The Basic Old-Age Pension Should Focus on Older People in Poverty

[Seoul Economic Daily · Op-Ed · May 6, 2012]

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

In 2001, the Organisation for Economic Co-operation and Development (OECD) recommended that Korea, which is experiencing population aging at the fastest rate among member countries, urgently establish a multi-pillar old-age income security system consisting of public pensions, corporate pensions, and personal pensions to effectively cope with the approaching aged society. The core idea is to provide a Basic Pension to all older people using taxes to alleviate the problem of many older people suffering from poverty because they do not receive the National Pension. Instead, it also included content to significantly lower the payment amounts and income replacement rates of the existing National Pension while converting it into an earnings-related pension by removing the income redistribution function (which applies low returns to high-income earners and high returns to low-income earners), and to supplement insufficient old-age income by activating corporate and personal pensions.

OECD Also Recommended Abolishing the Basic Pension

The OECD's pension overhaul recommendation, which seems natural in some ways, has sparked considerable controversy in our society. This is because claims have been repeatedly raised that while providing a Basic Pension to all older people through taxes could alleviate elderly poverty, it would be difficult to sustain due to a sharp increase in the burden after 2030, when the older population is expected to surge. As a result, the Basic Old-Age Pension was introduced instead of the Basic Pension, paying 5% (10% by 2028) of the average income of National Pension contributors to 70% of older people aged 65 and over.

In its recent '2012 OECD Economic Survey of Korea,' the OECD presented a meaningful recommendation regarding the overhaul of the Basic Old-Age Pension scheme. The main point is that since the effect of alleviating elderly poverty is not significant because the target group is broad while the payment amount is small, the target group should be narrowed to focus on older people in poverty, while increasing the payment amount per person. However, it also proposed a second-best alternative: if the proportion of beneficiaries cannot be reduced due to opposition from interest groups, such as older people already receiving the Basic Old-Age Pension, only the pension amount for older people in poverty should be increased, and the pension amount for beneficiaries with a certain level of income should be frozen.

What is the background behind the OECD, which has recommended the introduction of a tax-financed universal Basic Pension since 2001, proposing an overhaul plan for the Basic Old-Age Pension scheme? It considers the reality that Korea has one of the highest elderly poverty rates among OECD member countries and that the income gap among older people is far more severe than the income gap among the economically active population. The core of the 2012 recommendation is to overhaul the system so that the Basic Old-Age Pension, funded by taxes, is not paid to all older people but provides more benefits to relatively vulnerable older people, such as low-income earners. It seems to consider that while the older population requiring support is surging due to population aging, the support capacity of future generations will decrease due to the low fertility rate and low growth. It appears to take into account that compared to the past, the older population and the period requiring support after retirement are increasing, while the social capacity to support them will be significantly weakened.

The 2012 OECD report also recommended that since the main reason for Korea's low National Pension coverage rate is the duality of the labor market, which is split into regular and non-regular workers, it is necessary to increase the coverage rate of social insurance, including the National Pension, by providing non-regular workers with social insurance benefits similar to those of regular workers.

Hoping This Becomes a New Starting Point for Discussions on Pension System Overhaul

Although absent from the recommendation, the pension contribution support system introduced for low-income workers to increase National Pension coverage should be introduced for low-income self-employed persons as soon as possible. To build a social infrastructure where related systems can operate effectively, the introduction of the Earned Income Tax Credit (EITC) for low-income self-employed persons also seems urgent.

I hope that the 2012 OECD recommendation, which suggests scrapping the plan to introduce a universal Basic Pension and overhauling the Basic Old-Age Pension into a means-tested system, becomes the starting point for forming a social consensus on the direction of the overhaul of our Basic Old-Age Pension and National Pension systems.

Source: Seoul Economic Daily (original article)