To Carry Out Pension Reform, the Wrong Frame Must First Be Corrected

[Asia Today · Yun Suk-myung Column · May 1, 2024]

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

The voting by the citizen representatives of the Public Deliberation Committee under the National Assembly Special Committee on Pension Reform is becoming controversial. This is because, despite having studied extremely complex pension-related topics several times, the result showed a preference for an "overhaul plan that is even less sustainable" than before the studies.

I have participated in most of the pension reform discussion processes carried out in Korea, starting with the National Pension System Improvement Planning Group (hereinafter the Planning Group) in 1997. In the case of the National Pension, I participated in every Financial Estimation Committee (hereinafter the FEC) from 2003 (the first) to 2023 (the fifth), and in those I was in charge of the most core fiscal stabilization measures.

The financial projection system, implemented every five years, was introduced to check the health of the National Pension from a long-term perspective and to take appropriate measures. Through the efforts of the Planning Group in 1997, there was a reform that lowered the National Pension income replacement rate by 10 percentage points from 70%, but with the judgment that it was an insufficient reform to cope with a super-aged society, the financial projection system was introduced in the 1998 amendment to the National Pension Act. This was intended to implement proper reform measures at the right time through periodic checks.

The first financial projection in 2003 was operated in accordance with the purpose of the system's introduction. Despite various twists and turns, the 2007 reform, which is called a half-reform, could be carried out. Due to dissatisfaction with the Participatory Government (the Roh Moo-hyun administration), which showed several right-wing moves including the conclusion of the KORUS FTA, the approval rating of the administration plummeted as many of its core supporters left.

It was a time when criticism was so severe that people said the administration was "turning right while signaling left." As core figures from the campaign at the time of the administration's launch turned their backs, I, who had no connection to it, came to be in charge of polishing the text of the administration's pension reform white paper.

Even to understand the current chaotic situation, it is necessary to look back at the evaluation report of the Roh Moo-hyun administration's reform. This is because significant implications can be drawn from the Roh Moo-hyun administration's "National Pension Reform: Improving a Sustainable Pension System," which evaluated the 2007 reform. "Although the National Pension Act was passed with difficulty, it cannot be denied that it is far from a fiscal stabilization measure capable of coping with a super-aged society. In terms of the adequacy of old-age income, institutional reform in the direction of increasing contributions within a range where fiscal stabilization is possible would be a more desirable reform alternative than further cutting the income replacement rate (p. 125)." This report evaluates that to secure fiscal stabilization, the income replacement rate must be lowered to a level below 40%, but in terms of old-age income adequacy, achieving fiscal stabilization through contribution increases is more appropriate than lowering the income replacement rate below 40%.

The core content of the results of the fifth financial projection is that "even if the income replacement rate is lowered to 40% as planned and contributions are raised by an additional 6 percentage points to 15%, achieving fiscal stabilization is impossible." Even this result was derived by applying an extremely optimistic assumption that the fertility rate, which had plummeted to the 0.7 range, would rebound to 1.21. Although the ultra-low fertility assumption is more suitable for our reality, the financial projection results based on that assumption were excluded; therefore, I, who was in charge of fiscal stabilization measures, repeatedly requested their disclosure, but this was not accepted.

Despite applying extremely optimistic assumptions, and despite projection results showing that fiscal stabilization is impossible even with the combination of a "40% income replacement rate and 15% contribution rate"—which increases contributions by 6 percentage points from the current level—voices emerged saying that more pension benefits should be given. Ahead of the public hearing, it was suggested that a plan to raise the income replacement rate by 10 percentage points to 50% be included in the financial projection report, and I argued, "If you insist on including it, let us decide by a vote of the Committee Members." When the vote resulted in a decision that the "plan to increase the income replacement rate to 50%" should be included as a minority opinion, two Committee Members who had advocated for it resigned from the committee. I hope you will verify the dysfunctional operation of the committee during this process and the incomprehensible behavior of those members after their resignation through the minutes of the Financial Estimation Committee (especially the 22nd).

Reflecting the results of the fifth financial projection in 2023, a majority of the members of the Financial Estimation Committee supported the combination of a "40% income replacement rate and 15% contribution rate." The same choice was made by the advisory committee of the National Assembly Special Committee on Pension Reform, which operated during the same period as the Financial Estimation Committee. This is because, in a vote by the National Assembly special committee's advisory committee in January 2023, 10 out of 15 members overwhelmingly supported the "40% income replacement rate and 15% contribution rate plan." The problem is that the "40% income replacement rate and 15% contribution rate plan," which received overwhelming support from the special committee's advisory members, was excluded from the learning materials for the citizen representatives. This was due to the incomprehensible selection of the agenda deliberation group's advisory panel and the rule-setting for agenda selection. While claiming it was the result of discussions among 36 stakeholders, they deprived the citizen representatives of even the opportunity to be informed of the plan most preferred by experts.

Because core information that must be known was thoroughly excluded and learning materials containing inaccuracies were intensively exposed to the citizen representatives, unlike before the learning process, as the number of learning sessions increased, the citizen representatives came to prefer plans that raised the income replacement rate even further. They made a choice diametrically opposite to the "40% income replacement rate and 15% contribution rate plan" most preferred by the members of the Financial Estimation Committee and the National Assembly Special Committee on Pension Reform's advisory committee. This decision by the citizen representatives appears to be because proper information was not delivered, along with the non-transparent operation of the Public Deliberation Committee.

Option 1 (the 50% income replacement rate and 13% contribution rate plan) chosen by the citizen representatives is a "plan that makes the already unsustainable National Pension even more unsustainable." This is because it is a plan that increases the deficit by an additional 702 trillion won rather than reducing it. The fact that the citizen representatives chose Option 1 is due to the setting of a wrong frame. This is because the frame was constructed as "fiscal stabilization" versus "income security." Such a frame implies that one of the options could be one where both fiscal stabilization and income security are possible. This is despite the fact that the fifth financial projection in 2023 determined that achieving fiscal stabilization is difficult even with the "40% income replacement rate and 15% contribution rate plan."

To correct the situation, the "pension debate frame" must first be changed. The frame of "fiscal stabilization vs. income security" must be shifted to a frame of "system maintenance vs. system collapse." This is because plans that would destroy the system have been disguised as "income security plans." If the paradigm of the pension debate is properly established, I believe the citizen representatives will also be able to make correct judgments.

Source: Asia Today (original article)