age Pension Act, which had been prepared as a compromise to pass the National Pension fiscal stabilization bill, was passed, but the main subject—the National Pension fiscal stabilization bill—was rejected.

Afterward, something even more comical happened. It was decided to increase the beneficiaries of the Basic Old-Age Pension to 70% on the condition of passing a half-measure National Pension fiscal stabilization bill in July 2007. Before the scheme was even implemented, the number of beneficiaries was increased by another 10 percentage points just to save the face of the National Assembly. Despite the situation unfolding this way, the Roh Moo-hyun administration's Basic Old-Age Pension had an exit strategy. It was possible to reduce the number of beneficiaries if the fiscal situation worsened. This was a matter that the Ministry of Health and Welfare at the time had confirmed with the Ministry of Government Legislation regarding the nature of the Roh Moo-hyun administration's Basic Old-Age Pension. There was room to flexibly adjust the proportion of beneficiaries depending on the situation.

Introducing the Basic Pension Using Forced Logic

The Park Geun-hye administration deserves praise for pursuing the reform of the Government Employees Pension. On the other hand, it drove in a nail that is difficult to pull out regarding the Basic Pension. It explicitly stated in the law that a Basic Pension must be paid to 70% of older people using tax revenue. The Park Geun-hye administration introduced the Basic Pension—which neutral experts and the Ministry of Health and Welfare had so strongly opposed until the administration's launch—by taking all sorts of unreasonable measures. How problematic must it have been that Representative Jin Young, who had served as chair of the ruling party's policy committee, vice chairman of the presidential transition committee, and the administration's first Minister of Health and Welfare, resigned from his ministerial post while opposing the introduction of linking the Basic Pension to the National Pension? "Many experts and employees of the National Pension Service (NPS) oppose the Park Geun-hye administration transition committee's plan to operate the National Pension and the Basic Pension in a linked manner. As the minister of the competent ministry, how could I agree to this?" This was Minister Jin Young's plea.

The linkage between the National Pension and the Basic Pension amount emerged as a trick in the process of responding to the opposition's demand to keep presidential campaign promises. Because two schemes of different natures were forcibly linked, it was strained. "The Basic Pension is a measure to supplement the 2007 cut in National Pension benefits. (...) The Basic Pension must be introduced to fairly provide intergenerational transfer benefits to groups exposed to coverage gaps who cannot receive excessive intergenerational transfer benefits through the National Pension, which is also why linkage between the two schemes is necessary." This was the claim of some experts and relevant officials who used forced logic to introduce the Basic Pension during the Park Geun-hye administration.

If the Basic Pension was introduced to supplement the cut in the National Pension, why was the National Pension reformed with such difficulty? Furthermore, since the benefits for all National Pension contributors were cut, why is the Basic Pension paid only to 70% of older people? What supplementary measures were there for the remaining 30% of older people? Even more incomprehensible is their claim that because the National Pension is a scheme where one receives more than they contributed, the Basic Pension was introduced for those groups who do not receive such benefits. If a scheme is introduced where everyone receives more than they contribute, who takes responsibility for that? It is pathetic to introduce a Basic Pension that shifts a greater burden onto future generations instead of thinking about fixing the no longer sustainable National Pension.

OECD: Vulnerable Older People Must Receive Targeted Support

The Basic Pension, which was introduced through political contamination, has led to benefit increases during every presidential election. The Basic Old-Age Pension, which was less than 100,000 won under the Lee Myung-bak administration, was increased to 200,000 won under the Park Geun-hye administration and 300,000 won under the Moon Jae-in administration. The presidential campaign promise of the Yoon Suk-yeol administration was an increase to 400,000 won. If left as is, promises of 500,000 won in the 2027 election and 600,000 won in the 2033 election may emerge.

Now, the problematic linked operation of the National Pension and the Basic Pension must be abolished. Fiscal savings should be achieved through sustainable institutional reform, not through tricks like linked operation. The core of elderly poverty in our country lies in the polarization of old-age income. In this situation, distributing the Basic Pension to most older people costs a lot of money without drastically lowering the elderly poverty rate. "Reduce the number of beneficiaries and provide more to vulnerable older people." This is the content of the Basic Pension overhaul recommendation presented by the OECD over ten years ago. There is a way to put the OECD recommendation into practice. It is to change the eligibility threshold for the Basic Pension based on a certain level of recognized income, rather than 70% of older people.

"Yoon Suk-yeol is like the conservative Roh Moo-hyun." This is a remark that came from the ruling party. Schemes poorly created during a conservative administration must be properly fixed during a conservative administration. That would be good for the Republic of Korea and also for President Yoon.

Source: JoongAng Ilbo (original article)