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

[Asia Today · Yun Suk-myung Column · September 22, 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 4th, the government announced a pension reform plan. Since the government, which is responsible for managing the pension, had received all sorts of criticism for not even announcing a reform plan, it can be said that this was a very good move, although it is a case of too little, too late. From my perspective as a researcher, there are parts that seem insufficient as a reform plan. Nevertheless, I would like to give a high score to the government's announcement of this pension reform plan for the following reasons.

Because there was no baseline reform plan presented by the government, the National Assembly has led the discussions on pension reform. As a political group that lives on votes led the pension reform discussions, the discourse went astray. This is because the Public Deliberation Committee, led by the National Assembly, produced an utterly absurd conclusion. The background of this absurd conclusion stems from the fact that the citizen representatives were trained after key materials submitted by the Ministry of Health and Welfare were deleted. In the '50% income replacement rate—13% contribution' plan chosen by the majority of the citizen representatives, there is a difference of 21.3 percentage points in the lifetime National Pension contribution burden between those born in 2005 (14.8%) and those born in 2035 (36.1%). This is because the citizen representatives made their decision without knowing this figure.

Since there was no government plan, there was an aspect where it was possible to inform the public that the 'plan presented as a reform plan' through National Assembly discussions had many problems. Although there must have been much pressure in submitting a government plan belatedly, it means there is now more room to present a proper plan. In particular, the fact that the government could propose a plan to raise the National Pension contribution by 4 percentage points to 13%, after failing to raise it by even one percentage point for the past 26 years, is because the National Assembly created the room to show that it could be raised up to 13%.

Although it is a matter of results, I would like to highly evaluate the fact that the government eventually submitted a plan after not doing so initially. There is a part of the government plan that is noteworthy, and specifically, a part that I wish to emphasize. It is the review of "extending the mandatory contribution age by five years" for the National Pension. Until now, the government has been passive about extending the mandatory contribution age (the period during which the employer bears half of the contributions). There was opposition from employers due to the employment of older people, but the core reason was that because our National Pension is operated as a system where one receives more than what they paid, an increase in the mandatory contribution period would deepen fiscal instability to that extent. Despite these issues, the government's proposal to review the extension of the mandatory contribution period seems to be a very appropriate approach. This is because factors of fiscal instability can be reduced through fiscal stabilization measures. I highly evaluate this proposal because, in our wasteful pension debate, "the benefits could far outweigh the costs."

Typically, the OECD Economic Surveys of Korea, published every 18 months, have repeatedly called for the alleviation of Korea's dual labor market structure and rigid wage system. This is because many of the problems our society is experiencing stem from the labor market. As far as I know, in some OECD member countries, the monthly salaries of non-regular workers are higher than those of regular workers. This is done as a form of risk compensation since non-regular workers have a higher probability of losing their jobs than regular workers.

In addition to the large difference in monthly salaries between regular and non-regular workers, there are also significant differences in various welfare benefits. A worker employed as a non-regular worker at a decent workplace can be said to be in a relatively better situation compared to workers in even more precarious positions who have failed to enter the formal labor market altogether. Things that would be difficult to occur in a proper society have become commonplace in the Republic of Korea.

Because a seniority-based wage system, separate from labor productivity, is commonplace—especially at desirable workplaces—it is difficult to raise the retirement age. This is not only due to problems at the individual company level caused by the rigid wage system, but also because the dissatisfaction of the younger generation, who are in an employment ice age, is skyrocketing. Our reality is that there is considerable social pressure saying that if one has worked until age 60, it is now time to give working opportunities to young people as well. Therefore, discussions about raising the retirement age cannot easily emerge.

Korea is a country that consistently ignores OECD recommendations to alleviate the dual labor market structure and rigid wage system, while frequently citing the fact that it has the highest elderly poverty rate among OECD member countries. To navigate the high waves of a low-birthrate and aging society, we can no longer hesitate. We must hasten labor market reform in a direction that conforms to the rapidly changing social environment as soon as possible.

Labor market reform is closely related to strengthening old-age income security. If older workers can "work until age 65 through re-employment after retirement" as long as their health permits, the current mandatory contribution age for the National Pension of 59 can be extended by five years to 64. Contributing for five more years increases the pension income replacement rate by 13%. If the mandatory contribution age is extended to 70 from a long-term perspective—meaning 20 to 30 years from now, as Japan is already doing—there would be an effect of increasing the income replacement rate by 26%. Extending the mandatory contribution age by five years can yield immediate effects that are difficult to compare with the political sphere's debate over an income replacement rate of 45% or 50%. This is because by providing middle-aged and older workers, who are close to retirement, the opportunity to work for five more years, there is an effect of increasing the income replacement rate due to five additional years of National Pension contributions in addition to the extra earned income.

Suggesting an increase in the National Pension income replacement rate using the high elderly poverty rate as an excuse is a bottom-of-the-barrel measure that shifts a massive burden onto future generations while the actual effects only appear 40 years later. That is, if one truly advocates raising the income replacement rate to strengthen the public's old-age income security.

Since the mandatory enrollment in retirement pensions, which was presented along with the review of extending the mandatory contribution age, is also a matter of agreement between labor and management, the role of the Ministry of Employment and Labor is important. To encourage the employment of older workers, mandate retirement pensions, and especially prepare various tax support measures to increase incentives for the younger generation to participate in personal pensions, the participation of the Ministry of Economy and Finance and the Financial Services Commission is essential. Therefore, the establishment of a special committee in the National Assembly involving several standing committees is inevitable. To ensure smooth communication with policy authorities, the formation of a consultative body consisting of the ruling party, the opposition party, and the government is also inevitable.

The establishment of a National Assembly special committee is necessary even to properly follow the path that the OECD has recommended. A relevant special committee should be created in the National Assembly to hasten proper discussions on pension reform. Doing so is the way to fulfill the basic duties of the National Assembly.

Source: Asia Today (original article)