Prerequisites for a Proper Discussion on Pension Reform

[Hankook Ilbo · Opening the Morning · March 30, 2023]

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

Even while traveling to Paris dozens of times to attend meetings of the Organisation for Economic Co-operation and Development (OECD), I never had an interest in the French pension system. This was because I had heard that France is a country with the largest land area among Western European nations and such fertile soil that one year of farming can sustain a person for two years. I thought it was a country with an environment different from ours, owing to the wealth accumulated since the imperialist era and massive tourism revenue derived from its cultural heritage.

No matter how favorable a country's environment may be, nothing can withstand lax national administration. While neighboring countries such as Germany and the Netherlands hurried their labor market and pension reforms, France was the country that shortened the retirement age by five years because the public liked it. It is now properly suffering the aftereffects. This is a clear example of how a ruler's wrong judgment can cause national chaos. It is said that the deficit amount President Macron intends to save through French pension reform is about 20 trillion won per year (as of 2030).

What about us? The deficit subsidy for the Government Employees Pension, which covers 1.26 million people, exceeds 6 trillion won for the year 2023 alone. The unfunded pension liability of the four major public pensions is estimated to have exceeded 130% of GDP. Unfunded liability refers to the shortfall among the pension amounts already promised for payment. Despite this situation, the Yoon Suk-yeol administration's momentum for pension reform has dropped significantly. This phenomenon appeared after the Minister of Health and Welfare stated that the expert claim that National Pension contributions must be raised to at least 15% is not the official position of the government. To make matters worse, the National Assembly Special Committee on Pension Reform intends to submit a progress report containing content that has been stripped of its core. This is because it is a report that excludes the combination of contribution rates and income replacement rates, which are essential for fiscal stabilization. The government countered that raising contributions is not its official position, and the National Assembly intends to submit a hollow report with all important figures removed. It is difficult to understand the actions of the executive branch and the National Assembly—what exactly they intend to achieve.

Even in such a difficult situation, the National Assembly Budget Office released important figures. This is because it disclosed that if contributions are raised to 15% over 10 years by 0.6 percentage points annually while maintaining the income replacement rate at 40%—a scenario the government had denied—3,699 trillion won (at 2023 constant prices) would be saved over the next 70 years. Even this astronomical figure is only about half of the cumulative deficit that will increase over those 70 years. It can be called a symbolic figure showing why reform is said to be so urgent. On the other hand, if the income replacement rate is increased by 10 percentage points to 50% and contributions are raised to 15%, the reduction in the cumulative deficit is only 283 trillion won. This suggests that if the claim to increase the income replacement rate under the pretext of strengthening public pensions while raising contributions only to 12% is accepted, as some argue, the cumulative deficit may increase significantly rather than decrease.

The fiscal savings calculated by the Budget Office are figures that expose the illusion of claims that have misrepresented extending the date of fund depletion by a few years as a fiscal stabilization measure over the past several years. Despite this, why is the executive branch unable to present such figures? If the National Assembly and the executive branch simultaneously released fiscal savings figures, I believe they could persuade the MZ generation, who strongly oppose pension reform, by stating that the purpose of pension reform lies in reducing deficits of an astronomical scale.

A proper discussion on pension reform is possible only if the position of the MZ generation—that pension amounts for existing contributors, including beneficiaries, must also be cut—can be reflected. If the Yoon Suk-yeol administration truly has the will to reform pensions, it must disclose the fiscal savings of each alternative as of the end of the projection period, including the National Pension's unfunded pension liability. Only then can a national consensus on pension reform be formed.

Source: Hankook Ilbo (original article)