The National Assembly Special Committee on Pension Reform Should Form a Consultative Body With the Ruling Party, the Opposition, and the Government to Discuss "Differential Contribution Burdens"

[Asia Today · Yun Suk-myung Column · August 25, 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 appears that the Yoon Suk-yeol administration will soon announce a direction for pension reform focusing on the introduction of an automatic adjustment mechanism, differential increases in the contribution rate by age, and the expansion of military and childbirth credits. In my previous column, I covered the automatic adjustment mechanism, and since the expansion of credits is relatively less controversial, I intend to evaluate the differential burden of contributions.

The proposal to have "differential burdens for National Pension contributions by age" is an unfamiliar alternative. Even influential conservative media outlets that emphasize rapid pension reform have written editorials asking, "In which country in the world are contributions burdened differentially?" Those who argue for raising the income replacement rate criticize this, asking, "Are we now even dividing generations?"

The differential burden included in the Comprehensive National Pension Operation Plan is said to be the opinion of young people. It is a problem raised by the younger generation. "What kind of pain are the pension-receiving age group and those close to retirement sharing? For us, who find it difficult to even be certain if we will receive a pension despite increasing our burdens, it is hard to understand the current pension discussions." These are words I quoted during a debate while serving as the Moderator for a forum hosted by a media outlet last year (2023 Korea Forum, Shilla Hotel).

The National Pension, introduced in 1988, began with a combination of a "70% income replacement rate and 3% contributions." Even considering it was an era of high interest rates, contributions of over 20% should have been collected, but since only 3% were collected, it was woefully insufficient to pay benefits. Our National Pension, which is a defined benefit (DB) system, is a method of paying a certain amount regardless of the burden. This is the background for the strong incentive to avoid contribution increases.

The reform plan based on the first National Pension financial projection in 2003 was a combination of a "50% income replacement rate and 15.9% contributions." This was because maintaining 60% would have made the contribution burden too great, while lowering it to 40% raised concerns about the adequacy of income security. With the introduction of the retirement pension in 2006, there was room to ensure income adequacy even if the income replacement rate were lowered. Considering these changes, an income replacement rate of 40% was selected.

The National Pension, which started with a "70% income replacement rate and 3% contributions," was lowered to 60% in 1999. It was 60% from 1999 to 2007, 50% in 2008, and starting from 49.5% in 2009, it decreases by 0.5 percentage points every year. It is currently 42% and will be fixed at 40% in 2028. Contributions were increased from 3% to 6% and then to 9%, after which they have not been raised by even a single percentage point for 26 years.

The problem arising from low contributions, while the benefit amounts to be received are fixed, is the unfunded pension liability. The promised pension benefits total approximately 3,000 trillion won, but reserves are only 1,114 trillion won (as of the end of May). According to the Pension Future Forum, which I lead, the National Pension's unfunded liability already exceeds 1,825 trillion won (81% of 2023 GDP). This means this amount is lacking to pay the promised pensions. It is the result of accumulating while paying in too little.

The iceberg that sank the Titanic was far larger below the surface than what was visible above it. We only mention the reserves of 1,114 trillion won above the surface, while trying to ignore the unfunded liability or implicit debt reaching 1,825 trillion won below the surface. This liability will exert its full force starting from 2055, when the National Pension Fund is depleted. The PAYG cost rate immediately after fund depletion will soar to 26%, and up to 35% even under optimistic assumptions. This is the case when maintaining an income replacement rate of 40%. Under these circumstances, attempting to raise it further in the name of strengthening public pensions would make us a global laughingstock.

I wish to mention the grounds for why differential contributions by generation are appropriate in terms of intergenerational equity. Even if the age group currently aged 55 joined the National Pension late at age 30, they have been members for 25 years. Since they effectively joined in 1999, an income replacement rate of 60% applies to them for the nine years from 1999 to 2007, and 50% for 2008. In 2028, four years from now, 40% will apply to them for one year, for the first and last time. With nothing left but to receive their pensions, they will have paid contributions of only 9% throughout their lives. For more specific details, please refer to "Middle-aged and Elderly are the Biggest Beneficiaries Even if National Pension is Increased Differentially" (Etoday, August 19).

To avoid passing debt to future generations even at an income replacement rate of 40%, a contribution rate of 19.8% must be borne. Given this situation, is it such a problem to bear contributions for a few more years? Is this truly dividing generations? Can we not think of this as the minimum consideration that previous generations can show to young people and future generations who will be responsible for massive debt? While they cherish their own children and grandchildren, is it natural to leave an unbearable pile of debt to other children and grandchildren? I want to ask those who claim this is "dividing generations."

There are many criticisms that this is unprecedented worldwide. This is the same logic as the argument against introducing the pension system when Chancellor Bismarck of Prussia first introduced it, claiming there were no global precedents. Korea, which is experiencing low fertility and rapid population aging that are unprecedented worldwide, must do it even if there are no global cases. Although it is difficult to find in public pensions, Switzerland's retirement pension, which is a quasi-public pension system due to its mandatory application, operates a similar system. This is because it applies contributions of 7% for ages 25–34, 15% for ages 45–54, and 18% for ages 55–65.

In 2012, I visited Sweden, Denmark, and Finland. An elderly scholar I met in Helsinki compared Finland's population structure, which had deteriorated compared to the past, to "a situation where many used to row in a calm river, but now a few must navigate through a canyon where torrents rage." Because the Prime Minister of Finland was a close friend of his father, the Prime Minister often came to see his father whenever troublesome problems arose. Every time he brought them tea, he heard pensions being discussed. He said he became a pension scholar because of that connection. "Unlike Southern Europe, most European countries from Central Europe northward have secured pension sustainability. I believe it is because their sense of responsibility as citizens is thorough." This is the lesson the elderly scholar conveyed, and it still lingers in my mind.

Recently, the Righteous Youth Alliance shouted "STOP passing the bomb around with the National Pension" and announced that they would launch a campaign to defeat lawmakers who promote populism, as well as a petition drive for 10 million signatures. Instead of merely saying there are no foreign examples, it is time to contemplate the soft-landing plan most suitable for our reality!

Source: Asia Today (original article)