[Yun Suk-myung's Perspective] The 'Pension Bomb' Is Ticking — Why Hide the Scale of Liabilities?

[JoongAng Ilbo · Yun Suk-myung's Perspective · February 27, 2023]

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

Pension Reform Going Off Course

Since the second half of last year, discussions on pension reform have been proceeding simultaneously in the executive branch and the National Assembly. Committees in the National Assembly and the executive branch are operating busily, but the situation is deteriorating. Despite the fact that contributions must be raised by an additional 2 percentage points to achieve the same level of fiscal stabilization after wasting the past five years, voices are calling for higher pension benefits. Discussions on pension reform, which began to secure the fiscal sustainability of a pension system worsening due to low fertility rates and increasing life expectancy, are going off course.

Voices call for "increased benefits" even though contributions must be raised; is the reality of unfunded pension liabilities exceeding 2,800 trillion won across the four major pensions not visible?; "Is this a country only for older people?" Young people who will bear the future burden are boiling over with anger; Financial projections for the Government Employees Pension and Military Pension also remain undisclosed... it seems there is no intention to reform

After the preliminary results of the fifth National Pension financial projection were announced in late January, I listened to the reactions of young people. Student Hwang Se-woong from Chungnam National University and student Kim Kang-jin from UC San Diego in the United States sent me words being mentioned among the youth. "A country only for older people," "The National Pension is a state-run Luna Coin," "Do not shift the burden to the younger generation; distribute the burden fairly among current pension beneficiaries, who have the largest population and the most money," "It is only reform if those receiving pensions also share the pain; they are staging a scam to receive more for themselves," and so on—these are words that are embarrassing even to hear. It is as if an intergenerational war has begun.

In the fifth financial projection, the 2023 fertility rate was adopted as 0.73, but young people are reportedly critical of the assumption that the fertility rate will be 1.21 after 2050. They argue it is too optimistic a figure. The life expectancy assumption exceeds 90 years after 2060. A generation in which fewer than 250,000 people are born per year must support a generation in which 700,000 to 1 million people were born per year; yet, because some seek to increase the benefit rate to receive more pension, the younger generation is exploding.

30% of Basic Pension recipients among older people are not poor

The median age, which was 43.7 in 2020, will become 62.2 by 2070. In contrast, the median age of the European Union (EU) in 2070 will be 48.8, increasing by only 5.1 years from 2019. Lee Dong-hak, former Youth Supreme Council Member of the Democratic Party, said, "The time for reform has long since passed. Because those in positions of responsibility continue to postpone it, there is little hope for intergenerational equity or the sustainability of the community."

Those calling for a further increase in the benefit rate argue that, considering the elderly poverty rate and the short National Pension contribution period, emphasis should be placed on strengthening income for older age rather than fiscal stabilization. In particular, the National Pension reserves, which exceed 900 trillion won, make it difficult to judge the situation. They ask why only fiscal stabilization is emphasized when the fund will still hold as much as 1,755 trillion won in 2040 even without raising the contribution rate.

This confusion is a phenomenon occurring because information is not disclosed. The elderly poverty rate, which is said to be the highest among Organisation for Economic Co-operation and Development (OECD) member countries, is due to the "trap of the average." The core of the elderly poverty problem lies in the extreme income inequality within the older population, which is the highest among OECD member countries. Because wealthy older people and extremely poor older people are at opposite extremes, the poverty rate for all older people simply appears high when averaged.

When real estate is considered, the elderly poverty rate in our country drops significantly to the low 20% range. It should be noted that the 20% of the older population in poverty is the poorest group among the entire population. Nevertheless, the same Basic Pension amount is paid to 70% of older people. Even applying the OECD concept of relative poverty, one-third (approximately 2 million people) of Basic Pension beneficiaries are not poor older people. Despite this situation, it is misrepresented as if all older people are poor.

A deficit between revenues and expenditures in the National Pension to occur in 2041

What about the claim that if the National Pension income replacement rate of 40% is maintained while the expected contribution period is only 27 years, the majority of contributors will be exposed to poverty even after 50 years? According to an analysis of the National Pension contributor database for those born in 1970, the expected contribution period for first-decile contributors with the lowest income is only 19.4 years. In contrast, the expected contribution period for tenth-decile contributors with the highest income reaches 34 years. If the mandatory contribution age, currently fixed at 59, is gradually raised to 64, a contribution period of 40 years can be completed. Instead of a future-oriented approach, they misrepresent the situation as if all National Pension contributors will be exposed to poverty by claiming that the average contribution period will still be 27 years even 50 years from now.

Claims are gaining ground that Germany manages its pensions well despite having reserves for only two to three months, so why the fuss in a country with 900 trillion won in reserves, and why engage in "fear marketing" by emphasizing fund depletion. However, 14 years after a deficit between revenues and expenditures occurs in 2041, 1,802 trillion won — the sum of 1,755 trillion won in reserves and a 47 trillion won deficit — will disappear through pension expenditure. Even excluding contribution revenue and fund investment returns during that period, more than 130 trillion won leaves every year. To see this properly, the concept of unfunded pension liability is necessary. It can reveal the fiction of claims that fiscal stabilization measures have been prepared while merely extending the projected date of fund depletion by a few years.

The reason for the success of the 2007 National Pension reform was that the president and the Minister of Health and Welfare stepped forward and appealed to the public, stating, "The longer pension reform is delayed, the more unfunded liability will snowball." At that time, the government accepted the World Bank's recommendation to utilize the concept of unfunded liability for public pensions. However, at some point, the use of unfunded liability became taboo in our society. This is due to the complex political situation over the years.

Unfunded Pension Liability Reaches 135% of GDP

In addition to the 1,138 trillion won in accrued pension liability for the Government Employees Pension and Military Pension, it is estimated that the unfunded liability of the National Pension, which the government does not announce, is at least 1,500 trillion won, and that of the Private School Teachers Pension exceeds 160 trillion won. Even estimating by the minimum scale, the unfunded liability of the four major public pensions exceeds 2,800 trillion won, reaching 135% of the 2021 nominal GDP (2,072 trillion won). All public pensions are operated as systems where beneficiaries receive more than they contributed, and unfunded liability increases every year. Nevertheless, the status of unfunded liability is not being properly disclosed.

The financial projection reports for the Government Employees Pension and Military Pension, which were naturally disclosed, have been kept private since some point. The details of discussions within the relevant committees are also secret. This is why a major overhaul of the Government Employees Pension and Military Pension is necessary, as they are operated without the knowledge of the public, experts, the National Assembly, and the media, who bear the costs of operating the schemes. Because they are operated this way, absurd stories emerge claiming that Government Employees Pension contributors are at a 15% disadvantage in terms of the benefit-to-contribution ratio compared to National Pension contributors.

In 2021, the operating cost of the Government Employees Pension for 1.26 million active employees was 26.9 trillion won. The total amount borne by civil servants and the state was around 14 trillion won (48% of the operating cost). This point alone shows that in 2021, a significant portion of the operating cost will eventually be passed on as future taxes. This is the background behind the accrued pension liability for the Government Employees Pension and Military Pension, which reached 1,138 trillion won as of 2021. Despite massive accrued liability being passed on every year, the atmosphere within the civil service is that they alone are being treated unfairly.

Currently, our country takes the position that social security benefits are not recognized as accrued pension liability. The International Monetary Fund (IMF) stated, "Accrued liabilities for social security benefits are contingent liabilities and thus are not included in the liabilities of the government balance sheet. However, because they are contingent liabilities, they should be included in the notes to the government balance sheet." This is why the unfunded liability of the National Pension and Private School Teachers Pension must be announced.

Accrued Pension Liability Eventually Borne by Taxes

Ok Dong-seok, President of the Korean Association of Public Finance Policy (Professor at Incheon National University), pointed out, "The general government debt (D2) ratio of our country is 42.1% (as of 2019), which is low compared to the OECD average of 109.5%. However, since the accrued liability of the Government Employees Pension and Military Pension is 49.3% of GDP, if these are combined, the general government debt ratio reaches 91.4%."

In response, the Ministry of Personnel Management claimed, "Accrued pension liability is different from fixed debt that the state must necessarily repay, and accrued pension liability is excluded when comparing the scale of debt between countries," adding, "A situation where the full amount of accrued pension liability is borne by the public's taxes will not occur."

Even though a significant portion of the operating cost of the Government Employees Pension in 2021 alone will be passed on as the public's taxes, they blur the essence with the subtle expression that "a situation where the full amount is borne by the public's taxes will not occur." This differs from Professor Ok's paper, which states, "Because the Government Employees Pension and Military Pension are fixed liabilities that the government must pay as the employer, they should be included in the liability column of the balance sheet." Among fiscal experts, voices are emerging that "if the National Assembly does not properly implement pension reform this time, we should even launch a signature campaign of 10 million citizens to demand the disclosure of accrued liability for all pensions."

Source: JoongAng Ilbo (original article)