[Talking About the Three Major Reforms] Many Reasons Why the Government Employees Pension Must Be Urgently Integrated With the National Pension

[Hankook Ilbo · Talking About the Three Major Reforms · July 17, 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: 8. The Three Special Occupational Pension Schemes and the National Pension

The Government Employees Pension of Korea, introduced in 1960, is similar to the Japanese Government Employees Pension in terms of system operation and history. Until November 1959, the Japanese Government Employees Pension was operated under the onkyu system. The onkyu system, which began in Prussia, Germany, held that if a subject was loyal to the emperor, the emperor—that is, the state—took responsibility for their old age. Therefore, under the onkyu system, the state bore all the financial resources necessary for the operation of the system.

Japan also operated its government employees pension in the form of the Prussian onkyu system after the Meiji Restoration. From November 1959 onward, it changed to a system where the state bore half of the contributions and the civil servants bore the other half, similar to the Government Employees Pension of Korea. However, although the government employees pensions of Korea and Japan started as identical systems around the same time, they are now poles apart after more than 60 years. This is because while the Japanese government employees pension, which had operated a system far more generous than that for private-sector pension contributors, has effectively transitioned into a pension system identical to the private sector, our Government Employees Pension has been operated in a direction that widens the gap with National Pension contributors.

This happened in 2014 when the Park Geun-hye administration pursued reform of the Government Employees Pension. There was a request from the presidential office to explain the contents of my Op-Ed, "The 'Time Bomb' of the Government Employees Pension," which had been published in a daily newspaper on December 13, 2013. It seemed that President Park Geun-hye wanted to properly understand the contents of the column. At the request of then-Senior Secretary for Political Affairs Park Jun-woo, I explained the column at the presidential office in February 2014. The meeting at the presidential office was on Wednesday, and that weekend, media reports citing the presidential office poured out, announcing that it would pursue Government Employees Pension reform.

Subsequently, in the process of pursuing Government Employees Pension reform, accurate information on the Japanese government employees pension reform became desperately needed. Coincidentally, an international seminar on the financial projections of public pensions in Korea and Japan was held in Seoul. At the time, I repeatedly asked questions to Junichi Sakamoto, an advisor at Nomura Research Institute who had served as a counselor for pensions and head of the actuarial division at the Ministry of Health, Labour and Welfare of Japan. Since then, I have been asking about Japan's progress whenever the opportunity arises. This was because I wanted to know exactly through what process the Japanese government employees pension, which had been operated under the onkyu system, came to be operated as a system identical to that of the general public.

In 2004, Japan and Germany introduced automatic adjustment mechanisms for pension fiscal stability. Rather than pursuing pension reform based on political judgment as we do, they had already introduced policy tools that allow pension finances to be stabilized automatically. Subsequently, they pursued the unification of public pensions, and since 2015, Japan has operated identical pension systems for both the private sector and civil servants. What I repeatedly asked was not about superficial packaging, but whether the systems were truly operated 100% identically. One of the most recent questions in 2022 was, "What criteria does Japan apply to align the severance pay of civil servants with that of the private sector?" The answer I received was that they align the severance pay levels of civil servants with those of the private sector based on a workplace employing 50 people, and through verification by the National Personnel Authority, if it is found that the severance pay for civil servants is even slightly higher than that of the private sector, the difference is cut.

According to what I have confirmed over the past ten-plus years, Japan literally operates the pensions of the private sector and civil servants identically. What about us? Far from operating an identical system, we are drifting toward greater secrecy than in the past. Major information regarding the Government Employees Pension, which experts and the media should naturally know, has long been the exclusive property of a few officials. These are the things happening after the 2015 overhaul of the Government Employees Pension system. The reality in Korea in 2023 is that even the media and experts in the relevant field cannot see proper financial projection reports for the Government Employees Pension and the Military Pension.

While hiding core data, they are diligent in issuing rebuttal press releases against articles related to the Government Employees Pension. In the meantime, the accrued pension liability of the Government Employees Pension and the Military Pension has increased to 1,181.3 trillion won. They merely repeat like parrots that there is no need to worry greatly because the accrued pension liability is not a fixed liability and because future state and employee contribution revenues are considered. Even though, as of fiscal year 2021, an amount greater than the total of employee and state contributions has been passed on as a burden to future generations, their position remains that there is no need to worry. This is despite the fact that the deficit subsidy will snowball as time passes.

According to recent data from the National Assembly Budget Office, the deficit subsidy for the Government Employees Pension alone is estimated to reach 6.1 trillion won this year. This contrasts with President Macron's pension reform in France, which aims to reduce a pension deficit of 20 trillion won for a single year by 2030. This is because the deficit subsidy for the Government Employees Pension, covering 1.26 million people, already exceeds 6 trillion won per year and will soon far surpass 10 trillion won. As time passes, we are currently seeing the results of problems hidden in the 2015 overhaul plan for the Government Employees Pension that the political sphere had agreed upon. My Op-Ed published in a daily newspaper on May 4, 2015, titled 'The Deeply Flawed Government Employees Pension Agreement Cannot Stand as It Is,' predicted this surge in the deficit subsidy for the Government Employees Pension. This was also the background behind Cho Yoon-sun, Senior Secretary to the President for Political Affairs under the Park Geun-hye administration, voluntarily resigning in protest of the agreement.

Despite such a bleak situation, it is still difficult to find a future-oriented approach among us. Even in the National Assembly Special Committee on Pension Reform, proper discussions regarding the special occupational pension schemes, including the Government Employees Pension, are not taking place. The significance of the 170 trillion won unfunded pension liability of the Private School Teachers Pension, which was disclosed for the first time in this Special Committee, means that each of the 330,000 Private School Teachers Pension contributors is carrying a debt of over 500 million won.

The scale of the National Pension's unfunded liability, which the National Pension Financial Estimation Committee and the National Assembly Special Committee on Pension Reform have refused to disclose, exceeds 1,500 trillion won even by the most conservative estimate. This is an amount reaching 70 million won per National Pension contributor. For reference, unfunded pension liability refers to the shortfall from the pension amounts already promised to be paid. Despite this situation, people 'deny their own fault and only blame others.' The civil servant community understands that they receive no more benefits when considering their low salaries and severance pay that is lower than in the private sector. They even say they are actually losing out. They claim that since they have undergone pension overhauls more frequently, they will follow suit once the National Pension is reformed.

On the other hand, National Pension contributors say they are willing to participate in reform if the Government Employees Pension and others, which receive astronomical deficit subsidies every year, are reformed first. Despite the fact that the sustainability of all public pensions in our country is impossible, people are still only 'blaming others.' This is why integrated operation of public pensions is necessary. Coincidentally, the OECD Secretariat has also recommended that Korea operate its public pensions in an integrated manner. An OECD publication from 2022 (Reviews of Pension Systems - KOREA) recommends integrated operation, noting that among OECD member countries, only four, including Korea, operate the general public pension and the Government Employees Pension completely separately.

The issue of severance pay, which is the greatest source of dissatisfaction within the civil servant community, can be resolved by overhauling it to be paid exactly as it is in the private sector. In short, the National Pension and severance pay should be provided identically to private-sector workers and civil servants, and the additional 4.5% in contributions that civil servants pay should be returned as additional benefits on a defined contribution (DC) basis, so that no fiscal instability arises.

Despite recommendations for integrated operation from international organizations, the position of the Government Employees Pension has been that civil servants are at a loss, even while the system was operated in a way that made it difficult to compare schemes transparently. However, the integrated operation of public pensions that I have described is a plan that would allow civil servants to receive more. According to the arguments raised by the Government Employees Pension side, which claimed they were at a loss compared to National Pension contributors, there is absolutely no reason for the civil servant community to oppose integrated operation. Rather, they should welcome it with open arms. If they still oppose the integrated operation of public pensions, it would prove that the claim made by experts like me over the past 20 years—that the benefits of the Government Employees Pension remain so great that they are difficult to compare despite several overhauls—is true.

To properly design and execute important policies that determine the rise and fall of a nation, it is necessary to secure qualified civil servants and their sense of mission. Above all, an appropriate compensation system must be established so that talented personnel with a public mindset can serve in core public offices and devote themselves to their duties with pride. However, such a compensation system must not be a pension form like the current one, which blindly shifts the burden to future generations without any countermeasures, but must be an approach where excellent civil servants are rewarded through a properly functioning annual compensation system. This is the only way to minimize the irresponsible transfer of burdens to future generations.

In our society, where the total fertility rate has plummeted to the 0.7 range, a stronger pension reform is needed than in any other country, but the starting point of the tendency to 'blame others rather than oneself' is none other than the separate operation of public pensions. This is why I judge that integrated operation of public pensions can no longer be delayed. To eliminate unnecessary controversy regarding integrated operation, I emphasize once more: the integrated operation of public pensions that I have described does not mean merging individual pension schemes. The National Pension and the Government Employees Pension would still be operated in separate forms, but it means operating them in a truly identical manner, as in Japan. Only then can we establish the foundation to properly reform the Government Employees, Military, and Private School Teachers Pensions, which suffer from incurable diseases, and the National Pension, which has entered the stage of an intractable disease.

As Poet Cho Byung-hwa wrote, "A pension is a blessed sum, the money of a lifetime imbued with blood and sweat, a fragrant sum, a respectable sum, a noble sum, and the money of life." Now is the time to hurry the integrated operation of public pensions as our society's top priority measure to be reborn as a proper pension system.

Source: Hankook Ilbo (original article)