[Yun Suk-myung's Perspective] Let Us Create a Reform Plan That Can Provide the National Pension Even 100 Years from Now

[JoongAng Ilbo · Yun Suk-myung's Perspective · September 8, 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

What the Four National Pension Financial Projections Have Left Behind

The first meeting of the expert committee on financial projection, marking the start of the fifth National Pension financial projection, was held on the 30th of last month. The expert committee on fund management development, which operates alongside the expert committee on financial projection, conducts basic discussions on the financial projection, and based on this, the Financial Estimation Committee to be formed later determines the direction of the National Pension overhaul, including fiscal stabilization measures. The expert committee on financial projection was launched first because the financial projection is a matter of urgency.

I participated in all financial projections from the first National Pension financial projection in 2003 to the fourth in 2018. In all four financial projections, the area I was responsible for was fiscal stabilization measures. This was because I was convinced that only by achieving pension fiscal stabilization would there be the capacity to guarantee at least a minimum old-age income for vulnerable groups. Consequently, criticism arose that I emphasized only fiscal stabilization while neglecting appropriate pension benefit levels.

The financial projection period for the Korean National Pension is 70 years, which is shorter than Japan's 100 years; thus, while all contribution revenue is captured, a large portion of future pension expenditure is omitted. Optimistic projections ignore the reality of the National Pension and further worsen the fiscal state, so we must hurry to introduce the automatic adjustment mechanism adopted by 70% of OECD countries.

Introduction of Automatic Adjustment Mechanisms in Germany, Japan, and Others

Furthermore, I even gained the stigma of being a "proponent of fear marketing" who only emphasizes the fiscal instability of the National Pension, which holds 900 trillion won in reserves. Despite efforts to solidify income security across generations through a stable fiscal foundation, I was criticized for making National Pension contributors anxious. It is time to reflect on why pension discussions have degenerated into such nitpicking debates.

In the first financial projection in 2003, there were an expert committee on system development and an expert committee on financial projection under the National Pension Development Committee, which determined the direction of the pension overhaul. At that time, as the secretary of the expert committee on system development, I coordinated the setting of fiscal evaluation criteria, setting the financial projection period to 70 years and targeting a reserve ratio of 2 at the end of 2073, when the financial projection ends, as a fiscal stabilization indicator. Personally, I preferred 80 years, but due to the opposition of the majority of committee members, we agreed on a 70-year financial projection period.

Dr. Moon Hyung-pyo of KDI (former Minister of Health and Welfare) and I, who emphasized fiscal stabilization, formed a consensus during the second financial projection in 2008 to pursue the introduction of an automatic adjustment mechanism, referring to Sweden's introduction of such a mechanism in 1998. Germany and Japan, from which we learned about the National Pension, also introduced this system in 2004. This is a method of operating a pension system where fiscally conservative adjustments are taken automatically every year. By excluding political judgment, the wasteful costs associated with system reform can be minimized.

As the person responsible for fiscal stabilization measures in the second financial projection, I advocated for the introduction of an automatic adjustment mechanism until the very last moment. The final meeting took place over two days and one night in Yangpyeong, Gyeonggi Province. Since it was the year after the National Pension fiscal stabilization measures were passed in July 2007, it was a time when it was difficult to secure momentum for pension reform. The prevailing view was to take a break during this financial projection. Given the situation, a proposal was made to include a statement in the report that discussions on the automatic adjustment mechanism should be properly conducted during the next third financial projection. Reluctantly, I also agreed to this proposal.

However, when it came to the third financial projection in 2013, the direction changed drastically. Multiple committee members were selected to be in charge of pension finances. Discussions proceeded by dividing the members into two groups: those who emphasized fiscal stabilization, like me, and those who argued that once the National Pension Fund is depleted, the system should switch to a pay-as-you-go (PAYG) system and be funded by taxes. In a reality where proposals are vetoed by the political sphere even when experts form a single front, the structure of the discussion was changed so that the committee could not even create a single proposal. Under these circumstances, after several discussions within the committee, the introduction of an automatic adjustment mechanism was rejected.

Contributions Raised Only Slightly, Benefits Raised Further

The situation became even more serious during the fourth financial projection in 2018. The fact that the argument for discussing the introduction of an automatic adjustment mechanism was rejected by most committee members at the beginning was only the beginning. A fiscal stabilization plan emerged that shortened the period for fiscal stabilization measures, which had been 70 years in the previous three financial projections, to 30 years. In this case, the fund would not be depleted until 2048, 30 years later. Fund depletion was projected at the time to occur in 2057. The true intention was to raise the National Pension income replacement rate by an additional 5 percentage points while raising contributions by only 3.3 percentage points, under the pretext of strengthening public pensions.

Regarding this, I requested that the committee also include a proposal to extend the financial projection period by 10 to 20 years—to 80 or 90 years—if the fiscal stabilization period were to be set at 30 years. The reason for this request is that the projection period for public pensions must be extended indefinitely to properly reveal the problems inherent in the system. The problem with a specific projection period is that while all contribution revenue from National Pension contributors is tallied, not all future pension expenditure is captured. While all contribution revenue for a 70-year financial projection period is recorded, a significant portion of the pension expenditure to be paid in the future is omitted, resulting in an optimistic financial projection.

After intense discussion, multiple fiscal stabilization plans were presented in the fourth financial projection. Proposal A, which presented a fiscal stabilization plan by setting the fiscal stabilization period at 30 years, appeared for the first time in the history of financial projections. Proposal B, a fiscal stabilization plan applying a 70-year financial evaluation period, was presented as the second option. Considering the reality that it is difficult to raise the contribution rate to 17.2%, which is necessary to achieve fiscal stabilization, Proposal B was a plan that included some concepts of an automatic adjustment mechanism by raising the contribution rate by only 4.5 percentage points to 13.5% and utilizing a life expectancy coefficient similar to the Finnish model.

Sustainability Requires Raising Contributions to 20%

However, Proposal B was excluded from the Ministry of Health and Welfare's report to the President and the proposal submitted to the National Assembly in 2018. Officials at the Secretariat of the Organisation for Economic Co-operation and Development (OECD) were puzzled by this situation. High-ranking officials from the OECD Secretariat, who discussed fiscal stabilization plans with me twice in Sejong City in 2019 and 2020, asked, "Why did the Korean government not accept Proposal B presented by the National Pension Development Committee?" It must have been difficult for them to understand why Proposal B, which aligns with the global direction of pension reform, was excluded.

Let us summarize the points that must be resolved in the fifth National Pension financial projection. The 70-year financial projection period we adopted is far too short to properly inform people of the various problems inherent in the National Pension. According to Choi Ki-hong, former Visiting Research Fellow at the Korea Institute of Public Finance, to make the National Pension fiscally sustainable as of 2020, contributions must be raised by an additional 11.2 percentage points. This is a level of 20.2%, more than double the current National Pension contribution rate of 9%. Despite this situation, for the past five years, time has been wasted with claims that the National Pension benefit rate would be raised further on the condition of raising contributions by only 2 to 3 percentage points. We remained at a standstill even regarding the prerequisite basic tasks preceding the introduction of an automatic adjustment mechanism.

Pension Populism Despite Low Fertility and Aging

To properly identify these problems, Japan and Canada adopt much longer financial evaluation periods than we do. Even if we are reluctant to admit it, the Japanese Employees' Pension Insurance, from which we learned about the National Pension, has a financial evaluation period of 100 years, and the Canada Pension Plan (CPP) is set at 150 years. Both countries have secured the funds to pay pensions until those points. Canada has secured 100% of the funds to be paid even 150 years from now. Although it is not a pension fund, Norway has secured 300% of its gross domestic product (GDP) through a sovereign wealth fund to reduce the burden on future generations.

We, who have the lowest fertility rate in the world and whose old-age dependency ratio is rising fastest among OECD members—and in the worst possible way—are paying contributions far below the level required to achieve a balance between contributions and benefits. Furthermore, we have failed to introduce an automatic adjustment mechanism for pension finances, which has been adopted by 70% of OECD member countries.

Moreover, is the most fundamental reason why we have failed to have a serious discussion on these issues until now not because we have been unable to produce proper financial projection results? Is it not because extremely optimistic financial forecasts have prevented us from seeing the current state of the National Pension? In this fifth financial projection, in order to properly identify the impact that the rapidly increasing life expectancy over the past 20 years will have on pension finances, financial projection results with the projection period extended by at least 10 years or more must be presented.

The financial projection period I prefer is 100 years, the same as the Japanese Employees' Pension Insurance; however, if extending it by 30 years to 100 years immediately is difficult, it should be extended by at least 10 years to present financial projection results up to 2103, rather than 2093. I believe this would be a measure that could somewhat suppress the prevalence of pension populism.

Source: JoongAng Ilbo (original article)