Pension Experts From OECD Member Countries Evaluate Korea's Pension Reform <1>

[Asia Today · Yun Suk-myung Column · June 30, 2024]

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

On June 19, an international seminar hosted by the Pension Future Forum was held at the National Assembly. Experts from countries with significant implications among those who attended the 18th OECD Pension Experts Meeting (The 18th Pension Experts Meeting In the Asia-Pacific Region) participated. It was highly meaningful in that it presented desirable alternatives based on an objective evaluation of our pension system.

At the 18th experts meeting held prior to the seminar, OECD experts witnessed the intense debate over Korea's pension reform that continued until the end of last May. On the first day, the 17th, they experienced the Korean pension reform debate properly through me, as I participated as the Korean representative, and on the 18th, through a presentation by Professor Choi Young-jun of Yonsei University. This was because there was a significant difference between the two presentations regarding the desirable direction of pension reform.

Prior to the seminar hosted by the Pension Future Forum on the 19th, I requested presentations centered on highly controversial topics, such as the "state guarantee of benefit payment," along with an objective evaluation of the Korean pension. Since the presentation materials contain much important information, I intend to write this column in two parts. This installment will include the views of the OECD Secretariat and a Finnish expert, while the next will cover the views of experts from Norway, Australia, and Japan.

Andrew Reilly, a pension analyst at the OECD Secretariat who attended the Seoul meeting but could not attend the meeting on the 19th, expressed the following views on the condition of public disclosure. The following content is based on a document delivered that day, which detailed the conversation he had with me after the conclusion of the OECD experts meeting.

"The plan to maintain the current income replacement rate of 40% while raising contributions to 13% suggests that the National Pension is not currently sustainable. To keep the promise of a 40% income replacement rate, a contribution increase beyond 13% is necessary. … I welcome the plan to extend the mandatory contribution age for the National Pension from the current 59 to 64. Contributions should be possible throughout the entire working period to maximize the pension amount received. … The income redistribution function of the National Pension should be removed, while the Basic Pension (for low-income earners and vulnerable groups) should be further strengthened. Protecting low-income earners and vulnerable groups is important. Therefore, Basic Pension reform must take place first. … In 'Pensions at a Glance 2023,' which includes projections of pension expenditure relative to GDP, only the National Pension is covered in the case of Korea. If the Basic Pension, Government Employees Pension, and others were included, it would be much higher than 7.5% (for 2060)."

In an interview with me on the afternoon of the 18th, Andrew Reilly of the OECD stated that if the Korean government officially publishes long-term projections for the Basic Pension, Government Employees Pension, Private School Teachers Pension, and Military Pension, the OECD would include all of them in the pension expenditure relative to GDP in its reports. This was a response to my repeated points that commonly mentioned claims—that the share of public pension expenditure relative to GDP will remain below 10% even after 2070—are projections that exclude expenditures from major pension schemes with high shares.

I had repeatedly pointed out in the Fifth National Pension Financial Estimation Committee of 2023 and the Advisory Committee to the National Assembly Special Committee on Pension Reform that public pension expenditure is being underestimated due to our specificity of operating the National Pension and Government Employees Pension separately. Among OECD member countries, only four, including Korea, operate them separately. According to my estimates, if all public pension expenditures are included, the share of expenditure relative to GDP after 2070 is projected to exceed 15%. Despite this fact, some experts and politicians are exploiting the situation because the Korean government does not officially publish booklets containing long-term projections for the Basic Pension and the special occupational pension schemes, such as the Government Employees Pension.

The government must officially publish projections as soon as possible to prevent such distortions of the facts. Andrew Reilly, a pension analyst, is a co-author of Pensions at a Glance and OECD Reviews of Pension Systems: Korea (2022). This is why the seminar hosted by the Pension Future Forum is so significant. He has committed that if the Korean government publishes long-term projections in an official report, he will reflect those figures to include pension expenditure relative to GDP projections that differ from previous ones.

Ismo Risku, a Finnish certified actuary and Director of Planning and Coordination at the Finnish Centre for Pensions, submitted his opinions via email. "The proverb 'If a farmer is lazy in the spring and fails to plant crops in time, there will be no grain to harvest in autumn' emphasizes that sacrifice at the present moment is necessary for future consumption. … However, Koreans are preparing far too little of the resources required for future pension expenditure at this point. This is clearly evident through financial projections and international comparisons. … Despite having the lowest fertility rate in the world, they are saving too small an amount relative to current income. A pension scheme that fails to secure sufficient resources will find it difficult to properly pay pensions in the future. This is a very obvious fact."

Mika Vidlund, External Relations Officer at the Finnish Centre for Pensions who attended the seminar on the 19th, stated that Finland is approaching a pension reform scheduled for January 2025. He said they are looking for a method to stabilize pension contribution rates that can adapt to any economic shock through a rule-based stabilization system.

He gave a cold assessment of the '44% income replacement rate—13% contribution rate' plan of the National Assembly Special Committee on Pension Reform. "For Korea, where pension reform is urgent, contributions must be raised further to maintain a 40% income replacement rate. They should be raised to 15% or more, not the 13% discussed in the Korean National Assembly. The more reform is delayed, the more debt is passed on to future generations. … If contribution increases and life expectancy coefficients are utilized, the magnitude of the contribution increase can be reduced. … As alternatives for reform, Finland-style reform or even more radical Sweden-style reform should be considered. The sooner the reform, the better. … The Finnish pension has no payment guarantee provision."

The seminar proved how anachronistic the Korean pension debate is—proposing to 'legislate a state guarantee of benefit payment,' which is hard to find even in other countries—instead of reforming the pension to be sustainable.

Source: Asia Today (original article)