[Yun Suk-myung's Perspective] Urgent Pension Reform — It Is Time to Empower the Prime Minister

[JoongAng Ilbo · Yun Suk-myung's Perspective · December 22, 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

Conditions for the Success of Pension Reform

Discussions on pension reform have begun in the National Assembly Special Committee on Pension Reform and the Financial Estimation Committee. The Special Committee aims to legislate the results of these discussions by April of next year. During a "Dialogue with the People" on the 15th, President Yoon Suk-yeol stated, "We must start now so that research and public deliberation are sufficiently completed and a final version of pension reform is produced by the end of this administration or the beginning of the next." Minister Cho Kyoo-hong of the Ministry of Health and Welfare said that after the financial projection results are announced in March of next year, the reform plan will be finalized and announced in October of next year. There is a significant difference between the schedules of the National Assembly and the executive branch. This is why concerns are growing that the Yoon Suk-yeol administration will simply let five years pass, following the Moon Jae-in administration, which wasted its five-year term.

The schedule recently presented by the government lacks a sense of urgency regarding pension reform. It also diverges from the promises made during the presidential campaign—proposed by candidate Ahn Cheol-soo—that whoever became president would actively pursue pension reform. This is because the current plan suggests that if efforts at the end of the term do not go well, the burden will be passed to the next administration. Let us verify whether our situation allows for such an approach.

Cooperation from relevant ministries, including the Ministry of Health and Welfare, the Ministry of Employment and Labor, the Ministry of Education, and the Ministry of National Defense, is essential. The Prime Minister must step forward to coordinate differences between ministries and derive reform measures. The success of the National Pension reform in 1998 was also made possible through the leadership of the Prime Minister's Office at the time. To proceed with a proper pension discussion, the initiative must be given to the Prime Minister.

"When evaluating fiscal sustainability using professional statistical testing techniques, the continuation of large-scale fiscal deficits means that current fiscal management is not sustainable. Furthermore, considering the high growth rate of mandatory fiscal expenditures that the government cannot intervene in under future fiscal management trends, it cannot be denied that national debt has already reached a dangerous level. It is simply that we have not yet seen the catastrophe with our own eyes." These are the candid remarks made by Professor Lee Chul-in of the Seoul National University Department of Economics ahead of his inauguration as the next President of the Korean Association of Public Finance.

The Ministry of Education does not even have a division in charge of the Private School Teachers Pension

Due to the surge in the older population, the Basic Pension will exceed 37 trillion won in 2030 and 300 trillion won by 2080. If it is increased by 100,000 won, additional costs of 100 trillion won will occur, reaching 49.3 trillion won in 2030 and 408 trillion won by 2080. The political circles' position to pay more Basic Pension to all older people differs from the OECD recommendation to 'reduce the number of beneficiaries and pay more to vulnerable older people.' This is the worst direction, as it incurs high costs while failing to significantly lower the elderly poverty rate. According to a report that I, as the lead researcher, will submit to the National Assembly Research Service, if the National Pension is operated on a pay-as-you-go (PAYG) basis after fund depletion, the required contributions will exceed 38% of income. Even under the extreme assumption that all contributions are increased at once in 2024, a contribution rate of over 21% is necessary to achieve an appropriate level of fiscal stabilization.

According to the "Fiscal Year 2021 Government Employees Pension Fund Settlement Report," the 2021 current service cost for 1.26 million active civil servants was 29.6 trillion won, amounting to 24.3 million won per civil servant. The employee and employer contributions of 14.2 trillion won, which convert to 11.28 million won per person, account for only 48% of the Government Employees Pension's operating cost. This is why a deficit subsidy of 3.5 trillion won for the Government Employees Pension must be covered by taxes this year, despite the fact that contributions increased significantly because the Moon Jae-in administration hired 130,000 more civil servants.

According to a report by the National Assembly Budget Office released on the 6th, the deficit subsidy, which is 3.5 trillion won this year, will increase to 7.9 trillion won in 2030 and 19.3 trillion won in 2070. In the Ministry of Education, the primary ministry for the Private School Teachers Pension—which has the bleakest future due to low fertility—there is not even a division in charge of the Private School Teachers Pension. This is despite the existence of beneficiaries who began receiving pensions in their 30s under the provision for private school closures.

People in their 20s: "The National Pension is money we will not receive"

Under these circumstances, the financial projection reports for the Government Employees Pension and the Military Pension remain undisclosed. Discussions on the reform of the special occupational pension schemes, such as the Government Employees Pension, have been passed to the National Assembly. In the National Assembly Special Committee on Pension Reform, however, there is a perceived atmosphere of excluding discussions on the special occupational pension schemes, including the Government Employees Pension, given the short schedule of the Special Committee. This move is far removed from the OECD recommendation to 'operate Korea's public pensions in an integrated manner.' Can many citizens agree with the claim that since the Special Committee's schedule is short and time is lacking, the Government Employees Pension and others should be excluded to focus discussions on the National Pension and the Basic Pension?

On the 3rd of last month, I attended as a discussant at the 'National Pension Reform that Young People Empathize With' event hosted by the Sound Finance Forum (Representative Choi Jong-chan, former Minister of Construction and Transportation). Ko Byeong-gyu, a Seoul National University student, presented a 'National Pension Perception Survey of 110 Young People in Their 20s.' 'Time bomb, old rope, bottomless pit, sandcastle on the beach, intergenerational conflict, passing the bomb around, money that cannot be received.' These were the answers to the question about the most worrying problem regarding the National Pension. Responses stating that National Pension reform is urgent reached 81.9%. Discussant Baek Kyung-hoon, representative of Cheong-sa-jin, said that what is needed now is the 'courage to be disliked.' Lee Dong-hak, former Supreme Council member of the Democratic Party, criticized the current structure of pension discussions as 'a situation where Chul-soo and Young-hee will end up paying for the meal, yet they are excluded while others go off to eat expensive raw fish by themselves.'

The current conditions are incomparably better than those during the National Pension reform of 2007. This judgment is based on my experience of participating in the reform process at that time. Back then, the National Pension was reformed in a situation where the president's approval rating was low, the opposition party opposed it by claiming that introducing the Basic Pension for all older people should take priority over National Pension reform, and distrust of the National Pension was high across all social strata. In other words, the reform was achieved through a will to reform, not because the circumstances were favorable.

Japan, Where Pensions Can Be Paid Even 100 Years from Now

Chairman Joo Ho-young of the National Assembly Special Committee on Pension Reform told the advisory committee members, "The political situation cannot be seen as merely bad. In a divided government where the opposition holds the majority, the ruling party and the opposition can share the political burden of pension reform." On the 9th, the National Pension Financial Estimation Committee decided to disclose all statements by its members using their real names. This allows the public, the media, and experts outside the committee to share the details of the discussions and bring the pension debate into public deliberation.

Lee Ki-il, First Vice Minister of Health and Welfare, recently told me, "It is not sustainable to receive a pension of 400,000 won while paying contributions of 90,000 won on a monthly salary of 1 million won. If we leave it as is, would we not be committing a crime against future generations?" Vice Minister Lee Ki-il and other pension officials from the Ministry of Health and Welfare visited the Ministry of Health, Labour and Welfare of Japan from the 18th to the 21st. This was to learn from the experience of Japan, which has funds to pay pensions even 100 years from now and has achieved the integrated operation of public pensions.

The Ministry of Economy and Finance, which is responsible for the nation's finances, is also seeking short- and long-term pension overhaul directions, centered on Seong Chang-hoon, Director General of the Economic Structure Reform Bureau, and Kim Hyun-gon, Director General of the Fiscal Innovation Bureau. The Economic Structure Reform Bureau has established a Pension and Health Economy Division, while the Fiscal Innovation Bureau is deliberating through 'Fiscal Vision 2050.' The National Pension Service (NPS), responsible for the operation of the National Pension and the Basic Pension, is also conducting roundtables and expert forums focused on controversial topics under the leadership of Chairman Kim Tae-hyun and Kwon Moon-il, President of the National Pension Research Institute, to verify facts and spread the necessity of pension reform. The Ministry of Employment and Labor, led by Kim Dong-hyun, Director of the Retirement Pension Welfare Division, is working tirelessly with the Korea Workers' Compensation and Welfare Service to establish retirement pensions and improve rates of return.

Cooperation from Related Ministries Essential for Pension Discussions

The 'comprehensive pension statistics,' which were initiated through the efforts of former Statistics Korea Commissioner Ryu Geun-kwan and are being arduously pursued by Statistics Korea, will likely be available by the end of next year. Proper discussions are only possible if data is secured before August of next year, when the results of the National Pension Financial Estimation Committee's discussions will be submitted to a public hearing. This is why efforts are needed to secure statistical data in a timely manner through cooperation between government ministries, such as the National Tax Service. To conduct pension discussions properly, cooperation from related agencies—including the Ministry of Health and Welfare, the Ministry of Economy and Finance, the Ministry of Education, the Ministry of National Defense, the Ministry of Employment and Labor, the Financial Services Commission, the Ministry of Personnel Management, the National Tax Service, and Statistics Korea—is essential.

In this situation, Prime Minister Han Duck-soo appears to be the right person to coordinate differences between government ministries. In 2001, when the Korean delegation and the OECD Secretariat were in sharp conflict over the contents of pension overhaul recommendations, Prime Minister Han was on the ground as Korea's Ambassador to the OECD. Having also served as the President of the Korea Institute for Industrial Economics and Trade (KIET) under the Prime Minister's Office, he also possesses a broad understanding of expert perspectives. Bang Moon-gyu, the Minister for Government Policy Coordination who assists the Prime Minister, served as the Chair of the National Pension Deliberation Committee while he was Vice Minister of Health and Welfare. I served as the Vice Chair of this committee, and I have known Minister Bang since 2006, when we visited the headquarters of the World Bank and the IMF together while he was a deputy director general at the Ministry of Planning and Budget.

Based on such valuable experience of the Prime Minister and the Minister for Government Policy Coordination, it seems possible to derive a proper pension reform plan by actively supporting ministries with a will to reform and encouraging those that are passive. The successful National Pension reform of 1998 was also achieved through the Social Security Deliberation Committee under the Prime Minister's Office at the time. To proceed with proper pension discussions while minimizing the political burden on the presidential office, it is time to empower the Prime Minister.

Source: JoongAng Ilbo (original article)