[Talking About the Three Major Reforms] Twenty-Five Years of Inaction — Future Generations to Be Hit by a Bomb

[Hankook Ilbo · Talking About the Three Major Reforms · February 20, 2023]

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

Pension Reform: <1> Why Must We Reform?

The Government Employees Pension was introduced in 1960, when life expectancy was in the early 50s, to provide benefits from age 60 at the current National Pension benefit level (based on a 40-year contribution period and a 40% income replacement rate). Since then, the benefit level has been more than doubled, and the system was changed so that pensions could be received immediately upon retirement regardless of age, provided there were 20 years of service. Due to such lax management, fiscal instability became full-blown from the mid-1990s, and despite several overhauls, the crisis is deepening.

In 2001, a state guarantee of benefit payment was introduced to cover pension deficits with taxes. During the 2010 overhaul, the pensions of 56% of active employees were not cut, shifting the burden to new contributors. After the 2016 overhaul adopted a "short-to-medium-term prescription of slightly cutting benefits and further increasing contributions until 2035" instead of the Ministry of Personnel Management's "fiscal stabilization through drastic benefit cuts," instability has deepened day by day. This year alone, the deficit subsidy budget for the Government Employees Pension reaches 5.2 trillion won, and the estimated cumulative subsidy for the next eight years, until 2030, exceeds 40 trillion won.

Considering that France, where opposition to pension reform is fierce, aims to save between 18 trillion and 24 trillion won by 2030 through its reform, it is actually South Korea that has a fire under its feet. In fact, the burden on future generations is accumulating every year due to insufficient reform. In 2021 alone, 52% of the operating cost of the Government Employees Pension was shifted. The operating cost of the Government Employees Pension for 1.26 million active civil servants was 29.6 trillion won, but the burden on civil servants and the state was only 14 trillion won. The difference of 15 trillion won was once again passed on to future generations. This is why the accrued pension liabilities of the Government Employees Pension (904 trillion won) and the Military Pension reached a total of 1,138 trillion won in 2021.

The scale of the unfunded pension liability of the Private School Teachers Pension, which holds 24 trillion won in reserves, is also beyond imagination. An unfunded liability refers to the shortfall among the promised pension amounts. The unfunded liability of the Private School Teachers Pension, which was 98 trillion won in 2016, has increased by more than 10 trillion won every year and is estimated to exceed at least 160 trillion won. The unfunded liability of the National Pension, which holds 900 trillion won in reserves, is also estimated to exceed 1,500 trillion won.

At this rate, future generations, who will already face population shortages due to the ultra-low fertility rate, will be burdened with a disaster from birth. The fertility rate in 2023 is estimated at 0.73, which means fewer than 250,000 babies will be born that year. Under the current structure, they must support older generations who were born at a rate of 700,000 to 1 million per year; once the fund is depleted in 2055, the contribution rate must be raised immediately to 26.1%, and it must be increased to 34.9% by 2080 (the fifth National Pension financial projection).

Before writing this article, I asked for the opinions of the younger generation on the National Pension through student Hwang Se-woong of Chungnam National University and student Kim Kang-jin of the University of California. Their perceptions are shocking. They describe it as a "country only for older people," a "national Ponzi scheme," "benefits stay the same while those in their twenties and thirties are exploited," and a "state-run Luna Coin." To reassure our precious sons and grandsons, we must instill confidence that they too can receive pensions until death. This is why fiscal stabilization must be achieved even by 2093, 70 years from now.

To secure one year's worth of pension expenditure even in 2093, the current 9% contribution rate must be raised to 17.86%. That figure is derived from the extreme assumption that all increases occur in 2025. If the increase is delayed by ten years to 2035, it must be raised further by 3 percentage points to 20.73%. The numbers show that reform must be hurried by even a single day. All of this is the consequence of our generation hesitating and failing to raise the rate by even one percentage point over the past 25 years.

It is noteworthy that even countries in better conditions than ours have succeeded in painful reforms. This is because 70% of OECD member countries have adopted automatic adjustment mechanisms that guarantee the sustainability of their pension systems. This contrasts with us, who have procrastinated day after day. Having wasted time since the 2018 financial projection, the contribution rate required for the same fiscal stabilization has increased by 1.66 to 1.84 percentage points. This is living proof of the urgency of reform. This is why we must urgently and extensively reform the National Pension, the Basic Pension, the Government Employees Pension, the Military Pension, and the Private School Teachers Pension.

Source: Hankook Ilbo (original article)