A Financial Projection Period of 70 Years Is the Epicenter of Legal Plunder Through Pensions!

[Asia Today · Yun Suk-myung's Pension Reform Stories · November 24, 2024]

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

A financial projection system to evaluate the health of the National Pension was introduced through a law amendment in 1998. The first financial projection in 2003, based on a five-year cycle, was fraught with difficulties. As it was the first time a financial projection was being implemented, there was a need to accurately understand foreign operational cases. Due to this necessity, I visited the Ministry of Health, Labour and Welfare of Japan. Junichi Sakamoto, Director of the Pension Actuarial Division at the Ministry of Health, Labour and Welfare, provided detailed information on the situation in Japan.

At the time, the issues that caused much controversy were the appropriate financial projection period and the fiscal stabilization evaluation indicators. As the secretary member of the Expert Committee on System Development, I argued for a financial projection period of at least 80 years, citing cases such as Japan. On the other hand, the majority of members preferred a much shorter period. "We do not even know what will happen tomorrow; how can we properly know what will happen 80 years from now?" This was the logic of the members who wanted to shorten the financial projection period.

Due to the majority of members who argued that the period should be even shorter, the projection period was decided as 70 years, a reduction of 10 years. Having assessed that our 70 years was far too short compared to Japan, which set its financial projection period at 100 years, I argued from the third financial projection in 2013 to extend the projection period to 100 years. In the fourth financial projection in 2018, I again argued for an extension of another 30 years.

The fourth financial projection can be seen as a case that clearly demonstrates how far our pension discussions can regress. This is because the proposal to extend the financial projection period to 100 years, which I requested, was rejected, while the argument to drastically shorten the fiscal evaluation period was accepted. Despite the financial projection period being 70 years, it was decided as the 'Draft A' fiscal stabilization plan to set the period for evaluating whether fiscal stabilization is achieved at 30 years, shortening it by 40 years from the existing 70 years. 'Draft A' was proposed by Dr. Jeong Hae-sik of the Korea Institute for Health and Social Affairs (KIHASA) (current President of the Korea Institute for Self-Sufficiency and Welfare). On the other hand, my fiscal stabilization plan, which combined an increase in contributions with a Finnish-style "automatic adjustment mechanism" while adhering to a 70-year fiscal evaluation period, was pushed back as 'Draft B'. Furthermore, the names were changed from the original 'Option 1' and 'Option 2' to 'Draft A' and 'Draft B' after I raised an issue with the terminology.

The emergence of a fiscal stabilization plan that drastically shortened the fiscal evaluation period in the fourth financial projection was intended to establish a logic for providing more pension benefits. This was because setting the period at 30 years—ending in 2048—placed it before the point of fund depletion, thereby diluting the sense of crisis regarding fiscal instability. This is consistent with how the Moon Jae-in administration excluded only my proposed fiscal stabilization plan despite presenting four different options. This became even more blatant in the results of the discussions by the fifth Financial Estimation Committee and the National Assembly Special Committee on Pension Reform's public deliberation in 2023. The '40% income replacement rate—15% contribution rate plan,' which was my proposed fiscal stabilization plan overwhelmingly preferred by members of the Financial Estimation Committee and the private advisory committee of the National Assembly Special Committee on Pension Reform, failed to be included as a discussion agenda for the citizen representatives. This occurred because, due to highly problematic rule-setting, only two options preferred by stakeholders were presented as choices to the citizen representatives.

In this process, related content was also greatly distorted. Although the reality is that these plans place a heavier burden on future generations, the public and the media were deceived into believing they were fiscal stabilization plans simply because the date of fund depletion was extended by a few years. The results of the public deliberation and the system overhaul plan from last May are like administering morphine injections to ensure that the generation currently leading decision-making can receive more pension benefits until they die. They intend to create a payment guarantee provision for the National Pension, essentially telling future generations to deal with it once the current generation has passed away. There is no country in the world—at least not among our primary competitors—that operates its pensions so irresponsibly.

The background that allows such deception—calling it a fiscal stabilization plan despite shifting more burden to future generations—lies in the short financial projection period. If the financial projection period for the National Pension were extended by just 10 more years, it would become even clearer how much the pension overhaul discussions of last May plunder future generations. If the period were extended by another 30 years to 100 years, as in Japan, it would be starkly revealed as a national fraud. This is also what Lexis, a German demographer, statistician, and economist, explained through the Lexis diagram. At a specific evaluation point, all periods during which contributions have been paid are reflected in the fiscal evaluation. Conversely, the shorter the evaluation period, the more it reflects only a portion of the expected pension amounts for beneficiaries and the insured—that is, future expenditures—thereby inducing an optimistically biased evaluation.

In a country that operates a "pension system where one receives far more than they paid" while life expectancy is rapidly increasing, the negative aspects of a short fiscal evaluation period are most pronounced. This is because, in addition to the deepening fiscal instability caused by beneficiaries receiving more than they contributed, the period for receiving pensions increases significantly beyond expectations, further exacerbating that instability. I repeatedly emphasize the seriousness of the situation because Korea is the most representative example of this. This is even more true given that our fertility rate is at the lowest level in the world.

Despite these circumstances, the core of the pension overhaul plan last May was to provide more benefits on the grounds that contributions would be raised slightly. This is why I emphasize that the "legal plunder" mentioned by economist Bastiat is being perpetrated under the name of pensions. Using the outdated logic of intergenerational support, they attempted to carry out plunder even against generations not yet born. Unlike Korea, which operates on a five-year cycle, the United States submits financial projection reports to Congress every year and conducts fiscal evaluations for an infinite period using "sustainable solvency" (2024 Financial Projection Report, 209-211). This means they present fiscal stabilization plans that are permanently sustainable every year. This point reveals how pathetic our pension discussions are.

Those who participated in the pension reform discussions must take responsibility for their past actions. Our pension discussions have become more clouded because of experts who changed their positions every time the administration changed. All pension discussions must be legislated to ensure that detailed minutes are written and disclosed immediately, and that they are broadcast live on YouTube and permanently preserved. This is to expose the true faces of self-proclaimed experts whose positions have shifted frequently like chameleons. Only then can we minimize the legal plunder through public pensions—including the Government Employees Pension and the Private School Teachers Pension—that is being perpetrated in the name of pensions.

Source: Asia Today (original article)