The Four Public Pensions — National, Government Employees, Private School Teachers, and Military Personnel — Should Be Integrated (August 2022)

A consensus is forming around pension reform, but there is more than one mountain to climb before it can be properly carried out.

First, there are large gaps in perception about the current state of the system. When people think of pension reform, they usually think of the National Pension first. This is probably because it has far more insured members than the Government Employees Pension and the like.

Most pension experts are professors, and since the civil servants who would have to carry out the reform are themselves stakeholders, no strong voices are calling for the hard-hitting reform that the terminally ill Government Employees, Private School Teachers, and Military Personnel Pensions actually need.

A large share of the lawmakers who ought to shoulder the reform are themselves former judges, prosecutors, bureaucrats, or professors, so they too are passive about it.

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Since the second half of last year, the press has been emphasizing the urgency of pension reform, and since the presidential candidates also agreed on the need for it, discussion of pension reform has come to draw attention.

Even amid this, the political jockeying continues. A Pension Reform Committee that had been discussed as reporting directly to the president has been moved to the National Assembly instead.

Based on my 25 years of experience participating in pension reform discussions, if the National Assembly is left in charge from the very first stage of debate, achieving meaningful reform will not be easy.

A representative example is the 2015 'National Grand Compromise Body for Government Employees Pension Reform' (the Grand Compromise Body). Because the body was composed mainly of stakeholders from the Government Employees and Private School Teachers Pensions, objective discussion itself was difficult.

At the time, the government's reform baseline proposal, itself weaker than the ruling party's (Saenuri Party's) own plan, was presented to the Grand Compromise Body, but the final system overhaul retreated far further still.

At the invitation of the ruling party's Economic Democratization Practice Group (led by former lawmaker Kim Se-yeon), I evaluated the Government Employees Pension overhaul plan on several occasions.

I criticized even the ruling party's original Government Employees Pension reform proposal as too weak. Yet a government baseline proposal, weaker still than the ruling party's plan, was put forward, and the eventual overhaul ended up far weaker even than that government baseline.

Even so, the participants in the Grand Compromise Body publicized it as though they had achieved a tremendous accomplishment.

And this despite the fact that the overhaul moved in a direction opposite to the Ministry of Personnel Management's own internal materials, which — based on an International Monetary Fund (IMF) report — held that fiscal stability could only be achieved by sharply cutting the benefit accrual rate rather than by raising the contribution rate.

Time tells whether a reform succeeded or failed. Less than five years on, the government's deficit subsidy is rapidly increasing.

This is a phenomenon that appears once the short-term morphine effect wears off.

And even this trend has been substantially diluted by the large-scale hiring of civil servants under the Moon Jae-in administration. The contributions of 130,000 newly hired civil servants, together with the matching state contributions injected alongside them, are merely masking the rapid growth of the deficit subsidy.

The Government Employees Pension's long-term sustainability has fallen even more markedly.

Having failed to properly reform the Government Employees Pension while also meddling wrongly in strengthening the National Pension's income security, the Grand Compromise Body is bound to receive a negative verdict from history on this account.

It is astonishing that they even agreed to launch a 'Special Committee for Strengthening Public Pensions and Resolving Old-Age Poverty' in order to discuss raising the National Pension's benefit rate by 10 percentage points.

It was so absurd that Cho Yoon-sun, Senior Secretary for Political Affairs under the Park Geun-hye administration, resigned in protest against the terms of the agreement.

 

A Dark Chapter in National Assembly-Led Pension Reform

And yet, once again, the National Assembly says it will take the lead in pension reform discussions from the very start. Given the National Assembly's role in the legislative process and the current situation of a minority ruling party, this is understandable to some degree.

The problem is that there is no guarantee that the same absurd outcome will not happen again as a result of politicians' calculations and public sparring. How, then, can proper pension reform be made possible?

First, the government must hold the center. It must properly draft a fact-based report and disclose it quickly. Based on this, it must present the key principles of pension reform.

The key principles must include 'conforming to global pension reform trends,' 'securing intergenerational equity,' and 'achieving a dramatic improvement in the system's sustainability.' Only by evaluating the content of the overhaul against these principles can we prevent a situation in which a change is packaged as reform but turns out, in substance, to be a deterioration.

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The way to put these grievances to rest is to integrate the operation of the public pensions.

Civil servants stress that they pay twice as much in contributions as National Pension members. It is true that civil servants pay twice as much. But they turn a blind eye to the fact that the state, as their employer, also pays twice as much as private-sector employers do. And they emphasize only the fact that they receive a smaller severance payment than private-sector workers.

If truly this is the problem, paying civil servants the same severance pay (8.33% of monthly salary) as private-sector workers would make the grievance disappear.

If the extra 4.5 percentage points that the state pays beyond what private employers pay is converted into severance pay, and added to the retirement allowance already being paid (39% of the private-sector level), then paying civil servants the same severance pay as private-sector workers would add less than 0.6 percentage points to the state's burden.

The real issue is the portion where the state's contribution burden (9%) is twice that for National Pension members (4.5%). This is not difficult to solve — we need only follow the global pension reform trend.

Pay civil servants more, but pay the additional benefit as a defined contribution (DC) so that it does not create fiscal instability. This simply applies, to the portion civil servants pay in addition, a method that 70% of Organisation for Economic Co-operation and Development (OECD) member countries have already adopted.

Once benefit levels are matched to contribution burdens, and the reference income used to calculate pensions and the income-redistribution function are operated identically as well, there is no reason to be dissatisfied with integrated operation.

This is achievable without resorting to the tricks used at every past overhaul, by following the unified public pension operation that Japan achieved in 2015.

How Did Japan, the United States, Sweden, and Others Do It?

Voices opposing integration are certain to emerge in order to protect the vested interests hidden within separate operation. One likely line of opposition is to make an issue of the fact that integrated operation requires more funding in the short to medium term.

This too is not difficult to answer. Whether pension reform succeeds does not hinge on a short-term assessment, but on whether it can reduce the government's total burden over the long run.

To reduce the burden on future generations, some degree of burden-sharing by the present and near-future generations is necessary.

During the transition, the government's burden may increase, but it is enough to properly demonstrate that its total burden will decrease over the long term.

This is precisely why integrated operation is necessary. Through integrated operation, the government's total burden over the long run can be dramatically reduced.

https://www.joongang.co.kr/article/25091952