[Reset Korea] The Unsustainable 'Pay More, Receive More' Pension Reform

[JoongAng Ilbo · Reset Korea · April 29, 2024]

Yun Suk-myung, Research Fellow Emeritus at the Korea Institute for Health and Social Affairs (KIHASA) and Head of the Pension Division of Reset Korea

According to the fifth financial projection of the National Pension in 2023, fiscal stabilization is impossible even if the income replacement rate is lowered to 40% and contributions are raised by 6 percentage points to 15%. This result was derived from an optimistic assumption that the birth rate in the 0.7 range would rebound to 1.21. Despite this situation, the citizen representatives of the Public Deliberation Committee of the National Assembly Special Committee on Pension Reform selected the "pay a little more and receive much more" plan. Controversy is growing because the citizen representatives preferred the "more sustainable plan" before studying pensions, but chose the "no longer sustainable plan" after learning at the Public Deliberation Committee. The problem is serious in that they selected an overhaul plan diametrically opposed to the one chosen by the experts of the Financial Estimation Committee and the advisory committee members of the National Assembly Special Committee on Pension Reform.

Incorrect decision to "give more" induced by failure to properly explain to citizen representatives; information such as the cumulative deficit of the pension must be disclosed

The "income replacement rate 40%—contribution rate 15% plan," which was supported by 10 out of 15 members in the January 2023 vote of the advisory committee to the National Assembly Special Committee on Pension Reform, was completely excluded from the learning materials for the citizen representatives. By the decision of 36 stakeholders, the opportunity to inform the citizen representatives of the plan preferred by experts was stripped away. While knowing that the public would not prefer a "plan that only increases burdens while receiving the same amount," there was not even an opportunity to explain why experts had no choice but to prefer that plan.

The experts who created the "more sustainable plan" at the Financial Estimation Committee and the National Assembly Special Committee were actually excluded from the advisory group of the agenda deliberation team. The selection of an advisory group that excluded experts capable of properly explaining the "more sustainable plan," and the rule setting of the Public Deliberation Committee that made it impossible to even introduce this plan to the citizen representatives, can be seen as the background of the catastrophe that led to the decision to "give more pension." The Pension Future Forum, to which I belong, submitted a public inquiry to the Public Deliberation Committee regarding "what principles and procedures were used to compose the advisory group," but there has been no explanation. Among the 36 stakeholder groups, there are eight representing the younger generation, four of whom are known to prefer an increase in the National Pension payment rate. It is simply appalling that organizations that should represent the young and future generations are advocating for the strengthening of pension vested interests.

Circumstances have also emerged showing that the citizen representatives were taught content contrary to the facts while core materials they must know were excluded. While Option 1 (income replacement rate 50%—contribution rate 13%), which increases the deficit by as much as 702 trillion won, was described as a "sustainable plan," no such expression was used for Option 2 (income replacement rate 40%—contribution rate 12%), which would reduce the deficit by 1,970 trillion won and thus be "more sustainable." They failed to inform them that there is a difference in fiscal savings amounting to 2,700 trillion won between the two options. This was done on the grounds that the cumulative deficit is a concept not agreed upon among experts. It is preposterous to acknowledge the date of fund depletion obtained through financial projection while rejecting the cumulative deficit figure obtained through the same process.

While failing to disclose that Option 1 results in a fivefold difference in lifetime contribution burdens by generation, they engaged in "fear marketing" contrary to the facts, claiming that the pension amount for Option 2 is too low (660,000 won per month). Even though adopting Option 1 would only increase the pension amount for low-income earners (900,000 won) by 230,000 won, they taught them that it would increase by 500,000 won. It can be seen that as the approval rate for Option 2 fell due to incorrect learning, the approval rate for Option 1, the income security plan, rose significantly by 19.1 percentage points.

Consequently, it is difficult to view the Public Deliberation Committee as having been operated fairly in terms of the discussion structure and learning materials. In the United Kingdom, preference for painful reform plans exceeded a majority after core information was provided. The background that allowed Japan to succeed in pension reform was the disclosure of the fact that "the money to pay pensions 100 years from now will be short by 4,330 trillion won."

This figure is a concept similar to the controversial cumulative deficit. Japan disclosed it, so why do we say we cannot disclose ours? The report from the National Assembly Budget Office includes the cumulative deficit for each scenario except Option 1. The government and the National Assembly must disclose the total scale of the cumulative deficit that will occur during the projection period and the magnitude of increase or decrease by alternative to quell the controversy. They must also disclose unfunded pension liabilities, as the Roh Moo-hyun administration did.

The 21st National Assembly must not make the reckless move of rushing to process the decision of the citizen representatives, which was conducted on a tilted playing field with distorted learning materials. No matter how urgent reform is, if the direction is wrong, an analysis of the cause must come first. Doing so would be consistent with the purpose of public deliberation.

※ Contributions from external writers may differ from the editorial direction of this publication.

Source: JoongAng Ilbo (original article)