The National Assembly Special Committee on Pension Reform Should Study Foreign Cases of the Basic Pension Before Deliberating

[Asia Today · Column · July 28, 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 OECD first issued a recommendation regarding pension reform in Korea in September 2001, through Chapter 3, "Preparing for an aged society," of the "OECD Economic Surveys: Korea." It stated, "Provide a Basic Pension of 20% of the average wage (the minimum cost of living at the time) to all older people using taxes (p. 116)." This recommendation emerged as a major obstacle in Korea's pension reform process.

The day after the Korea Economic Review meeting was held in Paris, France, in June 2001, there was a wrap-up meeting for the publication of the final report. I, who was present as a pension expert, protested strongly along with Park Yong-hyun, Director of the Pension System Division at the Ministry of Health and Welfare. This was because the recommendation to collect taxes and provide a Basic Pension to all older people meant shifting toward a pay-as-you-go (PAYG) system (a method of financing the required pension amount each year through annual taxes), unlike major advanced countries that were pursuing reforms toward saving for one's own pension during their working years.

The OECD, which had arranged a special session titled "Preparing for an aged society" to effectively cope with the coming aged society, made a catastrophic recommendation for Korea, where the older population is surging, contrary to its intent. This is because a Basic Pension financed entirely by taxes would cause further suffering for future generations.

Faced with repeated protests to delete this recommendation, Randall Jones, then Deputy Head of the OECD Desk for Korea and Japan, presented an alternative: "This first tier could be provided by social assistance to the elderly with incomes below this level (p. 116)," meaning it could be operated as a means-tested system targeting only low-income older people below the minimum cost of living. Despite the presentation of these two alternatives, the opposition parties at the time did not budge from their demand for a universal tax-financed Basic Pension. This was because many pension experts in Korea at the time strongly argued for the necessity of introducing a tax-financed Basic Pension.

Based on the first financial projection of the National Pension in 2003, the government submitted a fiscal stabilization plan to the National Assembly. It was a fiscal stabilization plan prepared out of a sense of crisis that the National Pension would be difficult to sustain unless the "pay less and receive more" structure was corrected. After the government's fiscal stabilization plan was submitted to the National Assembly, the introduction of the Basic Pension became a primary subject of political strife. "How can you talk about fiscal stabilization so soon after the introduction of the National Pension? Do you know how difficult it is to make a living that you are talking about raising contributions? Are you aware of the reality of the world? Let us first solve the urgent issue of coverage gaps, namely the problem of those unable to join the National Pension." This was the content of the rebuttals from the opposition parties, civic organizations, and many pension experts regarding the government's fiscal stabilization plan for the National Pension.

As a result of these debates, the system introduced in 2007 as a compromise to pass the National Pension fiscal stabilization bill was the "Basic Old-Age Pension." The Basic Old-Age Pension differed significantly from the current Basic Pension in that the government could adjust the eligible recipients at its discretion. This was reflected in the response from the Ministry of Government Legislation to the Ministry of Health and Welfare's inquiry regarding the legal nature of the Basic Old-Age Pension.

The Basic Old-Age Pension, introduced through a political compromise process, eventually degenerated into a means of gaining more votes from older people. The Basic Pension was introduced after various complications, including the voluntary resignation of Representative Jin Young—who had been a vice chairman of the presidential transition committee for the Park Geun-hye administration and served as its first Minister of Health and Welfare—as a sign of protest. Unlike the Basic Old-Age Pension, where recipient adjustment was possible, the Basic Pension locked in the requirement to pay benefits to 70% of older people.

The Basic Pension, introduced amidst much controversy, is being operated as a populist system where the amount is raised by 100,000 won per month during every presidential election. Even if it is not raised further, our Basic Pension is surging to 3.2% of GDP. In Sweden, where contributions are as high as 18.5%, pension expenditure will be only 7.2% of GDP even in 2070. It is crystal clear how great a disaster our Basic Pension, financed entirely by taxes, will bring upon future generations. Despite this situation, Korea is a country that seeks to further increase the number of recipients.

It should be noted that since around 2010, before we introduced the Basic Pension, the OECD had already been issuing recommendations for a Basic Pension of a different nature. Despite the recommendation to reduce the number of recipients while providing more to vulnerable older people, Korea introduced a system that did the exact opposite. While emphasizing the figure that Korea has the highest elderly poverty rate among OECD member countries, Korea introduced the Basic Pension in 2014, contrary to the OECD recommendations that could have drastically reduced the elderly poverty rate.

This is the content of the 2018 OECD recommendation. "The Korean Basic Pension has a fatal weakness. One-third of Basic Pension beneficiaries are not poor older people even by OECD standards. Older people living miserable lives in absolute poverty are receiving the same amount of Basic Pension as non-poor older people. The high elderly poverty rate can be drastically lowered only if the number of recipients is reduced while providing more to vulnerable older people." These recommendations continued in 2020 (p. 73) and 2022 (p. 72).

Despite the OECD recommending for nearly 15 years that the Basic Pension be reformed, the Special Committee on Pension Reform only suggested raising the income replacement rate of the National Pension. They ignored the OECD recommendations. This is despite the fact that since the Basic Pension amount is already at the 12% level based on the income replacement rate, the effects of the 2007 National Pension reform have been significantly undermined. Because they only suggested raising the National Pension income replacement rate, I say that the Special Committee on Pension Reform of the 21st National Assembly was substandard.

Scandinavian countries abolished universal basic pensions long ago. Finland, which paid a full-rate Basic Pension to approximately 93% of older people in the early 1990s, reduced this to less than 10% in the early 2000s, just 10 years later. According to Director Ismo Risku, who attended the 17th OECD Pension Experts Meeting last year, only 4.8% of people in Finland receive the full-rate Basic Pension (which would be 334,000 won per month in our case).

It is said that members of the 22nd National Assembly are studying pensions diligently. I hope they start by studying the OECD's Basic Pension recommendations and foreign cases since 2010. If they study properly, it will be embarrassing for them to continue asserting the contents of the discussions from the Special Committee on Pension Reform of the 21st National Assembly!

Source: Asia Today (original article)