The Basic Old-Age Pension Should Focus on Vulnerable Groups

[Seoul Economic Daily · Op-Ed · August 23, 2011]

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

Following much controversy, discussions are underway to overhaul the Basic Old-Age Pension, which was introduced in 2008 to alleviate elderly poverty. The National Assembly has formed a Special Committee on Pension Improvement to examine plans for the structural reform of the National Pension and the Basic Old-Age Pension. The government currently pays a monthly Basic Old-Age Pension amount of 91,200 won (per person)—equivalent to 5% of the average income of National Pension contributors—to 70% of older people aged 65 and over, funded by tax revenue.

There are reasons for the urgency in discussing the direction of the overhaul of the National Pension and the Basic Old-Age Pension. Above all, many point out that the current Basic Old-Age Pension amount is too low to align with the purpose of the scheme, which is to alleviate elderly poverty. A benefit slightly exceeding 90,000 won per month is woefully insufficient for poor older people to maintain their livelihoods.

Pension Depletion Inevitable as Older Population Increases

However, in a reality where the older population is surging, it is difficult for the government—which must pay the Basic Old-Age Pension using taxes—to easily agree with such a position.

Unlike the National Pension, where one must regularly pay contributions to receive benefits, the Basic Old-Age Pension is inevitably attractive to older people because it can be received automatically upon turning 65. Even within the political sphere, there is significant temptation to expand the eligibility for the Basic Old-Age Pension to all older people aged 65 and over and to double the benefit to make it realistic.

However, the Basic Old-Age Pension must be approached very cautiously in that it imposes a massive liability on future generations. This is because while the older population is surging, the economically active population of the future who will support older people is expected to decrease sharply due to the decline in the fertility rate. While funding may be manageable for now, if the older population surges and the pension is paid to all older people with the amount doubled, government spending will increase so sharply that sustainability will be questioned. If the Basic Old-Age Pension amount rises to approximately 180,000 won, it would exceed the benefit (approximately 160,000 won per month) that a National Pension contributor with a reported income of 990,000 won would receive after paying contributions for 10 years, thereby weakening the incentive to join the National Pension.

Cases of scheme overhauls in European countries that introduced basic pensions long ago provide important implications. Scandinavian countries such as Sweden and Norway, which are synonymous with the welfare state, are racing to abolish their basic pensions. Due to socio-economic conditions that have changed from the past—namely, the surging older population and low economic growth—it has become difficult to maintain the schemes, leading them to abolish systems that use taxes to guarantee the old age of all older people.

If this is the essence of the situation, in what direction should it be restructured to be desirable for the future of the nation and its people? The answer seems clear. We must encourage people to receive pensions through their own efforts as much as possible, while concentrating the benefits of the Basic Old-Age Pension on vulnerable groups who cannot prepare for their old age on their own.

Although the solution seems clear in this way, the situation is not so simple when delving into the details. This is because among the approximately 19 million National Pension contributors, about 5 million are unable to pay their National Pension contributions for various reasons. If they are left as they are, it is obvious that they will be driven into old-age poverty. This is why we must hurry to find measures for low-income self-employed people and daily laborers who find it difficult to pay National Pension contributions due to low or irregular income from economic activities.

Overhaul It Around Low-Income Older People

In a situation where the older population is surging, the correct solution is for the preceding generation to appropriately alleviate the burden of supporting older people for future generations. This is precisely why we must increase the number of people who receive the National Pension through their own efforts by providing National Pension contribution support to vulnerable groups, even if it requires financial investment. While the scheme should be operated relatively generously for the current older population who were unable to properly prepare for their old age during the process of rapid social development, the correct direction would be to overhaul the Basic Old-Age Pension scheme to focus on low-income older people in the long term.

Source: Seoul Economic Daily (original article)