Key Points for Observing the Announcement of the Pension Financial Projection Results

[Hankook Ilbo · Opening the Morning · January 26, 2023]

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

The results of the National Pension financial projection will be announced on the 27th. This is because the latest projections are needed as advisory committee members of the National Assembly Special Committee on Pension Reform attempt to reach a related agreement on the 27th and 28th. Ahead of the announcement, primary interest is centering on the date of fund depletion. This is because the National Assembly Budget Office predicts 2055, KDI predicts 2054, and the National Assembly Research Service report for which I served as lead researcher predicts 2056 (Dr. Shin Hwa-yeon of the Korea Institute for Health and Social Affairs (KIHASA)) as the date of depletion.

It should be noted that while the Korea Institute for Health and Social Affairs (KIHASA) report advances the date of fund depletion by only one year, it derives more pessimistic results compared to the projections of the National Assembly Budget Office and KDI. This is because the contributions required to achieve a reserve ratio of 2 at the end of the 70-year fiscal evaluation period—that is, at the end of 2093—appear higher than in other financial projections. Even under the extreme assumption of a one-time increase of 12.33 percentage points in 2024, contributions must be raised to 21.33% to achieve a reserve ratio of 2 (securing pension expenditure for the following two years as of the end of 2093). This point indicates that there is a problem in our society, where interest is concentrated solely on the date of fund depletion itself.

For the National Pension, where the fund is depleted by the time those born in 1992 retire, incentives to participate in pension reform will only arise if these generations are given confidence that there will be money to receive pensions until they die. To achieve this, rather than extending the date of fund depletion by a few years, the fiscal state until the time of death must be shown starkly. An indicator that can do this is the scale of the cumulative deficit from the date of fund depletion until 2093, the end of the 70-year fiscal evaluation period. For advisory committee members of the National Assembly Special Committee to discuss proper fiscal stabilization measures, they must be able to see the trend of changes in the cumulative deficit according to combinations of contribution increases in the case where the National Pension income replacement rate is maintained at 40%. Projection results showing the trend of changes in the cumulative deficit if the income replacement rate is increased to 45% or 50%, as claimed by some, must also be disclosed.

Only then can we prevent situations where merely extending the date of fund depletion by a few years is misrepresented as a fiscal stabilization measure. This is because it allows us to properly explain the operating principle of pensions, where the positive effect of contribution increases on finances appears immediately, but the negative effect of income replacement rate increases manifests over a long period. We must properly demonstrate this time the side effects of the so-called 'short-term morphine effect,' which was exploited by the Government Employees Pension, Military Pension, and Private School Teachers Pension in several past overhauls.

The core of the French pension reform, which has recently drawn increased interest, is to save 24 trillion won by 2030 to balance the pension system. However, in 2023 alone, the deficit subsidy for our Government Employees Pension reached 5.2 trillion won. By 2027, five years from now, the cumulative deficit subsidy for the Government Employees Pension will exceed the amount France intends to save through reform. Despite this situation, financial projection reports for the Government Employees Pension and Military Pension remain undisclosed. This is why the cumulative deficit subsidies for the Government Employees Pension and Military Pension over the next 70 years must be submitted to the National Assembly Special Committee advisory committee members' discussion table in both nominal and present values.

The scale of the unfunded pension liability of the National Pension and Private School Teachers Pension, a concept similar to the accrued pension liability of the Government Employees Pension and Military Pension—which reached 1,138 trillion won as of 2021—must also be disclosed. I say this because discussions on pension reform are proceeding at a level that would be internationally ridiculed, as the scale of unfunded liability, which was disclosed in the past, is no longer being revealed.

Source: Hankook Ilbo (original article)