Hasten the National Assembly's Deliberation on the 'Government Pension Reform Plan'
[Kookmin Ilbo · Op-Ed · September 10, 2024]
Yun Suk-myung, Research Fellow Emeritus at the Korea Institute for Health and Social Affairs (KIHASA)
On the 4th, the government's pension reform plan was announced. It contains many weighty elements, such as the introduction of an automatic adjustment mechanism for pension finances and a state guarantee of benefit payment, differential contributions for the National Pension by age, increasing the Basic Pension to 400,000 won, reviewing a five-year increase in the mandatory contribution age for the National Pension, and promoting mandatory enrollment in retirement pensions.
Regarding pension reform, I agree with the priorities set by the government: sustainability of the system, intergenerational equity, and old-age income security. In particular, I highly value the introduction of the automatic adjustment mechanism, the extension of the mandatory contribution age, and the review of mandatory enrollment in retirement pensions. Conversely, I am very critical of the increase in the income replacement rate, the payment guarantee, and the increase in the Basic Pension. The government's proposal of an "income replacement rate of 42%—contribution rate of 13%" reduces the growth rate of the unfunded pension liability of 1,825 trillion won—the amount promised for payment but lacking—compared to the "income replacement rate of 44%—contribution rate of 13%" discussed in the National Assembly last May. I criticize the government's plan to increase the income replacement rate by 2 percentage points because the unfunded liability continues to grow, even if its scale is reduced.
In this situation, the government stated it would provide a payment guarantee to alleviate the anxiety of the younger generation. Three lawmakers from the opposition party have already introduced a payment guarantee bill. The Pension Future Forum, to which I belong, is concerned that a payment guarantee could become a major driver for neglecting pension reform. Regarding the payment guarantee, abstract phrasing should be used, but provisions must be specified to ensure that sustainable pension reform occurs automatically.
I am also critical of increasing the Basic Pension up to 400,000 won for older people in the bottom 70% by income. This is because one-third of Basic Pension beneficiaries are not impoverished older people, yet they receive the same amount of Basic Pension as those who are. The Organisation for Economic Co-operation and Development (OECD) also recommended that the Korean Basic Pension be operated so that more benefits go to vulnerable older people, noting that it is a system with very low cost-effectiveness.
The introduction of an automatic adjustment mechanism is highly significant in our pension reform discussions. The problem is that it is not a high-intensity automatic adjustment mechanism. This is because it is a method of fine-tuning by small margins. At a debate hosted by the opposition party, the automatic adjustment mechanism was criticized as an "automatic cutting device" that reduces pension amounts by 20%, but this is not an accurate assessment. This is because it is an automatic adjustment mechanism applied to the annual pension amount linkage method after the first pension is determined, rather than a cut to the income replacement rate.
Most of the fiscal stabilization effects of the government's reform plan are designed to stem from an aggressive investment portfolio that increases the rate of return by 1 percentage point every year. I am very critical of this approach. This is because as expected returns increase, investment risks also grow.
Despite these concerns, the introduction of the automatic adjustment mechanism, differential contributions by generation, the upward adjustment of the mandatory contribution age, and the promotion of mandatory enrollment in retirement pensions are steps in the right direction. The opposition party, which had urged the government to present a plan, has been entirely critical as soon as the government's reform plan was released. To a researcher like me, it is a very insufficient reform plan, but it seems necessary to examine whether it is a plan that the opposition should criticize so vehemently.
Already, 70% of OECD member countries have introduced automatic adjustment mechanisms. There are also foreign examples of differential contributions. The opposition party had sought to introduce a payment guarantee long ago. From my position as a researcher, I cannot help but criticize the government's reform plan as insufficient in several respects. However, I question whether the political sphere should do the same. This is because there are no sharp alternatives if one considers sustainability and reducing the burden on future generations. While flamboyant rhetoric is being deployed, pensions are simply a system where money comes in and goes out.
Last May, the leader of the opposition party and the Speaker of the National Assembly emphasized the urgency of reform. They stated that as reform is delayed, liabilities increase by more than 100 billion won per day. Since more than three months have already passed, the situation has worsened. From a neutral perspective, discussions on pension reform must begin with a sense of responsibility while gathering diverse public opinions. Doing so is the basic duty of the National Assembly.
Source: Kookmin Ilbo (original article)
