Pension Reform — Arrows That Are Missing the Mark

[Hankook Ilbo · Opening the Morning · April 27, 2023]

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

Looking at the pension reform achieved by French President Emmanuel Macron, I feel suffocated by our frustrating reality. This is due to the recent, incomprehensible actions of the National Assembly and the executive branch. The results of the fifth National Pension financial projection, which have been subject to much debate and trouble, were announced on the 31st of last month. The executive branch's position on these financial projection results is as follows.

It stated that most developed countries with long pension histories operate under a pay-as-you-go (PAYG) system without reserves. While announcing results showing that PAYG contribution rates are expected to be up to 34% in the median population scenario and up to 42% in ultra-low fertility scenarios, the first implication summarized by the government was that developed countries operate under a PAYG system. Because a PAYG system levies pension resources on the contributors of the current year, most of the economically active population at that time will bear the burden after fund depletion (2055). The meaning of a 42% PAYG contribution rate is that in order to procure resources for the National Pension, contributions equivalent to 42% of the monthly wages of the then-economically active population must be collected in some way for the scheme to be maintained.

It also stated that since there are reserves to be paid until 2055, fiscal stabilization measures from a medium- to long-term perspective are needed, rather than immediately. This is despite projection results showing that because the Moon Jae-in administration did not implement pension reform, the contribution rate must be raised by an additional 2 percentage points in just five years to achieve the same level of fiscal stabilization. The executive branch's perception of reality is frustrating in that if the Yoon Suk-yeol administration takes no action amid a fertility rate that has deteriorated compared to five years ago, the rate would have to be raised even more than the 2 percentage points from the Moon Jae-in administration—for example, an additional 3 percentage points—to achieve the same level of fiscal stabilization. I say this because our reality is such that if the Yoon Suk-yeol administration takes no action following the Moon Jae-in administration, we would have to collect approximately 5 percentage points more in National Pension contributions in just 10 years to achieve the same level of fiscal stabilization. Since we are a country that has failed to raise the National Pension contribution rate by even a single percentage point over the past 25 years, it is suffocatingly frustrating.

Regarding these deteriorated financial projection results, the executive branch stated that increasing the National Pension investment return by 1 percentage point could delay fund depletion by five years (an effect equivalent to a 2 percentage point increase in the contribution rate), yet it failed to mention the urgent need for reform of the scheme. Of course, I also agree that efforts to further increase the National Pension's returns are necessary. Since the Fund Management Headquarters is located in Jeonju, North Jeolla Province, I am not speaking out of ignorance regarding the frustration of the executive branch and the National Pension Service (NPS) over the fact that returns are lowered because they cannot secure core personnel needed to improve returns, such as alternative investment specialists. This is to emphasize that the government should have first shared with the public that there are limits to fiscal stabilization efforts through improving fund returns alone when there is a severe systemic imbalance in terms of the balance between contributions and benefits—that is, a gap between the burden and the benefit levels of the National Pension. Would countries that provide benefit rates similar to ours collect more than twice as many contributions simply because they are inferior to us? They do so to achieve a balance between contributions and benefits in their pension schemes and to minimize the transfer of burdens to future generations by suppressing the increase in unfunded pension liability. Unfunded liability refers to the amount that is lacking among the sums already promised to be paid as pensions.

Japan, from which we learned about pensions, calls its own pension system a PAYG system. The Japanese Employees' Pension Insurance, which operates under such a PAYG system, has secured enough funds to pay one year's worth of pensions even 100 years from now, in 2123. Most developed countries operating under a PAYG system have already introduced automatic adjustment mechanisms for their pension finances. This means they have achieved depoliticization in pension management and ensured fiscal sustainability. It means there are few developed countries where urgent reforms are postponed while populism—promising to give more pension benefits every election—runs rampant as it does here. Canada (CPP), which is among the countries that most recently introduced a public earnings-related pension among major developed nations, has secured 100% of the funds to pay pensions even 150 years from now. Why does the government fail to inform the public of these examples?

The National Assembly Special Committee on Pension Reform submitted a hollow report that omitted all relevant figures for the fiscal stabilization plan of the pension, the core of which is the combination of the benefit rate and contribution rate. The topics of the three public hearings held by the Special Committee were the Basic Pension, retirement pensions, and improving the returns of the National Pension. There was no public hearing on the fiscal stabilization plan for public pensions, which was the purpose of establishing the Special Committee and the area of greatest public interest. These are the reasons why I find the recent actions of the executive branch and the National Assembly difficult to comprehend.

Recently, the executive branch announced that the accrued pension liability of the Government Employees Pension and the Military Pension reached 1,181 trillion won. A significant portion of the annual operating cost per civil servant—which exceeds 20 million won per year (as of 2021)—is already being transferred to future generations. Despite the fact that the accrued pension liability cannot help but continue to increase due to a contribution rate of 18%, which is less than half of the operating cost of the Government Employees Pension and Military Pension systems, the position of the executive branch is that there is no need to worry even if the accrued liability increases, as has been the case until now. The deficit subsidy for the Government Employees Pension this year—the amount of public tax money that must be additionally injected because the 18% contribution rate borne by civil servants and the state is insufficient to pay the pensions of retired civil servants—reaches 6.1 trillion won in this year alone. The unfunded pension liability of the Private School Teachers Pension, in which most professors, including those at Seoul National University, are enrolled, is 170 trillion won, meaning each of the 330,000 contributors carries a debt of 500 million won. This contrasts with France, which seeks to resolve an expected annual pension deficit of 20 trillion won in 2030 through pension reform. While France's annual 20 trillion won pension deficit applies to the entire population, our deficit for pensions of special occupational groups, such as the Government Employees Pension for a small number of people, will soon increase to a level equivalent to the total population-wide deficit that France is trying to save.

According to an analysis by the National Assembly Budget Office published at the end of last March, it is projected that if the National Pension benefit rate is maintained at 40% while contributions are raised by 6 percentage points to 15% within 10 years, approximately 3,700 trillion won in cumulative deficit will be saved. This is about half the size of the 7,752 trillion won cumulative deficit expected if there is no increase in contributions, a figure I estimated as part of a research team. This means that even if National Pension contributions are raised to 15%, only about half of the increasing cumulative deficit can be reduced, and the cumulative deficit will continue to grow.

Despite these circumstances, there are louder voices in our society calling for an increase in the payment amounts of the Basic Pension and the National Pension under the pretext of strengthening public pensions. This is why voices among young people, such as the MZ generation (born from the early 1980s to the early 2000s), are growing that say, "If it is going to be operated this way, we should rather abolish the pension system." According to an analysis by the International Monetary Fund (IMF), a significant number of European Union (EU) member states are showing a decrease in their cumulative deficit over the 60 years following 2000. For us, who are in the worst position in the world to operate a pension system, the direction of pension reform we must learn from is none other than reducing the cumulative deficit, as EU member states do. By reforming in this direction, utilizing the saved resources as a minimum income guarantee—as adopted by Nordic countries—so that everyone born as a citizen of the Republic of Korea can maintain a minimum standard of living would be a way to join the global trend of pension reform.

Source: Hankook Ilbo (original article)