[Yun Suk-myung's Perspective] Advanced Nations Have Abandoned the Basic Pension — Korea Seeks to Raise It Further

[JoongAng Ilbo · Yun Suk-myung's Perspective · October 13, 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 Direction of Pension Reform Recommended by the OECD

The Organisation for Economic Co-operation and Development (OECD) unusually released reports on Korea on two consecutive days, September 19 and 20. The Economic Survey of Korea was presented by Vincent Koen, Deputy Director of Country Studies, at the Government Complex Sejong, while the pension report was released via its own website.

The two reports recommended that Korea ▶reduce the number of Basic Pension beneficiaries while providing more to vulnerable older people, ▶raise National Pension contributions quickly, ▶extend the contribution age for the National Pension, and ▶increase the income ceiling recognized by the National Pension to increase the pension amount payable. This means reducing fiscal expenditure by narrowing the target group of the tax-financed Basic Pension, while increasing the pension amount payable for high-income earners on the premise of fiscal stabilization measures by raising the upper limit of applicable income. There was also a recommendation to integrate the operation of the National, Government Employees, Private School Teachers, and Military Pensions.

The political sphere, regardless of party, puts pension reform on the back burner and focuses on raising the Basic Pension; the OECD proposes means-tested Basic Pension payments focused on vulnerable older people; National Pension contributions must be raised and the contribution age extended in line with aging; it is desirable to integrate the operation of the four major public pensions: National, Government Employees, Private School Teachers, and Military.

It is not easy to put these recommendations into practice. Nevertheless, the OECD viewed a major overhaul of Korea's pension system—which lags far behind the trends of the times—as inevitable. This can also be seen as a wake-up call to the political sphere, which seeks to raise the Basic Pension while leaving pension reform on the back burner.

OECD Meetings Are Like Diplomatic Wars

I first established a connection with the OECD in July 2001. During the process of drafting the Economic Survey of Korea, I visited the OECD headquarters in Paris as part of the government delegation led by then-Assistant Minister for Finance and Economy Kwon Oh-kyu. Facing the scene firsthand, I felt that OECD meetings were like diplomatic wars.

At that time, 'Coping with Aging' was selected as the special theme of the OECD Korea report. The intent was that Korea, which is aging most rapidly, must hurry its preparations for aging. When the draft report is presented at a meeting attended by all member states, two pre-designated countries provide comments. Based on these comments and others, the report writers and the Korean delegation deliberate the next day on the content to be included in the final report by theme. Because experts were needed during this process, I joined the delegation for pensions, and Dr. Lee Hye-hoon of KDI (former lawmaker) joined for the National Health Insurance.

At that time, the Korean side and the OECD engaged in a fierce battle. This was because there was a recommendation to provide a Basic Pension to all older people aged 65 and over, equal to 20% of the average wage of Korean workers, financed by taxes. While the intent to overhaul the pension system to cope with rapid population aging was good, the method was wrong. In a situation where the older population is surging, it was clear that introducing a Basic Pension would not be preparing for the future, but would instead become a disaster. Despite strongly arguing that this was unacceptable based on this logic, it was ultimately included in the report due to the complex dynamics within the OECD at the time.

At the 2005 Paris meeting, Assistant Minister Kim Seok-dong and OECD Director John Martin also engaged in a heated debate over the issue of introducing a Basic Pension. This was due to the difference in views between Korea's position that the recommendation could not be accepted and the OECD's position that it was valid. Our delegation became more firm as news arrived that the issue of pension reform was mentioned during a meeting between President Roh Moo-hyun and Grand National Party leader Park Geun-hye held at the presidential office on the same day. The matter was settled for the time being when Assistant Minister Kim's proposal to reach a conclusion via video conference after returning to Korea was accepted.

The person who had engaged in the heated debate during the 2001 report deliberation process, which was particularly controversial, was Randall Jones. Randall Jones, who was then the deputy head of the Korea-Japan team, was promoted to team leader shortly thereafter and served as the lead author of the Korea reports until 2018, shortly before his retirement. Randall Jones can speak Korean, as he had experience serving as a missionary in Busan during his college years in the United States. When I met him in Paris, he was a Korea expert who knew our situation well, to the extent that he showed me the JoongAng Ilbo and others, saying he read Korean newspapers almost every day.

Means-tested Basic Pension Recommendations Since 2012

The topics on which I continuously exchanged opinions with Randall Jones were the Basic Pension and the National Pension. I expressed negative opinions on the Basic Pension whenever there was an opportunity. The reason why proper discussions had not taken place after the fiscal stabilization plan for the National Pension was submitted to the National Assembly in October 2003 was due to opposition from the opposition party, which argued that providing a Basic Pension to all older people should precede efforts toward the fiscal stabilization of the National Pension.

After I continuously raised the problems of the Basic Pension while traveling between Seoul and Paris, the OECD's position changed in 2012 to recommend operating the Basic Pension on a means-tested basis. Before the introduction of the Basic Pension was decided in May 2014 following much controversy, including the resignation of Minister of Health and Welfare Jin Young, the OECD was already preparing a stronger recommendation for a means-tested Basic Pension. The OECD report, which was released in June 2014—much later than the original schedule due to complex domestic circumstances—contained a recommendation to operate the Basic Pension as a means-tested system centered on vulnerable older people. It must not have been easy to change recommendations that had already been issued several times, yet they issued a recommendation to the opposite effect.

Since then, the OECD has continued to recommend changing the direction of the Basic Pension's operation in reports published every 18 months. It judged the system to be inefficient because the effect on alleviating elderly poverty is small relative to the input costs. One-third of Basic Pension beneficiaries are not poor by OECD standards, yet they receive the same amount as extremely poor older people.

OECD: Most Public Pensions Operated Integratively

The reports released this time also recommend reducing the number of Basic Pension recipients and paying more to vulnerable older people. Despite this, the political sphere is competitively claiming they will pay more in Basic Pensions. Even though the recommendation is to reduce recipients and pay more to vulnerable older people, they are instead saying they will increase the number of recipients to the point of paying all older people. This is happening because, regardless of whether they are from the ruling or opposition party, they view taxpayers' money as little more than pocket money to achieve their political goals.

A notable point in the OECD report is that it recommended the integrative operation of the National Pension and the Government Employees Pension. It emphasized the need for integrative operation, stating that Korea, Germany, France, and Belgium are the only four OECD member countries that operate the National Pension and the special occupational pension schemes completely separately. Rather than integrating the systems and finances, integrative operation is feasible without difficulty if the National Pension and retirement pension are paid identically, while additional payments are made only in the amount of contributions additionally paid by government employees and private school teachers, in a manner that does not cause fiscal instability. The Military Pension should also be included in the integrative operation, provided that exceptional clauses for the eligibility age and other factors are recognized considering the unique nature of the military.

Above all, the content of this recommendation to "reform the National Pension so that people can pay more and receive more" must be properly understood. Because the income recognized by the National Pension is much lower than the actual average income, the income replacement rate of the National Pension calculated based on the average wage of workers is dropping significantly. Another reason the income replacement rate is decreasing is that, unlike major advanced nations that operate a 100% earnings-related pension, our National Pension has an income redistribution function, causing the income replacement rate to drop for higher-income groups. This problem can be solved by changing the National Pension into a 100% earnings-related pension, but a separate discussion is necessary for an overhaul of the system in this direction.

Pension Policies That Burden Future Generations

The gist of this recommendation to "let them pay more and receive more" is that, on the premise of taking fiscal stabilization measures for the National Pension, the government should "upwardly adjust the income recognized by the National Pension (as of 2022, the National Pension recognizes up to 5.53 million won, whereas the Government Employees Pension recognizes up to 8.62 million won), so that contributors pay more in contributions as their recognized income increases and can thus receive more in pensions." Additionally, it recommended "extending the mandatory contribution age to allow for an increase in the contribution period of the National Pension, thereby enabling people to receive more in pensions." However, if there is no income, the extension of the mandatory contribution age does not apply.

As seen in the example of the Basic Pension, international organizations also change their recommendations when they believe something is wrong. If the system had been sustainable, welfare-advanced nations—which bore far more taxes and contributions than we do—would have had no reason to abandon the Basic Pension starting 20 years ago. This is because the system was only sustainable if people could receive as much as they paid through self-help efforts, rather than under the guise of intergenerational support.

While we hesitated for over 20 years, we became a country with a birth rate of 0.81 last year, where fewer than 260,000 people are born in a single year. Far from alleviating the burden on these people, the true face of our political sphere is that it intends to increase the burden on the generation of 260,000 for the sake of generations that had 700,000 to 1 million births per year. All this while claiming that urgent pension reform is difficult. The public and history are watching the behavior of our political sphere, which runs counter to global trends.

Source: JoongAng Ilbo (original article)