Even Prosperous Northern Europe Carried Out Pension Reform Long Ago

[Hankook Ilbo · Opening the Morning · August 11, 2022]

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

About ten years ago, the Swedish welfare model caused a great stir in our society. At that time, Sweden's "life with evenings" was mentioned in presidential campaign pledges, and the Nordic welfare model was even the primary interest of study groups for members of the National Assembly. Interest in the welfare models of Nordic countries, including Sweden, which received such great attention, seems to have diminished. This is likely because people realized that "upon looking closely at the Nordic model, known as a welfare paradise, there is a significant gap between it and what was known superficially." The Nordic countries refer to Sweden, Finland, Norway, Denmark, and Iceland.

About ten years ago, during a business trip to Sweden, an official at the Swedish government whom I met in Stockholm asked me a question. He asked which government agency the Swedish people trust the most. While I was hesitating, he said it was the Swedish Tax Agency. He said it enjoys deep public trust due to its transparent processing of affairs. Most data is disclosed, and it is said that one can even check the annual income level of their neighbor. This is a decisive point of difference from us, who do not even disclose the results of financial projections for the Government Employees Pension and the Military Pension.

Looking at the current status of pension operations in Nordic countries, they operate public pensions in the form of identical pensions. This means that while they have not integrated them into a single pension system, they operate the pension for the general public and the Government Employees Pension identically. Sweden and Norway abolished the Basic Pension, which was previously paid to most older people. Finland overhauled it by focusing on vulnerable older people through a method of selection and concentration. It reduced the number of recipients but, in exchange, strengthened income security for vulnerable older people. Furthermore, despite having a much better demographic structure than ours, they took preemptive fiscal stabilization measures for the pension before a crisis hit. They introduced the so-called automatic adjustment mechanism for pension finances.

An automatic adjustment mechanism is a measure that automatically reflects negative factors occurring in the operation of a pension system. When the fertility rate falls, life expectancy increases—lengthening the period of receiving pensions—and the economic growth rate declines, weakening the national capacity for support, an automatic adjustment mechanism for pension finances automatically reflects these factors in the operation of the pension system every year. Sweden was the first in the world to introduce an automatic adjustment mechanism in 1998. Germany and Japan adopted similar automatic adjustment mechanisms in 2004. Norway, where oil pours out from North Sea oil fields, also introduced an automatic adjustment mechanism in 2012.

These are words that Mika Vidlund, a long-time acquaintance from Finland, said to me around 2014. "I heard Norway confirmed another high-quality oil deposit in the North Sea; Norway is truly lucky." Even this Norway, despite having the world's largest sovereign wealth fund (GPFG) exceeding 300% of its GDP, is trying to pass it on to future generations rather than spending it now, for the sake of the descendants who will suffer from aging. This is the true nature of the welfare and pension systems operated by Nordic countries.

Our first baby-boom generation, numbering over 7 million—more than the total population of individual Nordic countries excluding Sweden—is mostly retiring from the labor market. Last year's fertility rate of 0.81 means that a generation of 260,000 must support generations that once saw 700,000 to 1 million births. Until now, our society enjoyed an era of "demographic bonus," but we are now entering an era of "demographic onus" where the population is decreasing. As the total population declines, the burden on the younger generation and future generations inevitably increases. The Nordic countries are showing us why we must carry out high-intensity pension reform as quickly as possible without hesitation.

Source: Hankook Ilbo (original article)