It Is Time to Stop the "Legal Plunder" Packaged as "Pension"

[Asia Today · Yun Suk-myung's Pension Reform Stories · November 4, 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 recent National Pension public opinion survey by Pension Reform Youth Action is shocking. This is because in a survey commissioned to "Poll Fairness," 31.3% of respondents and 47% of the MZ generation preferred the abolition of the National Pension. The answer lies in the responses to the question regarding "agreement with criticisms of the pension."

These are the responses to the question: "What do you think about the criticism that the current structure of the National Pension is like a multi-level marketing scam or a Ponzi scheme that imposes an unbearable debt on the children's generation?" Those who "tend to agree" were 45.2%, while those who "tend to disagree" were 36.5%. By age group, 63.2% of those aged 18 to 29 "tend to agree," 59.2% of those in their 30s do, and 48.6% of those in their 40s do. However, it is a completely different story from those in their 50s and older. For those in their 60s, the response that they "tend to disagree" — meaning the National Pension is not a Ponzi scheme — was 46.8%, which is much higher than the 33.5% who responded that it is a Ponzi scheme. This means that the majority, excluding the generation currently receiving or soon to receive pensions, perceive the National Pension as a Ponzi scheme.

Despite this perception of the National Pension, people only criticize the "automatic adjustment mechanism" included in the government's pension reform plan as making it an "empty pension." This is despite the fact that to prevent it from truly becoming an "empty pension," an "automatic adjustment mechanism" that applies equally to both contributors and beneficiaries of the National Pension must be introduced starting next year. What is even more pathetic is that lawmakers are opposing the introduction of the "automatic adjustment mechanism." Representative Kang Sun-woo, the Democratic Party's ranking member on the National Assembly Health and Welfare Committee, along with Democratic Party Representatives Nam In-soon, Kim Nam-hee, and Jeon Jin-suk, as well as Representative Kim Sun-min of the Rebuilding Korea Party, are particularly so.

On the other hand, the position of the Reform Party seems to be different. During the National Assembly audit of the National Pension Service (NPS) on the 18th of last month, Chairperson Kim Tae-hyun stated, "The National Pension reform plan must be able to gain the trust of future generations." He also added, "I believe the National Pension reform plan should be one where future generations, who must pay contributions in the future, can willingly bear their own contributions."

Representative Lee Ju-young of the Reform Party expressed concern during the audit that day, stating, "There will be no money to pay pensions for children born last year. After fund depletion, the additional fiscal resources that the governments of future generations must invest in the Basic Pension and the National Pension will be about 9% of total GDP" (Source: Asia Today, [2024 Audit] 'Pension Reform, Now is the Time for the National Assembly... In-depth Discussion Between Ruling and Opposition Parties Needed'). He further pointed out that "even if an automatic adjustment mechanism is introduced, the fund will be depleted in 2088, so the national treasury must be used to maintain benefits." This would only be possible if the automatic adjustment mechanism is introduced starting from 2036, the earliest option in the government proposal. If it is introduced in 2054, the latest option in the government proposal, the fund will be depleted in 2077.

There are also problems with the Reform Party's position. This is because the use of the national treasury mentioned by Representative Lee Ju-young appears to follow the method of Professor Kim Woo-chang of KAIST. That is, his claim that fiscal stabilization can be achieved by raising contributions less than the appropriate level while injecting national treasury funds and aggressively investing the resulting larger fund. I held a different position from Professor Kim Woo-chang on the private advisory committee of the National Assembly Special Committee on Pension Reform. A few months ago, I also refuted Professor Kim's claim on KBS 1 Radio's "Open Debate." This is for the following reasons.

"Professor Kim Woo-chang's claim is to expose the National Pension to risks almost at the level of a hedge fund. The National Pension portfolio is already exposed to a significant level of risk. This is because it is operated with a probability of loss once every three years. This is the background behind the 79 trillion won loss (-8.22% return) for the year 2022." Despite this situation, at the public hearing for the Fifth National Pension financial projection on September 1 last year, fiscal stabilization measures that are difficult to accept were presented. This is because among more than 18 fiscal stabilization measures presented, the plan included the possibility of raising the fund's investment return by 1 percentage point higher than the assumptions of the Financial Projection Expert Committee every single year for the next 70 years. Throughout the term of the Fifth National Pension Financial Estimation Committee, I alone strongly criticized this approach, referring to it as "false hope."

The problem is that the logic of Professor Kim Woo-chang, which the Reform Party seems to accept, presupposes an even more aggressive portfolio composition. It should be noted that he is overlooking "political risk," the greatest risk in pension management. Over the next 70 years, there is a high probability that we will experience situations like the 2008 global financial crisis several times. If such a crisis occurs and 20 to 30% of the National Pension Fund disappears in just one year, could our society tolerate such an aggressive portfolio? Recalling the appearance of our National Assembly during the audit, the National Assembly would likely be the first to put the brakes on an aggressive portfolio! Detailed information on this will be covered in a subsequent column.

As Representative Lee Ju-young mentioned, the use of the national treasury is necessary. However, it becomes a problem if that is used as a means to keep contributions low. The use of the national treasury is inevitable to resolve the unfunded pension liability, which already exceeds 1,825 trillion won. Only by doing so can we change the public perception that views the National Pension as a Ponzi scheme. Although I differ in position regarding the direction of the national treasury's use, I want to express my support. This is because he seems to be contemplating the direction of reform from the perspective of young people. This is why the Democratic Party of Korea, which engages in "opposition for the sake of opposition," and the People Power Party, which has left the Special Committee on Pension Reform in a state of suspended animation despite forming it, should be ashamed.

Even with an income replacement rate of 40%, contributions must be collected at 19.7% starting immediately next year—meaning 10.7 percentage points more than now—to stop the increase in unfunded liability. Only by preventing further increases in the unfunded liability, which has already grown to an unbearable level, can we change the minds of the MZ generation who want to abolish the National Pension. Yet, our reality is that some members of the political sphere and stakeholders are leading a plan under which "the pay-as-you-go (PAYG) cost rate of the National Pension will soar to 43.2% by 2078," making the eventual collapse of the pension scheme inevitable. This means further consolidating what the renowned economist F. Bastiat emphasized as "legal plunder" under the name of a pension. This is why we must reveal to the world the true nature of the wolf in sheep's clothing—the "legal plunder being perpetrated in the name of a pension" targeting generations not yet born!

Source: Asia Today (original article)