Pension Surgery Missing Reform Targets

[Seoul Economic Daily · Op-Ed · July 6, 2022]

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

There was a significant achievement in the last presidential candidate TV debates. This was because the candidates, especially Candidate Yoon Suk-yeol, readily agreed to Candidate Ahn Cheol-soo's proposal to reach an agreement on pension reform. Watching the TV debates, I felt half hopeful and half worried. Having participated in pension discussions for 25 years, I had experienced the difficulty of implementing proper pension reform.

There have been several system overhauls since the 1998 National Pension reform. The National Pension reforms of 1998 and 2007 were truly streamlined. Vested interests were recognized only up to the point of reform, and all reform details were applied equally to both old and new contributors after the reform. In contrast, other system overhauls involved discriminatory application between old and new entrants and numerous transitional provisions. This is the reason why the deficit expanded within a few years. For this reason, I use the word 'reform' only for the National Pension system overhauls of 1998 and 2007.

During the 2000 overhaul of the Government Employees Pension and Military Pension, a state guarantee of benefit payment provision was introduced, which is rare even globally. Instead of fundamental system reform, it allowed the rapidly increasing deficit to be covered by taxes. This happened right after the International Monetary Fund (IMF) foreign exchange crisis. In the 2009 Government Employees Pension overhaul, contrary to the government's announcement, the pensions of 56% of current civil servants were not reduced by a single penny. The pain of the system overhaul was shifted entirely to new entrants and civil servants with short periods of service.

The Basic Pension, introduced in 2014 after many twists and turns, is costing a great deal of money but has failed to significantly reduce the elderly poverty rate. Instead, it has degenerated into a populist system where the amount is increased by 100,000 won per month during every presidential election. Regarding the 2015 Government Employees Pension overhaul, through the application of flexible standards for the pension conversion rate of the retirement allowance and the application of income redistribution and income caps different from those of the National Pension, the Government Employees Pension for new entrants remains far more advantageous than for National Pension contributors; however, it is wrongly known that its benefit-to-contribution ratio is lower than that of National Pension contributors.

President Yoon Suk-yeol has emphasized pension reform several times, including in his first policy speech to the National Assembly. Recently, a pension reform debate was held, hosted by the ruling party's Policy Committee. The Yoon Suk-yeol administration has set sail for pension reform. However, one must note that "the devil is in the details" in this discussion. The Yoon Suk-yeol administration and the ruling party's Policy Committee are placing the emphasis of pension reform on securing sustainability. Yet, in the debate hosted by the ruling party's Policy Committee, discussions primarily moved in a fiscally unsustainable direction. This is because the contents suggested increasing the National Pension benefit rate or paying more in Basic Pension. Why were discussions far removed from achieving fiscal stabilization mentioned? And this occurred under the Yoon Suk-yeol administration, which intends to achieve pension reform that can secure sustainability.

These phenomena occur because the pension reality we face is not properly known. Financial projection reports for the Government Employees Pension and Military Pension remain undisclosed. Since the 2007 reform, the government has actively tried to deny the necessity of the unfunded pension liability concept of the National Pension, which former Ministers of Health and Welfare frequently cited to emphasize the urgency of pension reform. These are all phenomena appearing as transparent information disclosure—a prerequisite for the successful National Pension reforms of 1998 and 2007—has disappeared. As facts are hidden, discussions on system overhauls move according to camp logic. This was the background that allowed claims that more pensions could be given to prevail under the Moon Jae-in administration.

The prerequisite for successful pension reform lies in information disclosure without sanctuaries. This is why the Yoon administration, which has with difficulty set sail for pension reform, must devote effort to transparent information disclosure. Additionally, clear guidelines for pension reform must be presented. This is because if stakeholders are simply told to reach an agreement, time may slip away and the ship of pension reform may head toward the mountains.

Source: Seoul Economic Daily (original article)