The Government's Pension Reform Plan Must Be Communicated More Actively to the Public

[Asia Today · Yun Suk-myung Column · September 29, 2024]

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

The Government's Pension Reform Plan Must Preserve the Purpose of Introducing the "Automatic Adjustment Mechanism"

The Collective Hypnosis of Our Society, Mistakenly Believing an Increase in the National Pension Income Replacement Rate Is Possible

The Income Replacement Rate, Currently at 42%, Must Be Cut to Around 20%, Half of Its Current Level

Japan's Income Replacement Rate Is Only 32.4%, and the Benefit Rate of Sweden's Public Earnings-Related Old-Age Pension Is 34%

It Is Wrong to Fuel Conflict by Calling the 'Differential Burden by Generation Plan' 'Splitting Between Generations,' Even Though It Is a Device to Reduce Intergenerational Inequity

Professors Who Oppose the Government Plan While Calling for the Strengthening of Public Pensions, Even Though the Burden on Future Generations Remains Heavy Under the Government Plan

Since the government announced the pension reform plan on September 4, it has been heavily criticized. Even the media, which had criticized the government for not presenting a reform plan, are now attacking the government's proposal. Now that the government has presented a plan as requested, they are merely searching for flaws. They seem indifferent to the deliberations that led to such a plan. It appears there was no intention to work together to create a better alternative.

Having long advocated for the introduction of an "automatic adjustment mechanism," I have criticized the government's "automatic adjustment mechanism" for lacking proper content. My criticism is different in nature from those groups attempting to undermine the purpose of introducing the "automatic adjustment mechanism" by framing it as an 'automatic cutting device.' This is because I believe that only by clearly showing how much must be cut for our pension system to be sustainable can we prevent the outbursts of agitators.

Currently, Korean society is in a state of collective hypnosis, believing that it is possible to further increase the income replacement rate of the National Pension. I have criticized the fifth financial projection of the National Pension for being overly optimistic. Even under such an optimistic financial projection, the core of the fifth National Pension financial projection is that if the system were operated like those of major OECD countries, the current 42% income replacement rate of the National Pension would have to be cut to around 20%, half of its current level.

Despite this situation, many stakeholders in our society are agitating the public and the media as if it were possible to provide more pension benefits. I am not suggesting that the National Pension income replacement rate be halved simply to achieve fiscal stabilization. Although the golden time for reform has already passed, I am raising this issue with the intention of striving to strengthen old-age income security as much as possible after properly revealing our actual reality.

They are fueling intergenerational conflict by calling the 'differential contribution burden by generation plan'—which was proposed to reduce even a small part of the enormous gap in burdens and benefit levels between older and younger generations—a 'splitting between generations.' They are inducing conflict by using expressions such as that the relevant age group is 'seething' over a government proposal that has not even been legislated, which contains extremely passive measures such as temporarily varying the speed of contribution increases for a generation that benefits from an income replacement rate 10 percentage points higher than that of the younger generation. They criticize the government's proposed automatic adjustment mechanism with expressions like 'a tin-can pension, let alone old-age income security,' while contrasting it by stating that "the original function of public pensions is to ensure stable old-age income security for the people."

This was the content presented by Jeon Young-jun, Professor of Hanyang University's School of Economics and Finance and a member of the Pension Future Forum, at the Forum's sixth seminar on the 24th. "The effect of extended life expectancy was fully reflected, but the decrease in National Pension insured was only partially reflected. These assumptions were set to obtain results similar to the government's announcement. The government overhaul plan was found to be insufficient for achieving fiscal stabilization of the National Pension. Although unfunded pension liability decreases, it still exists on a considerably large scale. Even if the government overhaul plan is fully implemented, the unfunded liability, which is 82.5% of GDP as of 2024, will only slightly drop to 64.4%. If the system switches to a pay-as-you-go (PAYG) system after fund depletion, the net tax burden on future generations is projected to rise to more than 9% of their lifetime income." Even though only part of the decrease in the insured due to the falling birth rate was reflected—meaning that even if the government plan, which is condemned as an 'automatic cutting device,' is put into practice—the burden on future generations is shown to remain heavy. Despite this, can such expressions as 'automatic cutting' and 'splitting between generations' still be used?

Let us compare this with other countries. In Japan, where contributions are 18.3%, the income replacement rate is only 32.4%. This is the current status of pension operations in Japan, a G3 nation from which we have learned about pensions. The Japanese Government Employees Pension, for which contributors paid not a single penny in contributions until before 1959, now has an income replacement rate of 32.4% despite paying an 18.3% contribution. In contrast, the income replacement rates of the Korean Government Employees Pension and Private School Teachers Pension, which have lower contributions than Japan's, exceed 68%.

Public pensions in Finland, including the Government Employees Pension where contributors bear more than 24.4% in contributions and over 28% when taxes are included, will see their income replacement rate drop to 44% if the automatic adjustment mechanism operates as planned, despite having a much better demographic structure than ours. Unlike our Government Employees Pension and Private School Teachers Pension, which pay up to 39% relative to private sector severance pay, Finnish civil servants receive no severance pay other than their pension. Even so, their pension amounts are far lower than ours.

According to a recent report by the Swedish government, the 2022 public scheme old-age earnings-related benefit rate (Public scheme: old-age earnings related Benefit Ratio) in Sweden, where contributions are 18.5% (public pension contributions are 16%), is 34%. It is projected to be 25% by 2050, 28 years later, a drop of 9 percentage points. Despite bearing a 16% contribution, a 25% benefit rate (Benefit ratio) is expected by 2050 (2024 AGEING REPORT. Country fiche for Sweden. p. 20).

Norway, which possesses the world's second-largest sovereign wealth fund, provides a 42% income replacement rate despite contributors bearing 18.1% of total earned income. The Canada Pension Plan (CPP), an earnings-related pension often cited during the Moon Jae-in administration as a 'country that implemented pension reform to pay more and receive more,' had contributors bear a 9.9% contribution for 20 years to provide a 25% income replacement rate.

Seeing these foreign examples, do you still believe the claim that the purpose of public pensions is unconditionally 'to ensure stable old-age income security for the people' is valid? The unfunded pension liability (the amount lacking relative to the promised pension benefits) of the Private School Teachers Pension, in which university professors who cry for the strengthening of public pensions are enrolled, has already exceeded 175 trillion won. This means the liability per contributor of the Private School Teachers Pension has exceeded 500 million won. While the pension system they themselves are enrolled in is on the brink of collapse, why are they trying to drive the National Pension, which they are not even enrolled in, into the abyss of collapse?

It is time to properly judge these self-proclaimed pension experts—who have devolved into agitators disguised as experts without knowing the reality of foreign pension operations—along with the younger generation, who will be the greatest victims. This is because they are growing rapidly like a malignant tumor that will shake the foundations of our society. This is also the background for why Lee Jae-young, head of the Righteous Youth Alliance, participated as a discussant in a recent Pension Future Forum seminar. It must also be actively communicated that the government's pension reform plan is the minimum measure to protect this country, which was achieved with great effort, from these agitators.

Source: Asia Today (original article)