Why Raising the National Pension Income Replacement Rate by Even 0.1 Percentage Point Is a Deterioration

[Asia Today · Column · June 16, 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 Yoon Suk-yeol administration has finally accomplished something meaningful. This is because it did not yield to the wave of attacks—which by the end of last May included the leader of the supermajority opposition, the Speaker of the National Assembly, and even most conservative media outlets—and instead passed the issue of pension reform to the 22nd National Assembly. Looking back at the events of May, particularly during the final ten days, it is impossible not to conclude that a general offensive was launched according to a predetermined blueprint.

The situation was so one-sided that a column by the editor (and president) of one conservative newspaper, arguing that pension reform should be passed on to the 22nd National Assembly, was almost the only exception. One influential conservative newspaper even ran a threatening editorial asking whether the President would take responsibility if pension reform fell through. That newspaper has kept running editorials and columns in a similar tone even after May. Last May, even the Ministry of Health and Welfare supported, in various ways, the passage of the National Pension deterioration plan through the 21st National Assembly. This was because, by supplying distorted data and putting forward experts who could not even distinguish between reform and deterioration, it misrepresented 'a 44% income replacement rate and a 13% contribution rate' as a reform plan. That is why I rate the Yoon Suk-yeol administration highly for having held out with determination, on the pension issue at least, even in those difficult circumstances.

Over the past year, I have rarely written columns or appeared on broadcasts providing a positive evaluation of the Yoon Suk-yeol administration regarding pension reform. Therefore, I hope this column is not misunderstood as flattery intended to gain some favor. What was done well is well, and what was done poorly is poorly. I am writing this piece simply to sound an alarm about the pathetic reality currently unfolding in the Republic of Korea and to provide an objective evaluation.

The Pension Future Forum, to which I belong, has released several position statements, beginning with an emergency press conference in front of the National Assembly on April 3. On May 22, during the most critical period, it held an emergency press conference at the National Assembly Communication Hall, and finally, on May 28, it held its fourth seminar at the Francisco Hall in Jeong-dong, Seoul. At these events, the Forum asserted that if the income replacement rate were raised by even 0.1 percentage point, it would be deterioration, not reform. I intend to explain the background of why the Pension Future Forum tried so hard to prevent the pension overhaul plan from passing through the 21st National Assembly.

First, it is necessary to note the remarks made by Joo Ho-young, Chairman of the National Assembly Special Committee on Pension Reform, during a session where he was briefed on the discussions of the Public Deliberation Committee. "If one side proposed a '12% contribution—40% income replacement rate' plan, then according to the principle of equivalence, the other alternative should have been a '13% contribution—42% income replacement rate' plan." Chairman Joo Ho-young made these remarks to remind everyone that from an actuarial perspective, if contributions are raised by 1 percentage point, the income replacement rate must be raised by only 2 percentage points to maintain equivalence; in other words, only then can additional fiscal instability be avoided.

Since one side had proposed a '12% contribution—40% income replacement rate' plan, he intended to emphasize that if one wished to propose a plan raising contributions by only 1 percentage point more, the '13% contribution—42% income replacement rate' plan should have been presented, considering this principle of equivalence. This can be seen as suggesting that the '13% contribution—50% income replacement rate' plan, presented as Option 1 to the Public Deliberation Committee's citizen representatives, was an extreme populist plan that was objectively impossible to compare with the '12% contribution—40% income replacement rate' plan presented as Option 2 at the time.

This content was discussed intensively during a telephone conversation between Chairman Joo Ho-young and me on May 16. These are the words I said to Chairman Joo during that call: "I do not know why the reality of our pension discussions is so absurd! I say this because the expertise of those who call themselves, or are called by others, pension experts is inferior to that of lawmakers. I simply cannot understand why the experts who participated in the Public Deliberation Committee failed to even raise an issue regarding the Chairman's point."

However, a more important point here is that even Chairman Joo Ho-young's remarks are only half-valid. This is because Chairman Joo's statement can only be valid when our National Pension reaches a balance between contributions and benefits, as is the case with other OECD member countries. A 'balance between contributions and benefits' refers to a situation where the contributions paid by the insured are equal to the pension amount they receive. The average contribution rate in OECD member countries that provide pensions at our current level (a 42% income replacement rate) is around 18–20%. Because our National Pension has a contribution rate of 9%, which is half the level of those countries, it cannot achieve a balance between contributions and benefits. Given our situation, Chairman Joo's remarks are only half-valid in that he compared the two plans discussed by the Public Deliberation Committee based on the principle of equivalence generally used by OECD member countries.

According to the fifth financial projection of the National Pension in 2023, the contribution rate for a balance between contributions and benefits is 19.8%. This means that even if the income replacement rate is maintained at 40%, contributions must be collected at 19.8% to achieve a balance—in other words, to avoid passing further debt bombs onto future generations.

This fact means that the overhaul plan, which was self-congratulated as a historic agreement, is in reality a massive deterioration. Even under the extreme premise that the state takes responsibility for the astronomical pension debt already incurred, at least 21.8% must be collected to prevent debt from increasing further after the reform in the case of the '44% income replacement rate—13% contribution' plan. Since only 13% is collected when 21.8% should be, contributions are under-collected by 8.8 percentage points, and the pension debt increases by that much every year. This is the background behind why the unfunded pension liability of the National Pension in 2050 is projected at 6,366 trillion won, surging 3.5 times in just 27 years.

In this way, they deceived the public and the media by misrepresenting a plan that was a deterioration among deteriorations as a reform plan. As most media outlets, except for a very small number, joined in, the last ten days of May were spent launching a total attack on the Yoon Suk-yeol administration for 'not accepting the deterioration plan.' This is why I emphasize again and again that the events of that time must be recorded in detail. It is to leave a lasting record in history so that such an event never happens again. It is because we must properly secure the basic data to bring before a historical hearing the group that led the discussions of the Public Deliberation Committee, which attempted to push the Republic of Korea over an irrecoverable cliff by misrepresenting a deterioration plan as a reform plan.

Source: Asia Today (original article)