The National Assembly Special Committee on Pension Reform Should Accurately Understand the Income Replacement Rate and Discuss Reform

[Asia Today · Yun Suk-myung Column · August 4, 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 the morning of June 20, 2018, before the "OECD Economic Surveys: Korea" was released by the Ministry of Economy and Finance, a related seminar was held at the KDI in Sejong City. The 2018 Economic Survey of Korea was the final report by Team Leader Randall Jones, who had long served as the desk head for Korea and Japan. I had a long association with Team Leader Randall Jones. This is because I attended most of the meetings from the OECD EDRC Committee's Korea economic review meeting in 2001 until 2012.

This is the content of the 2018 OECD report: "The targeted National Pension replacement rate should remain at its current 45% (excluding the Basic Pension, which has a replacement rate of 5.5%), rather than cut to 40% as planned (page 54)." The background of this recommendation was that "since the average contribution period of the National Pension will be 20.6 years in 2040, the effective income replacement rate will be only 20%." At the same time, it included the content that "even if the income replacement rate is lowered to 40% as planned and the eligibility age is raised to 65, pension expenditure will exceed revenue starting from 2044 (page 54)." It was a report that was contradictory—that is, it lacked logical consistency.

At the time, I was strongly criticizing the "position of the Moon Jae-in administration's core presidential office staff and sympathetic experts who preferred raising the income replacement rate of the National Pension." This is what I said as a discussant, sitting right next to Team Leader Randall Jones after his presentation: "After exchanging opinions for 20 years, we have come to agree on the major issues regarding Korean pensions. I pride myself on having accomplished something great. However, there is one disagreement in this report. It is because of the content suggesting that the income replacement rate be raised."

"Korea has wide coverage gaps in the National Pension due to the high proportion of self-employed persons. Unlike employees, the self-employed, who must bear the full 9% contribution themselves, are already suffering. If the income replacement rate is raised, contributions must be increased further to achieve fiscal stabilization. The higher contributions could further expand coverage gaps for vulnerable groups. This contradicts the OECD's recommendations to reduce coverage gaps, which have been emphasized all along..... The claim that the National Pension contribution period in 2040 will be only 20.6 years is also due to the 'trap of the average.' The contribution period for the 10th decile, with the highest income, is projected to be 34 years. Even this figure is based on the unrealistic assumption that the mandatory contribution age remains at 59. This means the actual contribution period for high-income earners could increase further. It is a deeply problematic recommendation, in that the benefits of raising the income replacement rate would be concentrated on high-income earners." After my remarks, a recess was suddenly declared.

These were Team Leader Randall Jones's remarks after a five-minute recess: "At the time of each report publication, there are special requests from the government. While it is not necessary to grant every request, there is an aspect of considering the government's requests to maintain a cooperative relationship." I will leave it to the reader to judge what Team Leader Jones's remarks mean.

The claim to "strengthen public pensions by raising the income replacement rate of the National Pension," which heated up discussions last May, originated from the 2015 'National Grand Compromise Body for Government Employees Pension Reform' (the Grand Compromise Body). The Grand Compromise Body, composed mainly of stakeholders from the Government Employees Pension and the Private School Teachers Pension, presumptuously agreed to raise the income replacement rate of the National Pension. While shifting most of the burden resulting from the overhaul to new civil servants, they even decided on raising the income replacement rate of the National Pension. I still wonder in what capacity they made such a decision.

At this point, let us look back at a question asked by a Japanese pension expert during a Korea-China-Japan pension experts' meeting held in 2021: "What is the secret to being able to provide much more pension than Japan while contributors bear only 9%, which is less than half of Japan's?" There was a reason why he asked so cautiously as a civil servant. This was because Japanese Government Employees Pension and National Pension contributors bear 18.3%, which is even higher than our Government Employees Pension and Private School Teachers Pension, yet their pension payment rates are much lower than those of our National Pension beneficiaries. I wanted to answer that the 'secret is the whirlwind of populism,' but instead said, "I simply envy Japan's pension management situation, as they possess the funds to pay pensions even 100 years from now." It was a moment when I felt ashamed to even hold my head up as a Korean pension expert.

The behavior shown by the majority of the media, pension experts, and politicians last May was almost bizarre. This is because they insisted that a 'plan to raise the income replacement rate further while only slightly increasing contributions' was pension reform, and led the way in creating an atmosphere as if the country would perish if it were not passed immediately. They are still fiercely criticizing the fact that the '44% income replacement rate—13% contribution plan' was not accepted.

Therefore, the public must know the results of the financial projection for the case where the National Pension income replacement rate is not maintained at 40%, but lowered by 10 percentage points to 30%. "Even if the '30% income replacement rate—12% contribution plan,' which is almost unimaginable in our political sphere, were implemented, the fund would be depleted by 2070, and the PAYG cost rate required for that year would soar to 26.7% (5th National Pension Financial Projection Data Book, p. 479)." Even this figure is a result obtained from an extremely optimistic birth rate assumption given the current situation. Despite this, Korea is a country where some suggest raising the National Pension income replacement rate further to 45% or 50%. This is one facet of a catastrophe occurring because the generation born during the era of being a developing nation is handling pension issues with a developing-nation mindset.

From now on, discussions on pension reform must begin in a way that meets the expectations of the generation born during the process of leaping forward into a developed nation. "We are currently powerless and suffering, but when we take the lead, we will put the 586 generation—who brought things to this state—into 'pension Goryeojang' (abandonment)." This is what is being discussed in young people's communities. It is an expression of anger toward the discussions of the 21st National Assembly Special Committee on Pension Reform, which took raising the income replacement rate for granted under the pretext of strengthening public pensions. I hope the 22nd National Assembly can face this situation squarely!

Source: Asia Today (original article)