[Yun Suk-myung's Perspective] The National Pension Does Not Even Disclose Its Liabilities — Is There Any Will to Reform?

[JoongAng Ilbo · Yun Suk-myung's Perspective · May 30, 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 in Name Only

As the Special Committee on Pension Reform of the National Assembly begins its second term, discussions on pension reform are receiving attention once again. The Financial Estimation Committee has also entered full-scale discussions on fiscal stabilization measures. While the pace of pension discussions is accelerating, many aspects remain unsettling. This is because of the public hearing the Special Committee held and an interpretation of the National Pension financial projections that is hard to accept.

The World Bank recommended that "the amount of shortfall among future pension payments must be disclosed"; Korea accepted this in 2007 but subsequently stopped, leaving pension reform spinning its wheels. If the liabilities of the National Pension, Government Employees Pension, Military Pension, and Private School Teachers Pension are combined, they exceed 130% of GDP. With the contribution rate remaining stagnant for 25 years, will we simply pass the debt on to the younger generation?

The Start of the Second Term of the National Assembly Special Committee on Pension Reform

Development plans for the Basic Pension and retirement pensions, as well as measures to improve the return on the National Pension, were the themes of the Special Committee's public hearing held in late April. Even before the hearing, the committee had been criticized for being superficial because the progress report lacked specific fiscal stabilization measures. Since fiscal stabilization measures were not addressed at the hearing either, criticisms are emerging that the Special Committee is merely for show. Proper public deliberation is difficult without the most critical basic data.

The Financial Estimation Committee also appears to lack the will to reform. The unfunded pension liability of the National Pension, which had been repeatedly requested for disclosure, was postponed for another five years because an agreement could not be reached within the Financial Estimation Expert Committee. Unfunded liability refers to the shortfall among the pension amounts already promised to be paid. It is difficult to understand why disclosing the National Pension's unfunded liability is deemed difficult even though the Special Committee disclosed the unfunded liability of the Private School Teachers Pension. The argument that there are various methods for calculating unfunded liabilities and that disclosing unfunded liabilities—rather than fixed liabilities—could only cause confusion was accepted again this time. In protest, one member of the Financial Estimation Expert Committee resigned.

In its 1994 publication "Averting the Old Age Crisis," the World Bank warned that since most new nations after World War II relied solely on unsustainable public pensions, a national disaster would likely ensue if left unchecked. Despite domestic criticism that the World Bank report intends to weaken the function of public pensions and activate private pensions, I emphasize it because the argument that the public pension system must be reformed urgently is valid.

"The National Pension will never collapse, and as long as the nation exists, pensions will be paid." This is what the government and the National Pension Service (NPS) have been saying to reassure the public. To future generations, such as the MZ generation who must live in the world 30 to 50 years from now, these words seem only irresponsible. Therefore, a yardstick is needed to objectively evaluate the health of the pension system. Objectivity can be secured only through a verification process utilizing various yardsticks.

Fiscal Stabilization Impossible if Income Replacement Rate Is Raised

I participated as a Korean participant in the pension reform discussions jointly hosted by the World Bank and Harvard University at Harvard University in 1999. At that time, the World Bank recommended evaluating sustainability by applying the concept of unfunded liability to public pensions. Perhaps due to this influence, the concept of unfunded liability was utilized in the 2007 National Pension reform. However, since then, the concept of unfunded liability has been rejected in Korea. Observing that the failure to implement pension reform over the past 16 years stemmed from this social atmosphere, I repeatedly demand the disclosure of unfunded liabilities.

In the 2018 National Pension System Development Committee and the Comprehensive National Pension Operation Plan, the argument prevailed that fiscal stabilization is possible if the National Pension income replacement rate is raised under the guise of strengthening public pensions while simultaneously increasing National Pension contributions. Similar arguments are being made in the National Assembly's Special Committee on Pension Reform now in operation.

According to data provided by the National Assembly Budget Office to Representative Ahn Cheol-soo's office, even if the National Pension income replacement rate is raised by 10 percentage points to 50% and contributions are raised by 3 percentage points to 12% in just three years, the cumulative deficit of the National Pension increases significantly. The year of fund depletion is postponed by three years, from 2055 to 2058, but by 2093—the end of the 70-year financial evaluation period adopted by the National Pension—the cumulative deficit of the National Pension increases by as much as 1,404.4 trillion won (at constant prices of 2023). From the five years of the Moon Jae-in administration until now, the public and politicians are being misled by claiming that extending the fund depletion date by a few years is a fiscal stabilization measure. In reality, it is a plan to pass astronomical amounts of pension liability on to future generations. The yardstick that can properly reveal the true face of such arguments is the concept of unfunded liability.

Only when the scale of unfunded pension liability is properly understood can a pension reform that is both intergenerationally equitable and sustainable be achieved. How can one speak of intergenerational equity and fairness without even knowing the scale of the unfunded liability? We must listen to the frustrations of young people who ask, "How can an overhaul plan that only increases the burden on young people and future generations, without any pain-sharing from beneficiaries and those who have contributed for a long time, be called a reform plan?"

The Health Status of Public Pensions Suffering from a Critical Illness

The health status of our public pensions is far worse than commonly known. The recently disclosed unfunded liability of the Private School Teachers Pension reaches 170 trillion won. This means there is a debt of 500 million won per person for its 330,000 contributors. Even though the Private School Teachers Pension received an excellent evaluation in fund management, its structure makes it inevitable that its unfunded liability will continue to increase. If we combine the unfunded liabilities of the National Pension and the Private School Teachers Pension—which I have repeatedly demanded be disclosed—with the accrued pension liabilities of the Government Employees Pension and the Military Pension, it is estimated to exceed at least 130% of GDP.

"Most major advanced countries have switched their financing method to a pay-as-you-go (PAYG) system. While there is a need for institutional reform, it needs to be reformed from a mid-to-long-term perspective. If the fund return is increased by 1 percentage point, the date of fund depletion is extended by five years, allowing the depletion date to be delayed until 2060." This is quoted from the press release of the 5th National Pension financial projection announced at the end of last March. Given that the birth rate in Seoul has plummeted to 0.59, this seems far too complacent for a country where the population receiving pensions will increase most rapidly.

In the interim announcement last January, it was stated that because the Moon Jae-in administration missed the timing for pension reform, contributions must be increased by an additional 2 percentage points to achieve the same level of fiscal stabilization. However, upon announcing the finalized projection results, a press release devoid of such a sense of crisis was distributed. If we fail to reform properly this time, an additional 3 percentage points must be borne to achieve the same level of fiscal stabilization due to various factors that have worsened. Adding the 3 percentage points to the 2 percentage points resulting from the Moon Jae-in administration's failure to reform means an additional 5 percentage points must be borne. Since we are a country that has failed to raise the contribution rate by even 1 percentage point over the past 25 years, this can be called an excessively complacent approach.

Finland's Integrated Operation of Public Pensions

An Asia-Pacific pension experts meeting was held from the 25th to the 26th. First, the OECD Secretariat presented the details of automatic adjustment mechanisms operated by member countries. Subsequently, the details of automatic adjustment mechanisms operated in Germany, Finland, and Japan were also presented. Listening to the operational status of their automatic adjustment mechanisms, I felt suffocated. This is because we are the country that must introduce an automatic adjustment mechanism as quickly as possible, yet neither the National Assembly nor the government mentions its necessity.

The presentation by Ismo Risku, Director of Planning at the Finnish Centre for Pensions, who attended the OECD pension experts meeting, drew attention. Despite having a much more favorable pension environment than ours, the contribution rate for Finland's earnings-related National Pension is 24.4%, and public pensions are operated in an integrated manner. He stated that they do not have benefits like the retirement pension (for National Pension contributors) or the retirement allowance (for Government Employees Pension contributors) that we have. Considering the taxes injected into pension finances in addition to contributions, it is said that the actual burden rate of the National Pension and the Government Employees Pension is around 28% of monthly salaries. He noted that if the operation of the already introduced semi-automatic adjustment mechanism were to stop—that is, if the eligibility age for pensions were fixed at 63—the contribution rate is projected to increase up to 47%.

Statistics Showing Individual Pension Status Are Desperately Needed

Despite bearing a much heavier burden than we do, Finnish Government Employees Pension contributors receive far less than our contributors based on the annual pension accrual rate. Considering Finland's high pension income tax levied on National Pension benefits, the level of old-age income security for Korean National Pension contributors who can also receive retirement pension benefits (the 53% of workers eligible for a retirement pension who have actually enrolled) must be seen as higher than Finland's.

Despite this international status, we have neglected discussions based on facts. Because the direction of pension discussions has been determined according to the tastes of specific administrations, we missed the golden time for reform. Even in this situation, we are in a state where grasshoppers who mock ants working hard in midsummer are prevailing. To secure basic data for proper public deliberation, the timing for producing "comprehensive pension statistics" must be expedited. We must produce pension statistics that can accurately show individual pension enrollment status, including personal pensions, and who is enrolled in which system and how. This is because desirable pension reform can only be possible with proper statistics. It seems time to put into practice the argument of former Statistics Korea Commissioner Ryu Geun-kwan to upgrade Statistics Korea from an agency to a ministry-level statistics office.

Source: JoongAng Ilbo (original article)