The National Assembly Special Committee on Pension Reform Should Form a Consultative Body With the Ruling Party, Opposition, and Government to Discuss the Automatic Adjustment Mechanism

[Asia Today · Yun Suk-myung Column · August 18, 2024]

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

It seems a breakthrough is opening in the pension discussions, which had felt like "suffocating on a sweet potato." This is because the presidential office is specifically mentioning the direction of pension reform. Despite the immense political pressure in May, I wrote a column in this paper ("Why Raising the National Pension Income Replacement Rate by Even 0.1 Percentage Point Is a Deterioration" June 17) highly evaluating the Yoon Suk-yeol administration's decision to discuss it properly in the 22nd National Assembly. Holding that view, I found the sluggish pension discussions in the 22nd National Assembly quite frustrating.

It is said that the President will personally announce a pension reform plan (or direction) soon. According to media reports, it seems the most advanced reform plan in our country's pension reform discussions will be announced. This is because they intend to introduce an automatic adjustment mechanism (Built-in-stabilizer) for pension finances. An automatic adjustment mechanism refers to a method of linking three factors that negatively affect pension finances—namely, the decrease in the fertility rate, the increase in life expectancy, and the slowdown in the economic growth rate—to fiscal stabilization.

Sweden introduced it first in 1999, followed by Germany and Japan in 2004. Currently, 70% of OECD member countries have introduced automatic adjustment mechanisms. Even introducing it now is more than 20 years late. Korea, where the fertility rate is extremely low and aging is progressing rapidly, is the country where the introduction of an automatic adjustment mechanism is most urgent. Although it is long overdue, I highly evaluate that the direction of pension reform has been properly set. It is even more meaningful because this reform plan is presented after withstanding pressure from the media, the political sphere, and experts to accept an overhaul plan that "packaged deterioration as reform."

The key now is whether it can be properly introduced in a way that fits our reality. Even if the income replacement rate is maintained at 40%, contributions of 19.8% must be collected immediately to avoid shifting the burden to future generations. If contributions are not raised, fiscal stabilization can only be achieved by drastically cutting the income replacement rate. Considering our reality, where it is difficult to have everything at once, the introduction of the automatic adjustment mechanism must be expedited.

From the first National Pension financial projection in 2003 to the fifth in 2023, I was in charge of fiscal stabilization measures for the Financial Estimation Committee every time. As the secretary member of the "Expert Committee on System Development" during the first financial projection, after an intense debate, I was able to set a projection period of 70 years and a reserve ratio of two times (meaning securing pension amounts payable up to 72 years later) as fiscal stabilization indicators. A point that remains regrettable even now is that the financial projection period was decided as 70 years, which was 10 years shorter than the 80 years I strongly advocated for. This is because the period is far too short to evaluate the fiscal state from a life-cycle perspective. It is even more unfortunate since Japan, which we modeled our pension after, had already set a projection period of 100 years in 2003.

Due to this regret, after the government submitted fiscal stabilization measures to the National Assembly in October 2003, I made a resolution with Dr. Moon Hyung-pyo of KDI (former Minister of Health and Welfare), who was a member of the Expert Committee on System Development. Since Sweden introduced an automatic adjustment mechanism in 1999, let us also introduce an automatic adjustment mechanism in the second financial projection in 2008, five years later! We made that promise with solemn determination.

Because National Pension reform only took place in 2007 after many twists and turns, it was difficult to secure additional momentum for reform during the second financial projection in 2008. At the final meeting of the second financial projection, discussions on automatic adjustment measures were concluded on the condition that a provision stating "the introduction of an automatic adjustment mechanism must be discussed in the third financial projection in 2013" be included. However, during the third financial projection in 2013, National Pension issues were pushed to the background due to debates regarding the introduction of the Basic Pension. This is the background as to why I failed to obtain the committee's consent despite strongly advocating for the introduction of an automatic adjustment mechanism in the third financial projection.

The situation worsened thereafter, and something absurd happened during the fourth financial projection in 2018. Despite results showing that fiscal instability was serious, there were calls to further increase the pension payment rate. Even amidst this, I proposed the introduction of a Finnish-style quasi-automatic adjustment mechanism. Finland operates its system such that while the total amount of pension paid over a lifetime remains the same, if life expectancy increases, the monthly pension amount is reduced by utilizing a Life-expectancy Coefficient.

On January 10, 2020, four employees from the OECD Secretariat visited the Korea Institute for Health and Social Affairs (KIHASA) in Sejong City to verify the contents of my "Study on the Calculation of Various Elderly Poverty Indicators (I)," which analyzed the reality of Korea's high elderly poverty rate. In addition to my research findings that Korea's elderly poverty rate would drop significantly to below 20% if the assets held by older people in Korea were considered, I also explained a fiscal stabilization measure reflecting a Finnish-style quasi-automatic adjustment mechanism.

Vincent Koen, Deputy Director of Country Studies in the OECD Economics Department, who was listening to the explanation, called it "perfect." He seemed to judge it as a fiscal stabilization measure appropriate for the Korean situation. A director from the Ministry of Economy and Finance dispatched to the OECD representation in Paris was also present. At that time, Deputy Director Koen asked me why the Korean government would not accept such a good proposal. The moment I answered that it was because it was a "populist government," the atmosphere turned cold. The reason I called it that was that the Moon Jae-in administration had submitted plans to the National Assembly to give more pension benefits despite serious fiscal instability.

In the fifth National Pension financial projection in 2023, I also proposed the introduction of a Finnish-style quasi-automatic adjustment mechanism (Fifth National Pension Financial Projection Materials, p. 491). According to the fifth financial projection, it is difficult to achieve fiscal stabilization even if the income replacement rate is maintained at 40% and contributions are raised to 15%. Given this situation, I proposed a fiscal stabilization measure that would have the effect of increasing contributions by about 2 percentage points through the introduction of a quasi-automatic adjustment mechanism; that is, contributions would only be raised to 15%, but there would be a practical effect of a 17% increase.

The problem is that even the plan I proposed is far from achieving complete fiscal stabilization. This is why we must introduce an automatic adjustment mechanism of the maximum intensity that the public can accept after properly informing them of our reality. Some say that the automatic adjustment mechanism mentioned by the presidential office seems to include improving fund investment returns. If the fund investment return, which is an exogenous variable, is linked to the automatic adjustment mechanism, it could become an international laughingstock. The Yoon Suk-yeol administration must lay the foundation for a proper automatic adjustment mechanism, even if the intensity of fiscal stabilization decreases. This means the direction must be set correctly!

Source: Asia Today (original article)