[Yoon Seok-myeong's Pension Reform Stories] The Deplorable Level of Understanding of the Automatic Adjustment Mechanism Among National Assembly Members at Parliamentary Audit Hearings (October 2024)
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In the course of criticizing the automatic adjustment mechanism included in the government's pension reform proposal, the term "empty-can pension" has even appeared. The criticism has been led primarily by opposition-party legislators—Representative Kang Seon-woo, the floor manager of the Democratic Party of Korea on the National Assembly's Health and Welfare Committee; Democratic Party Representatives Nam In-soon, Kim Nam-hee, and Jeon Jin-suk; and Representative Kim Seon-min of the Cho Guk Innovation Party—who have mounted fierce attacks on the automatic adjustment mechanism.
The automatic adjustment mechanism has already been adopted by 70% of OECD member states. Germany and Japan introduced it in 2004, and Sweden did so in 1999, a quarter-century ago. Given that the current proposal does not even call for immediate introduction, one may well ask why such fierce criticism persists—particularly after Professor Emeritus Shin Se-don of Sookmyung Women's University described the automatic adjustment mechanism as the centerpiece of the government's pension reform proposal (see "The National Pension Reform Proposal Is the Best Among Second-Best Options," Sisajournal, Issue 1828).
The author introduced the automatic adjustment mechanism in the September 1999 issue of the Health and Welfare Forum, with the intention of advocating for its early adoption. Yet the latest possible introduction date in the government's proposal is 2054—thirty years from now. And even then, the mechanism would only affect the price-indexation component of benefits paid to existing recipients. Given that the benefit-payment period is set at 25 years, full actuarial effect would not materialize until 55 years hence. Despite all this, the government's proposal is being dismissed as a hollow "empty-can pension," and members of the National Assembly are joining in that characterization.
The automatic adjustment mechanism that the author has advocated since the Fourth National Pension Financial Projection in 2018 is one that reduces the initial pension benefit. It is a scheme that scales down the initial benefit in proportion to the individual contributor's own increase in life expectancy. Total lifetime pension receipts remain unchanged, but the monthly benefit is reduced by the amount corresponding to the extension of the payment period resulting from longer lifespans—a Finnish-style approach. If the mandatory contribution age, currently 59, were extended by five years to 64 through labor market reforms such as "re-employment after retirement," the income replacement rate would increase by more than 10 percentage points, such that the introduction of an automatic adjustment mechanism need not result in any reduction in the benefit amount.
Only by introducing an automatic adjustment mechanism in this manner—one that reduces one's own initial pension benefit—can intergenerational equity be improved, even if only marginally. Yet given that the latest possible introduction date is 2054, thirty years hence, it is highly probable that the first baby boom generation, such as the author himself, who benefited from a 3% contribution rate with a 70% income replacement rate, will pass on having enjoyed all the benefits while bearing none of the burden of adjustment. This is precisely why the automatic adjustment mechanism as proposed by the government has been criticized as an "evasion of responsibility." It is also the reason why, in a recent public opinion survey by "Youth Action for Pension Reform," 31.3% of respondents overall—and 47% among the MZ generation—expressed a preference for abolishing the National Pension. Given this situation, watching members of the National Assembly engage in reflexive opposition purely for its own sake, one cannot help but wonder whether they possess any genuine understanding of the matter at all.
Canada, which was frequently cited during the Moon Jae-in administration as a model for a "contribute more, receive more" National Pension reform, has operated for the past two decades with a 9.9% contribution rate in exchange for a promised income replacement rate of only 25%. A system with such parameters would naturally exhibit no fiscal instability. Yet even Canada has a statutory provision stipulating that "if the political sphere takes no action, 50% of the fiscal imbalance factors shall be forcibly resolved within three years," with additional corrective measures applying three years thereafter.
On the 22nd of last month, Representative Kim Seon-min of the Cho Guk Innovation Party introduced a bill to amend the National Pension Act proposing a 50% income replacement rate and a 13% contribution rate. In response, the Citizens' Action for Strengthening Public Pensions issued a commentary on the 24th, stating: "Representative Kim Seon-min and the Cho Guk Innovation Party have demonstrated their role as representatives of the popular will by introducing a bill that respects the wishes of the citizenry. The Pension Action once again welcomes this bill and will spare no effort in solidarity and cooperation to guarantee adequate retirement income through public pensions" (Labor and World, October 25, 2024). What this amounts to is welcoming a proposal that the author would characterize as a regressive deterioration—one in which the lifetime National Pension contribution burden differs by 21.3 percentage points between the cohort born in 2005 (14.8%) and that born in 2035 (36.1%), and in which the pay-as-you-go (PAYG) cost rate would soar to 43.2%. At a 13% contribution rate, the income replacement rate consistent with fiscal balance is 26.3%, yet the bill proposes benefits exceeding that breakeven figure by 23.7 percentage points. The irony that this bill was introduced by the very legislator who so forcefully attacked the automatic adjustment mechanism makes the situation all the more astounding.
A photograph depicting stakeholders and members of the National Assembly jointly demonstrating to demand acceptance of deliberative panel outcomes—where citizen panels were educated using distorted materials—was included in the author's presentation at the 2024 OECD Pension Expert Meeting. In response to this situation, foreign experts—specifically the Director Izmo and Officer Mika of the Finnish Centre for Pensions, and Dr. Kruse of Statistics Norway—stated that they were "convinced that the Korean pension system is unsustainable."
The government itself has acknowledged that the National Pension liability is accumulating at a rate of 88.5 billion won per day. Before criticizing the government's proposal, those involved would do well to reflect on how profoundly uninformed they are about the automatic adjustment mechanism—and this applies equally to pension specialists who oppose its introduction on the grounds that it is premature. Members of the National Assembly must assess current and future circumstances objectively and speak with the weight of genuine deliberation. That is the task the public sent them there to perform.
