To Reduce Coverage Gaps in the National Pension

[Seoul Economic Daily · Op-Ed · January 28, 2010]

Yun Suk-myung (Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA))

The National Pension scheme was introduced in 1988 to enable people to enjoy a certain level of living in old age by saving a portion of the income generated during their working years for retirement purposes. Since then, the target population for enrollment has been gradually expanded, and with the addition of urban self-employed workers in 1999, the "era of universal pension" began. Furthermore, in 2008, the Basic Old-Age Pension scheme—a non-contributory system funded by taxpayers' money—was introduced to provide income support for low-income older people aged 65 and over who retired without retirement preparations.

However, in the case of the National Pension scheme, there are a significant number of groups that do not receive benefits, and social pressure to strengthen the system is growing. This is due to criticism that the National Pension scheme, which targets the entire population, is actually a "half-pension system" where benefits only go to those with economic capacity, such as the middle class and above.

Government Support for Low-Income Earners' Contributions

Unlike the middle class, for the majority of low-income people who struggle just to make ends meet today, National Pension contributions are a heavy burden. Of the 18 million people subject to National Pension coverage, about 5 million are not paying contributions. If they remain unable to pay as they are now, poverty during their working years is likely to turn into poverty in old age. As the number of low-income people with no provision for old age grows, the government's fiscal burden for alleviating old-age poverty will inevitably increase. Yet in a super-aged society, where the older population surges while the economically active population that must support it shrinks, the government's fiscal capacity to devote to alleviating old-age poverty is limited, so measures must be prepared in advance.

In this context, it is urgent to devise measures to minimize "coverage gaps in the National Pension" for low-income groups—that is, cases where they cannot receive a pension even as they age. In particular, remedial measures are necessary because government policies asking low-income people, who struggle to make a living immediately, to look toward the distant future and pay National Pension contributions are unlikely to be effective. The most certain measure for low-income groups is to reduce the burden of contributions.

While introducing a contribution support system poses the problem of increasing the government's burden, it is far more effective when considering the government burden that will be required for income support for low-income people who retire without any preparation. In particular, contribution support is very urgent for low-income self-employed workers who must bear the full amount of contributions themselves, unlike salaried employees whose companies bear 50% of the contributions.

Despite such necessity, there are hurdles to overcome to introduce a contribution support system. First, because it is not easy to identify the actual income of self-employed workers, countermeasures against underreporting of income are necessary. It is necessary to actively utilize the Earned Income Tax Credit (EITC), which was introduced to encourage employment among low-income groups, as a means of income identification for the self-employed. For the time being, while income identification for the self-employed remains difficult, it would be desirable to operate this as a pilot project and then fully introduce it after 2013, when the EITC will also apply to low-income self-employed workers.

Clearly Setting the Coordinates for the Basic Old-Age Pension

Along with this, the direction for the development of the Basic Old-Age Pension scheme, which was introduced without a clear vision, must also be clarified. It is now time to present a vision for how to harmonize the National Pension, received as a reward for steadily paying contributions, and the non-contributory Basic Old-Age Pension, which is paid once a person turns 65.

The smaller the proportion of older people who secure retirement income through the National Pension among all older people, the greater the importance of the tax-financed Basic Old-Age Pension. This implies an increase in the fiscal burden on future governments. Even to reduce the fiscal burden on future governments that will struggle to manage the national budget in a super-aged society, it is necessary to minimize the role of the tax-financed Basic Old-Age Pension. The necessity to tighten up related schemes so that low-income people currently engaged in labor activities can prepare their own retirement income lies exactly here.

Source: Seoul Economic Daily (original article)