The Debate over Pension Contribution Rate Increases at the Third National Pension Financial Projection in 2013 (November 2013)

(Following the conclusion of the third National Pension financial projection in 2013, a heated debate arose over the necessity of raising pension contribution rates.

The groups that had championed the futility of accumulating a large fund—arguing that such accumulation would ultimately cause asset values to decline through large-scale sell-offs at the point of liquidation—were precisely the core actors behind the "National Action for Strengthening Public Pensions."

Yet now, arguments have emerged claiming that, as long as fund management is handled well, there is no need to worry about fund depletion throughout the 21st century.

Among the members of this group, given that they have advanced positions swinging between such extreme poles, it seems worthwhile to look back on the past public debates in print over the necessity of raising National Pension contribution rates.

This is why a summary of the key arguments advanced by Professor Ju Eun-seon in the JoongAng Ilbo debate of November 2013 is reproduced here.)

 

Professor Ju Eun-seon, Department of Social Welfare, Kyonggi University

A profound misconception about the National Pension pervades Korean society. It is the belief that the National Pension Fund faces imminent depletion, and that this crisis can be resolved by raising pension contributions to increase the fund's size.

To state the conclusion first: what is currently at risk is not the finances of the National Pension, but the broader social sustainability of society.

Why, and in what sense, is the fund not fundamentally important to pension financial stability?

The National Pension is not an individual pension in which each person accumulates contributions and receives benefits according to investment returns. It is a public social security system grounded in intergenerational solidarity. That is, it is a system in which the succeeding generation—which enjoys greater productive achievements built upon the economic foundations laid by the preceding generation—collectively supports the older generation.

Public pension systems are structured so that pension contributions paid by the working generation are channeled into the retirement security of the parent generation. This holds true even in the exceptional circumstances found in countries such as Korea, where reserves are accumulated on a large scale. The ultimate source of funding for pension benefits—derived from the sale of stocks, bonds, and real estate assets held by the pension fund—is the wealth generated within that society, namely the working generation.

The problem is that large-scale liquidation of pension fund assets in an aging society leads to a decline in asset values, and that asset values are variable depending on the real purchasing power of the succeeding generation.

The National Pension is projected to accumulate a fund exceeding 3,200 trillion won in nominal terms by the 2040s, but it remains unclear whether that level of real value will be maintained.

Accumulating ever-larger pension fund reserves unconditionally is not a method that guarantees the long-term financial stability of the pension system.

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