Government Employees Pension Reform — Depoliticization Is the Answer

[Seoul Economic Daily · Op-Ed · April 1, 2015]

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA) and Adjunct Professor of Economics at Korea University

Discussions on Government Employees Pension reform are stalling again. This is because pension discussions are becoming politicized ahead of the by-elections. This also serves as the background for claims that sufficient time for discussion is needed. If we were the first in the world to undertake pension reform, sufficient time for discussion would be necessary. However, most of the countries we should emulate have already carried out reforms toward sustainability, enduring bone-cutting pain.

Concerns over wasteful political strife ahead of by-elections

We, too, had sufficient discussions on the necessity and direction of reform during three reform processes since the mid-1990s. In 2000, immediately after the foreign exchange crisis, the World Bank even issued a policy recommendation to align the Government Employees Pension with the level of the National Pension. The Organisation for Economic Co-operation and Development (OECD), of which we are a member, also provided policy recommendations on the direction of Government Employees Pension reform from 2003 to 2014. The core of these recommendations was to either align benefit levels with the National Pension or implement corresponding reforms.

Under these circumstances, what more research, and how much of it, is needed to find an answer for the Government Employees Pension, whose deficit subsidy will, if it is left as it is, reach 19.7 trillion won every year from 2016 to 2080 (53.9 billion won a day in 2012 present value)? When it is self-evident that, however much one studies it, there is no clever way out other than cutting what is paid out, how are we to accept the argument that even the National Pension, reformed with such difficulty, should be rolled back in the name of strengthening public pensions? It seems the time has come for us, too, to look not at the outward appearance of the countries that run their welfare systems well but at what lies within. It is time to learn the sense of responsibility of these countries, which respond preemptively whenever the need for reform arises, let all members of society benefit evenly, and take care not to hand a heavy burden to later generations. It is also time to learn a depoliticized way of conducting the debate that blocks reform discussions from drifting into wasteful political strife at the source.

Japan, where the current pension accrual rate (the benefit rate paid per year of contribution period) is 1.5675, has established a sustainable pension system until 2110 (95 years from now) by introducing an automatic adjustment mechanism through which the benefit rate is expected to drop to 1.275 in the most optimistic scenario (an income replacement rate of 51% for 40 years and 38.25% for 30 years) and 1.05 in the most pessimistic scenario (an income replacement rate of 42% for 40 years and 31.5% for 30 years) starting from 2058. This system will also apply to Japanese civil servants starting this October. Would Japan have required civil servants to bear half of the contributions—when they were previously paid in full by taxes—and eventually enroll them in the Employees' Pension Insurance, which applies the same rules as those for the general public, simply because it was inferior to us?

The yardstick for evaluating the success of this Government Employees Pension reform lies in the extent of benefit reductions. The reason the entire nation has been in turmoil over the Government Employees Pension issue only a few years after the 2009 reform is ultimately that a proper reform was not carried out. This is because the targets of reform were limited to a few, and the first pension payment for those with more than 10 years of service was not reduced by a single penny.

Reduction Amounts Should Be Determined Through Expert Evaluation and Verification

It should also be noted that the higher the intensity of reform, the smaller the difference between structural reform and parametric reform. The shortcut to ensuring sustainability is to group new and old civil servants under the same system while significantly increasing the magnitude of benefit reductions and minimizing the increase in contributions borne by civil servants. In the case of parametric reform, even if the scheme is run as a single integrated system, the portions corresponding to the National Pension and to severance pay should be clearly separated so that it can easily be compared with the National Pension.

The positive aspects derived from the National Assembly, which is responsible for legislation, leading the reform discussions should also be fully utilized. This is because it allows for fair proceedings, transparent disclosure of data, and an increased understanding of the system. It should be the government's role to provide accurate data and set an appropriate scope of discussion so that the reform discussions do not lose their direction. Evaluation and verification work through multiple objective experts are also essential elements for depoliticizing reform discussions.

Source: Seoul Economic Daily (original article)