The 'High-Speed Train of Pension Ruin' Must Be Stopped Here!

[Asia Today · Yun Suk-myung's Pension Reform Stories · November 17, 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 year I earned my degree, with a dissertation on an empirical analysis of pensions and healthcare in the United States, was the year the IMF economic crisis struck. After the graduation ceremony in May 1997, I began research at the Korea Institute for Health and Social Affairs (KIHASA) in July, only to experience the national default a few months later.

While attention was focused on the IMF, which held the handle of the restructuring sword, I witnessed from a closer vantage point the sorrow of a nation that had lost its economic sovereignty. This was because I saw the government's desperate efforts to borrow dollars. I mean, specifically, the fiscal authorities' desperate efforts for the 3 billion dollar Structural Adjustment Loan (SAL) led by the World Bank at the time. The Ministry of Finance and Economy, responsible for the nation's coffers, coordinated the visit schedules of institutions requested by the World Bank. The Korea Institute for Health and Social Affairs (KIHASA), where I worked, was also a target for a visit. This was because the publication of a white paper on restructuring the old-age income security system was included as a condition for providing the structural adjustment loan.

At that time, the Korea Institute for Health and Social Affairs (KIHASA) served as the communication channel with the World Bank in the field of pensions. Starting in 1999, I carried out one of five pension tasks requested by the World Bank pension team, which included Robert Holzmann (current Governor of the Oesterreichische Nationalbank), who was then the World Bank's pension team leader. At an international conference held at the Shilla Hotel on October 12–13, 2000, the World Bank bound and distributed only the task I had performed among those five tasks. That material is 'Generational Accounting for Korea: With Special Reference to Public Pension Schemes.' It contains the argument that there are significant problems with the Korean pension system in terms of intergenerational equity. Part of this content was included on page 112 (Figure 36. Transfers between generations under the current system) of 'OECD Economic Surveys: Korea 2001.'

Due to these connections, I was able to participate in 'The HIID-WBI Workshop on Pension Systems in Crisis' held at Harvard University from June 14–25, 1999. In the presentation materials of Team Leader Holzmann of the World Bank at the workshop jointly hosted by Harvard University and the World Bank, there is a comparison table of pension liabilities among major countries. That content is included in my 'Current Status and Problems of Public Pensions (Health and Welfare Forum, November 1999).' Due to such influences, the concept of pension liability was extensively utilized in the 2007 National Pension reform.

The problem is that our pension discussions have since suffered repeated regressions. "Since the 4th financial projection in 2018, extending the date of fund depletion by a few years has been called a fiscal stabilization measure.… If the income replacement rate is raised to 50% and the contribution rate is increased to 12%, the date of fund depletion may be extended by a few years, but the cumulative deficit of the National Pension, which already reached 7,750 trillion won, will increase by another 1,440 trillion won.… Therefore, presenting only the income replacement rate and contribution rate as a fiscal stabilization measure is akin to defrauding the public." These are my remarks from the 17th meeting (June 23, 2023) of the minutes of the 5th Financial Estimation Committee (pages 606–609).

This was a challenge to the committee, which opposed the disclosure of the National Pension's cumulative deficit and unfunded pension liability until the 5th Financial Estimation Committee concluded. It was a protest against the committee's decision that it could not even disclose the cumulative deficit—which is calculated simply by performing a financial projection—in addition to the unfunded liability used in the 1999 World Bank and Harvard University workshop. Ultimately, the committee announced at a public hearing that extending the date of fund depletion by a few years was the only fiscal stabilization measure.

Due to the claims of the opposition party and stakeholders that the decisions of the Public Deliberation Committee's citizen representatives—which were far too problematic in terms of information provision—should be followed, the 22nd National Assembly has not even been able to begin discussions on pension reform. According to an estimate by Jeon Young-jun, Professor of Hanyang University's School of Economics and Finance, a member of the Pension Future Forum, under the '50% income replacement rate–13% contribution rate' preferred by the citizen representatives, the unfunded liability, which was 1,825 trillion won in 2023, will surge to 7,700 trillion won (138.8% of GDP) by 2050. The '44% income replacement rate–13% contribution rate' plan, which fortunately failed to pass as a law last May, also sees unfunded liability surge to 6,366 trillion won (123.2% of GDP) by 2050. Despite this reality, it is still being misrepresented as a fiscal stabilization measure based on extending the date of fund depletion by a few years.

This is what Choi Ki-hong, a visiting researcher at Seoul National University's Institute of Economic Research, has emphasized. "The United States and Canada effectively use an infinite horizon as the standard for fiscal evaluation. This is through 'Sustainable Solvency.'" A U.S. pension financial projection report submitted to Congress in May 2024 supports this. "After the 75-year financial projection period, namely at the end of 2100, the pension reserve ratio (the ratio of held pension reserves to one year of pension expenditure at the end of 2100) must be positive, and simultaneously, this ratio must be stable or increasing." This means that fiscal stabilization for the National Pension must be secured over an effectively infinite horizon.

The United States contributes 12.4% and provides a pension income replacement rate of 39.1%. Even so, it recommends quickly lowering the income replacement rate and raising the contribution level because it is unsustainable. This is to enable the sharing of pain across multiple generations. However, the generous concession made by the opposition party last May was to "raise contributions to 13%, the current U.S. level, while also raising the income replacement rate to 44%." This is why I emphasize that "presenting only a combination of income replacement rate and contribution rate as a fiscal stabilization measure is akin to defrauding the public." This is also why 47% of the MZ generation wants the National Pension abolished.

"With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations (page 28)." This is the conclusion of the 2024 U.S. pension financial projection report. If the National Pension is subjected to deterioration disguised as reform, it will be difficult to recover. There is no need to even mention the Government Employees Pension and Private School Teachers Pension, whose situations are far worse than that of the National Pension. This is why reform discussions must proceed while disclosing all information. Only then can we stop the 'high-speed train heading toward national ruin.'

Source: Asia Today (original article)