Can We Pay More and Receive More From the National Pension?
[Kookmin Ilbo · Op-Ed · January 10, 2023]
Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA)
As someone serving both as an advisory committee member of the National Assembly Special Committee on Pension Reform and as a member of the National Pension Financial Estimation Committee, I found recent media reports claiming that "an agreement has been reached to pay more and receive more from the National Pension" to be utterly absurd. This is because the Special Committee's advisory committee is still at the stage of coordinating the direction of discussions. This is why the group chat for the Special Committee's advisory committee members was as chaotic as a fire in a hotteok shop on the 3rd, which was the reporting date for the Special Committee.
Then, is an overhaul of the National Pension in the "pay more and receive more direction," which has become a subject of controversy, even possible? Those who claimed in the fourth financial projection in 2018 that it is possible to pay more and receive more argued that if contributions—currently at 9%—are increased by 2 percentage points and the benefit rate is raised by 5 percentage points to 45%, the date of fund depletion will be extended by several years; they called this a fiscal stabilization measure and claimed that one can pay more and receive more.
Such claims contrast with the position that "extending the date of fund depletion by a few years cannot be the essence of fiscal stabilization." This is because they believe a proper evaluation can only be made if the financial evaluation period is set as the duration until the person who first joins the National Pension passes away, rather than a financial evaluation centered on the date of fund depletion. For example, if someone joins the National Pension at age 20, any debate of the "you can pay more and receive more" kind should proceed while showing the financial state of the National Pension up to that person's death at around 85 to 90. This is also the background for setting the National Pension financial evaluation period to 70 years since 2003.
The problem is that even if the benefit rate is not raised further, the contribution rate must be increased all at once to over 38% after fund depletion. For reference, the figures cited hereafter are based on the contents of a report for which I served as lead researcher, recently submitted to the National Assembly Research Service. We have failed to raise the 9% National Pension contribution rate by even a single percentage point over the past 25 years. This is why criticism is raised that we are ignoring the reality of the National Pension, which must be raised to the 38% level after fund depletion despite our failure to raise it by even one percentage point for a long period.
"If the financial evaluation period is short, all pension contributions are captured, but a significant portion of future expenditures is omitted from the financial evaluation, leading to an optimistically biased financial projection." This is something that can be confirmed regarding the financial evaluation period of public pensions through the 'Lexis Diagram' of Lexis, a genius German statistician. The Japanese National Pension and Government Employees Pension, from which we learned our pension system, have enough money to pay pensions even 100 years from now. Canada has secured 100% of the funds to pay pensions even 150 years from now. The Japanese case was confirmed last month when First Vice Minister Lee Ki-il of the Ministry of Health and Welfare and others visited the Ministry of Health, Labour and Welfare of Japan.
According to the 2018 National Pension financial projection, the cumulative deficit from fund depletion in 2057 to 2088, the final year of the 70-year financial evaluation period, was 17,000 trillion won. According to a recent estimate by my research team, the cumulative deficit increases to 22,650 trillion won by 2092. In present-value terms, this comes to about 7,752 trillion won. The unfunded pension liability of the National Pension, the use of which is recommended by the World Bank and others, is estimated to have already exceeded 1,500 trillion won. Since the total amount of the National Pension already promised for payment is about 2,500 trillion won, this means that even considering the reserves of 900 trillion won, there is a shortage of over 1,500 trillion won in payments.
Even if the National Pension amount payable is not raised further, the unfunded liability increases rapidly. This is because the contribution rate would have to be raised to over 20% for it not to increase, yet only 9% is being paid. In this situation, what would happen if the income replacement rate is raised further on the condition of raising contributions by a few percentage points? It might hold out for several decades, but the ship of the Republic of Korea after fund depletion will find it difficult to avoid catastrophe. Which path should we choose? The path of mutual destruction, or the path of intergenerational coexistence? The golden time for choice has already passed. Even from now on, we must find a way to resolve this while sharing information with the public.
Source: Kookmin Ilbo (original article)
