The State Guarantee of National Pension Benefit Payment Must Be Handled With Utmost Caution

[Asia Today · Yun Suk-myung Column · September 1, 2024]

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

My feelings regarding the President's policy briefing on August 29, which mentioned an "automatic adjustment mechanism," are special. Participating as an expert panelist on an MBN news special program, I heard the automatic adjustment mechanism—which I have emphasized for 25 years—mentioned while in the studio. Here is the presidential briefing: "The three major principles of pension reform are sustainability, intergenerational equity, and old-age income security." ... "We must ensure the long-term sustainability of the pension by introducing an automatic adjustment mechanism." ... "The fact that the state guarantees payment must also be codified in law. Only then can we instill confidence in young people that 'we can receive it too.'" ... "I promise to increase the Basic Pension to a target of 400,000 won per month during my term."

These were the words I spoke on the MBN live broadcast as the President moved to the press conference room after the state briefing. "The mention of an automatic adjustment mechanism is almost revolutionary. It is the most progressive step in the history of our pension reform discussions. ... On the other hand, the content regarding the guarantee of pension payments is deeply concerning. The deficit subsidy for next year for the Government Employees Pension, which has a payment guarantee provision, exceeds 10 trillion won."

This was my evaluation toward the end of the broadcast. "The principles of pension reform were mentioned in the order of sustainability of the system, intergenerational equity, and old-age income security. The significance of placing sustainability as the top priority seems great. This is because it contrasts with the National Assembly discussions that emphasized old-age income security." "Only by revealing the fact that the National Pension's unfunded pension liability exceeds 1,825 trillion won (81% of 2023 GDP) can the justification for 'differential contribution increases between generations' be secured."

During a broadcast of Lee Dong-jae's News Cabinet on the Maeil Shinmun YouTube channel on August 28, I repeatedly emphasized that if President Yoon Suk-yeol proceeds as reported in the media, he "could stand alongside German Chancellor Schröder, Japanese Prime Minister Koizumi, French President Macron, and British Prime Minister Blair."

However, there is content in the presidential briefing that renders such praise meaningless. This is due to the state guarantee of pension benefit payment and the increase of the Basic Pension to 400,000 won. After the press conference, the Pension Future Forum, which I lead, was in an uproar. This was because a majority of the members strongly criticized the payment guarantee.

The Basic Pension is problematic because the sincere advice of experts is not heard. A majority of experts criticized the Park Geun-hye administration's Basic Pension plan. To resolve the situation, Representative Jin Young, who was a vice chairman of the transition committee, was appointed as the Minister of Health and Welfare. At an expert meeting held the day after his inauguration, I also gave sincere advice to Minister Jin Young several times. After a process of collecting various opinions, a plan different from that of the transition committee was reported to the President, but when it was not accepted, Minister Jin Young voluntarily resigned.

My sincere advice was also mentioned in an editorial. It was in Seoul Sinmun's "Lawmakers Ignoring Livelihood Bills Should Be Judged by Votes" (February 22, 2014). "Yun Suk-myung, Director of the Pension Research Center at the Korea Institute for Health and Social Affairs (KIHASA), gave sincere advice through Seoul Sinmun on the 14th to delete the 'payment to 70% of those aged 65 and older' provision from the main act or move it to an enforcement decree or regulation, instead of linking the National Pension and the Basic Pension." If this advice had been accepted, the Basic Pension could have been very different.

The Basic Old-Age Pension introduced in 2007 allowed for the reduction of recipients depending on financial conditions. On the other hand, the Basic Pension fixed the requirement to pay 70% of older people aged 65 and older, so that even if it is not immediately raised to 400,000 won per month, expenditures will increase up to 3.2% of GDP. This is the result of introducing the scheme while ignoring OECD recommendations to operate it focusing on vulnerable older people. Such a Basic Pension has become a populist system. This is because candidates promise to raise it by 100,000 won during every presidential election.

The unfunded pension liability has already exceeded 3,200 trillion won. The Government Employees and Military Pensions are short by 1,230 trillion won, the National Pension by 1,825 trillion won, and the Private School Teachers Pension by more than 175 trillion won. Even with high-intensity reform, this figure continues to increase. The OECD's 2018 Economic Survey of Korea projected that central government debt would reach a level of 200% of GDP (p. 68). Public pensions are the primary reason.

The International Monetary Fund (IMF) report on Korea released on November 16 last year is shocking (Annex X. Pension Reform Options to Cope With Rapid Aging). This is because it predicts that national debt will double relative to GDP in about 50 years, based on only two factors: Korea's rapid population aging and the pension system. The IMF projected that national debt relative to GDP would increase even if the National Pension is overhauled so that benefits are received from age 71, or even if the National Pension amount is reduced by half. In particular, national debt increases even if the eligibility age is extended to 67 while maintaining the income replacement rate at 40%, and contributions are raised to 18.2% (a further increase of 9.2 percentage points). This is vastly different from the European countries analyzed by the IMF in 2021. In many European countries, pension liabilities relative to GDP do not increase significantly by 2060. In France, Italy, Greece, Sweden, and Finland, they actually decrease. This is because they implemented excruciating pension reforms.

Even when political demands were strong, past administrations did not introduce a payment guarantee provision. This was for a good reason. A payment guarantee intended to help young people can make things harder for the youth and future generations. This is because it can become a strong incentive to neglect reform efforts. The Government Employees and Military Pensions, which have payment guarantees, prove this.

I am not unaware of the government's concerns. The leader of the opposition party only suggests giving more, and three opposition lawmakers have already proposed a payment guarantee bill. Even if the situation is difficult, principles must be upheld. Otherwise, the Yoon Suk-yeol administration could 'lose both the fish and the net.' This is because a payment guarantee can be the starting point on the road to national ruin.

If a payment guarantee is to be considered, I suggest doing nothing at all instead. This is because it could become an obstacle when reforms are forced by external powers during a financial crisis that seems inevitable at some point. There are no global precedents for a payment guarantee like that of our Government Employees Pension. Claims that countries such as Germany have payment guarantee provisions are contrary to the facts. During the 2008 global financial crisis, Greece, under external pressure, cut at a stroke 50% of the pension amounts for high-income earners. Our situation in the pension sector is even worse than that of Greece at the time. This is because the amount insufficient for paying pensions already exceeds 3,200 trillion won (143% of GDP). I look forward to a wise decision by the Yoon Suk-yeol administration regarding the payment guarantee!

Source: Asia Today (original article)