(A No-Holds-Barred Debate on the 2007 Introduction of the Basic Old-Age Pension and the Substance of National Pension Reform. Maeil Business Newspaper, January 25, 2007) (Posted September 8, 2026)

https://www.mk.co.kr/news/all/4260878

[No-Holds-Barred Debate] What Is to Be Done About National Pension Reform

Updated: November 1, 2007, 3:05 p.m.

MK–SERI Year-Long Series/ ◆

◆Kim Yong-ha, Professor at Soonchunhyang University "Not Reform but a Stopgap Coefficient Adjustment"
= The government's reform plan merely defers the point of National Pension depletion by barely ten years or so, and amounts to a coefficient adjustment rather than a reform. The Basic Old-Age Pension paid to older people in the bottom 60% by income will, through problems of equity, explosively amplify conflict among older people. President Roh Moo-hyun said that reform of the Government Employees Pension becomes possible only once the National Pension is reformed, but the notion that the public must sacrifice first before those with vested interests will follow is not something a national leader should say. Moreover, while the National Pension reform plan is designed both to raise contributions and to cut the benefit level, the Government Employees Pension reform plan raises contributions but is extremely weak when it comes to cutting the benefit level.


◆Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA) "Deferring the Fund-Depletion Date Is Highly Significant"
= If one thinks only of the fiscal stabilization effect, there are in theory many plans that could achieve it. But concentrating on fiscal stabilization inevitably gives rise to the problem of benefit adequacy, and the present government plan is the one that finds the greatest common divisor between these two values. One may criticize it for having deferred the depletion date by no more than ten years or so, but its significance is by no means small. Once ten years or so have passed, National Pension beneficiaries will appear in earnest and perceptions of the scheme will change.
At that point further fiscal stabilization measures can be taken. It is regrettable that the Basic Old-Age Pension's target group was greatly enlarged in the course of the debate in the political sphere.


◆Dr. Kang Sung-won, SERI "Selecting Basic Old-Age Pension Recipients Is Highly Likely to Cause Problems"
= By 2028, older people aged 65 and over will account for 27% of voters. They are what are called the post-386 generations, a cohort with strong political organizing power. Reform will not be easy. That is why, even if the amendment passes this time, the debate on pension reform must be started again as soon as possible. The Basic Old-Age Pension is highly likely to run into problems in selecting its recipients. As a matter of what ought to be done, the Government Employees Pension should be reformed first. A homogeneous interest group leads negotiations with the government to its own advantage more than a heterogeneous one does. That is the case with the Government Employees Pension.

※The MK–SERI jointly planned discussion was a so-called "no-holds-barred debate," run until a conclusion was reached, and took two hours and forty minutes.

※For the full text of the debate, please see the attached file below.

[Reporter Noh Won-myung]

MK–SERI Year-Long Series: Full Text of the Discussion

Discussion: How Should the National Pension Be Reformed?

Date and Time: Thursday, January 25, 2007, 2:00 p.m.

Venue: Maekyung Media Center, 30 Pil-dong 1-ga, Jung-gu, Seoul

Discussants: Kim Yong-ha, Professor at Soonchunhyang University

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs

Kang Sung-won, Principal Researcher at the Samsung Economic Research Institute

Moderator: Reporter Noh Won-myung (Society Desk, Editorial Bureau, Maeil Business Newspaper)

○ Moderator: The amendment to the National Pension Act has not yet passed the plenary session of the National Assembly. The amendment itself also appears to have many limitations. I think that looking back at the strengths and the limitations of the government's plan and searching for alternatives remains a valid exercise. I would like to begin our discussion with the fiscal stabilization effect of the government's plan. If things are done as the government's plan provides, will the National Pension's finances be stabilized?

○ Professor Kim Yong-ha: The plan that has just passed the Health and Welfare Committee is judged to have a considerably weaker fiscal stabilization effect than the original government plan. Even on the face of it, the original government plan included lowering the benefit level to 50% while at the same time raising the contribution rate to 15.9%, but because the Health and Welfare Committee's plan raises the contribution rate only as far as 12.9%, the effect of reforming the scheme is judged to be that the year of fund depletion, which was set for 2047 if the present system were maintained, is pushed back by this pension reform to around 2065.

Under the original government plan it was thought to run until around 2075, so the date has been brought forward by ten years from that. Another point we have to note is that although I said 2065, this is in fact a financial projection built on Statistics Korea's 2001 population projection, so if we were to use the more recent 2006 population projection, the year of fund depletion could be brought forward by around five more years. In that case, looking at it as a whole, depletion would be expected at around 2060, so as things stand this amounts to no more than pushing the fund-depletion year back by barely thirteen years or so. I do therefore think this pension reform stabilizes the National Pension's finances, but another reform will be needed five years from now, and at that rate another five years after that, so that we cannot avoid reforming continually; in other words, this is less a reform than a gradual adjustment of the scheme through coefficient adjustment.

○ Dr. Yun Suk-myung: In pension reform, the gulf between the ideal and the real seems much too wide.

That is because on one side there are those who argue for firm fiscal stabilization, while on the other side there are arguments that in fact run counter to fiscal stabilization — that rather than fiscal stabilization we should collect taxes and pay pensions to those in the coverage gaps, that is, to older people who receive no pension — and the two are set against each other.

At the National Pension Development Committee, which discussed fiscal stabilization plans, a fiscal stabilization benchmark applied identically to each of the 40%, 50%, and 60% income replacement rate cases (holding reserves equal to twice pension expenditure as of the end of 2070) was set, and the corresponding contribution rate was set for each. All three alternatives are thus identical in terms of fiscal stabilization; the point at issue is whether the appropriate income replacement rate and the contribution rate corresponding to it are at a level future generations can bear.

Given that our National Pension scheme is still in the early stages of its introduction, the argument that a sharp fall in the income replacement rate would be difficult — on the ground that a gap arises between the theoretical income replacement rate under the Pension Act and the effective income replacement rate — was persuasive. Those who pressed this logic strongly argued for keeping the 60% income replacement rate while raising the contribution rate to 18.85%, the level at which fiscal stabilization is possible. Against that argument, a majority of the committee preferred the [50% income replacement rate – 15.85% contribution rate] combination, judging that while benefit adequacy would be met, imposing a National Pension contribution rate of 18.85% alone on future generations was too high a level. If this alternative were adopted, the fund is expected to keep accumulating reserves at least until the mid-2070s.   

On the basis of this logic, a plan with a 50% income replacement rate and the contribution rate raised to 15.85% was put forward as the committee's plan, and reactions to the plan for improving the scheme were expressed in various ways, centered on the political sphere and other stakeholders. The plan for improving the National Pension scheme that the government submitted, reflecting the committee's plan, was amended once it reached the ruling party into an improvement plan that would bring the rate down gradually, by way of 55%, to 50%, and in that form it was submitted to the National Assembly.

But after three years in which the pension reform debate dragged on, the Basic Old-Age Pension Act was added and the bill passed a National Assembly standing committee at the end of November last year; the point is that the amendment that passed after all those twists and turns differs from the committee's original plan. The improvement plan that passed the standing committee lowers the income replacement rate to 50% while raising the contribution rate to 12.9% by 2018. Under that improvement plan, as Professor Kim Yong-ha noted, the fund is expected to run dry in 2065. The fund-depletion date is thus brought forward by about ten years compared with the original government plan.

If the current system is maintained the fund is depleted in 2047, and there seems to be no little criticism along the lines of: what kind of fiscal stabilization plan is it that defers the fund-depletion date by a mere eighteen years, and was it to make a scheme like this that we went through all that agony?

It is also the reality that many argue that, rather than preparing and legislating an incomplete fiscal stabilization plan like this, we should take our time and approach the matter slowly until a complete fiscal stabilization plan can be prepared. I myself likewise agree that the amendment pending before the National Assembly is not a 100% complete fiscal stabilization plan. On the assessment of the fiscal stabilization bill, however, I hold a considerably different view.

In theory it is possible to produce a plan for improving the scheme under which no fiscal instability arises even more than a hundred years from now. The problem is that the stronger the fiscal stabilization plan, the more suffering it entails for contributors. On one side there are those who argue for a strong fiscal stabilization plan, while on the other side the position is that in that case pension amounts become too small and the level of burden is raised too far, so that they cannot agree to such a plan for improving the scheme and will fight against it.

The National Pension scheme, which is operated as a social insurance scheme in which every member of society takes part, cannot be amended by accepting the views of only one side. In such a social and political environment, the best choice open to policymakers and politicians is to encompass the extreme positions and draw out a compromise.

In our present situation, we can neither cut benefits recklessly nor raise the contribution rate without limit in the name of fiscal stabilization. What was devised in these circumstances, as an expedient born of necessity, is the fiscal stabilization plan of the 50% income replacement rate – 12.9% contribution rate combination. Let me say again: as fiscal stabilization in itself this is a plan for improving the scheme that cannot be 100% satisfactory, but in that it contributes substantially to fiscal stabilization compared with the current system, I consider it an improvement to the scheme in the right direction.      

For reference, let me say that I too have argued since 2005 that achieving fiscal stabilization of the National Pension requires a far stronger fiscal stabilization plan than the amendment already submitted. In the autumn of 2005 I put forward a plan for improving the scheme to the same effect at the Korean Association of Applied Economics. Specifically, I published a paper arguing that the income replacement rate should first be lowered to 50% and that then, around 2028, when the National Pension and retirement pension (introduced in December 2005) schemes enter their mature stage, the National Pension's income replacement rate should be adjusted to 40%, a further 10-percentage-point reduction.

The background to my expressing this view is that conditions had changed since the 2003 National Pension Development Committee recommended its plan for improving the scheme. With the passage in December 2004 of the bill converting severance pay into the retirement pension, the retirement pension scheme was introduced from December 2005. In the case of severance pay/the retirement pension, the employer bears a monthly contribution of 8.3%. It stems from the judgment that under the amendment to the National Pension Act submitted in 2003 the combined contribution burden including the National Pension and the retirement pension would in the long run reach 24.2% (National Pension 15.9% + retirement pension 8.3%), which is too high a level of burden. On the income replacement rate side, by contrast, with the National Pension (50%) and the retirement pension (roughly 20%), this too is no small level.

Accordingly, taking note that once both schemes enter their mature stage the gap between the effective income replacement rate and the theoretical income replacement rate will narrow, I came to argue that the National Pension's income replacement rate needs to be cut to 40% around 2030. In that case, if the same fiscal stabilization benchmark as the 2003 National Pension Development Committee's were adopted — that is, if a fiscal stabilization plan maintaining reserves until the mid-2070s were derived — the contribution rate required was calculated at 12.9%.

If one wants a fiscal stabilization plan stronger than the one now submitted to the National Assembly, all that is needed is to enact into law a fiscal stabilization plan reflecting these contents. In fact, in June 2006 the Ministry of Health and Welfare too put to the political sphere an amendment almost identical to the plan for improving the scheme that I have described, but in the end, in the course of party-government consultation, it retreated into the bill that passed the standing committee.

What these experiences mean is that, given the ideal of complete fiscal stabilization on the one hand and, on the other, the reality of the political sphere and of stakeholders such as National Pension contributors who want the suffering that goes with it minimized, there is no choice but to adopt a compromise between the two extremes. Once we have accepted the reality that this is the degree of fiscal stabilization we can accept at present, then, since the direction set for fiscal stabilization is the right one, however inadequate some parts may be, this is the moment to devote every effort to forging a social consensus so that the amendment can pass the National Assembly as soon as possible.   

○ Dr. Kang Sung-won: I think the two of you have probably put it appropriately. Professor Kim said, to begin with, that as a reform plan in itself it is an insufficient one, and I understand that Dr. Yun agrees with that.

Looking at the paper Dr. Yun wrote in 2005, the gist was to go with the 50%, 15% plan while planning once more in 2028. And reforming once more meant, in essence, lowering benefits further.

But as I see it, the aging of our society does not work in favor of further reform. By 2028, those aged 55 and over will account for 46% of voters aged 19 and over, and those aged 65 and over for 27%.

What is more, looking at who will be 65 at that point, they are the generations after the people who went to university in the early 1980s. So they will be a cohort with considerable political organizing power. I had some doubt as to whether these people would hand over their pension benefits so readily. So my sense is that reform will not be all that easy.

So while I accept that further reform is necessary, the question does arise whether that further reform will in fact be politically easy.

Second, then, we ought to give some credit for the thirteen years that have been bought, because pension reform itself was in a very difficult situation.

Support for the government and the ruling party pushing the reform was extremely low, and with a major election — the presidential election — bound up in it, no one was in a position to put forward a bold reform plan at the cost of political sacrifice. So the timing itself was very bad, and I therefore thought this pension reform would come to almost nothing, that it would simply be dragged out and handed on to the next administration.

But on the fact that a compromise of sorts was pulled together, I do think there was an achievement of a kind. Because thirteen years have been bought, the debate on reform will have to be started again as soon as possible, before aging proceeds further and the balance of political forces brings about a situation that makes reform extremely difficult; and the fact that time has been bought in which that debate can be held must, for now, be rated highly. That said, the point is that the present reform is unsettling and insufficient.

So on the mathematical analysis I side with Professor Kim, but in the sense that the political achievement has to be assessed, I also agree with Dr. Yun.

That said, reform looks likely to become steadily more difficult from here on.

One of the fates Western welfare states are undergoing is that pension reform has to be carried out and yet, because older people's political power is so formidable, pension reform in the form of benefit cuts is extremely difficult.

○ Dr. Yun Suk-myung: Let me elaborate on Dr. Kang's view.

As can be seen in the amendment to the Government Employees Pension that has been the subject of recent controversy, a two-track approach is being taken: in order to protect vested interests, a relatively generous pension scheme is maintained for those already in service, while a somewhat harsher scheme is applied to newly appointed civil servants. My point is that the longer pension reform is put off, the more such phenomena are bound to intensify. To minimize political resistance, there would seem to be no way forward other than to improve the system while acknowledging the vested interests attached to pensions.

It is true that the fiscal stabilization bill submitted to the National Assembly, the 50% income replacement rate – 12.9% contribution rate combination, is not 100% satisfactory in fiscal stabilization terms. Even so, the political sphere has not managed to reach agreement even on this. Somewhat inadequate though it is, in the spirit of putting out the nearest fire first, we could pass a fiscal stabilization package of about this scale and then examine further fiscal stabilization measures from a long-term perspective.

One concrete alternative that could be examined is the automatic fiscal stabilization mechanism for pension finances that Japan and Germany recently introduced through pension reform. Amending the law so that pension benefits are automatically indexed to the economic and social conditions that unfold in the years ahead is what may be called an automatic fiscal stabilization mechanism for pension finances. In that case the loss to today's contributors from applying the scheme would be slight, so I do not think political resistance would be great.

There is a problem, though: if the environment surrounding the pension system deteriorates far beyond its present state, through a falling fertility rate and a slowdown in economic growth and the like, then introducing an automatic fiscal stabilization mechanism would stabilize pension finances but would also cut pension benefits sharply. On this point, if the scheme were tied down so that a pension of at least a socially acceptable fixed amount is guaranteed, with the government subsidizing the shortfall out of taxes, I think that would be a way of indirectly sidestepping the political resistance that Dr. Kang

spoke of a moment ago.

○ Dr. Kang Sung-won: To add to that, what you have just described ultimately amounts to lowering the security of the benefit in terms of variation. In the end it means taking a stable benefit and turning it into a risky one, and while that may well be workable in the present situation, where the older generation is below 10% — in any case these are people whose contribution periods are short, so they draw little from the National Pension — I have the feeling that when we reach, say, 2028, given the demographic structure I have just described and the political leanings within the older population, even that will not come easily. The country that successfully introduced that reform is Sweden.

In Sweden the officials have traditionally been highly capable, so that a kind of national process operates to draw out such a consensus; here that is not yet properly established. That is why I sound a note of caution.

○ Professor Kim Yong-ha: I am not saying that the measure now under discussion, lowering the benefit level by 10% and raising the contribution rate, has no fiscal improvement effect  at all.  But when one looks at the National Pension, if the premise held that this country had a pension system suited to the aging society of 30, 50, or 100 years from now, then taking one step forward would be meaningful even if the effect lasted only 15 years, or only 10, and even if the scheme were improved for only a single year. The trouble is that the present National Pension system has in itself a structure unsuited to this country's aging society, so if we say that we have reformed the pension system on the strength of a coefficient adjustment of this order,
lang=EN-US>  that may well be an error of judgment. In any country a public pension scheme is not a financial product. If we speak of a financial product, then basically I receive the money I paid in, which is to say I get back what I paid in with interest added. You watch only whether the money is well managed, and if it is, you collect it when you reach old age. Regarded in that way, as a financial product, this scheme was already designed to pay out more than twice the contributions one has paid in plus interest, so on that view the scheme itself would have to be brought to an unconditional end this very day. Yet even though we have now reformed the pension system, have we taken a benefit-to-contribution ratio of more than 2.0 and brought it into a balance between contributions and benefits? We have not. In the end, even after the change, the structure remains low-contribution, high-benefit relative to what one has paid in; and even from the standpoint of the generation that joins the scheme at the point when the contribution rate has risen to 12.9% and the 50% benefit level applies, the cohort that stands to lose most from the amendment, the benefit-to-contribution ratio is still about 1.5, so the burden on future generations still goes on rising. That is the structure. The first premise, then, has to be a recognition of that structure itself. For example, our National Pension was designed from the outset with a benefit-to-contribution ratio of 2.0 or 3.0 and with intergenerational redistribution built in, and even though we have carried out this pension reform, that intergenerational redistribution is still being allowed to stand; so what, then, is the meaning of a scheme that permits intergenerational redistribution? A recognition of that has to come first, and on that premise a national consensus has to be reached on the policy direction, on how we are to reconcile a desirable form of intergenerational support with each person's own preparation for old age according to their own capacity. Yet although the debate on our National Pension reform is said to have run for the past three years and longer, no such substantive debate has actually taken place. The talk has proceeded solely in terms of what percentage to cut the benefit level by and whether to raise the contribution rate after that. How, then, will the older generation feed itself in 2050, when older people reach 40%, and how will the working generation live...on questions of that kind there has been no adequate discussion. Standing where we are now, and assuming the country develops normally, 2050 can be foreseen; a picture first has to be drawn of the way we will live in that foreseeable 2050, and on top of that picture there has to be a clear vision of what role the National Pension will play and what roles the other schemes will play. The National Pension takes as its principle that all citizens are covered apart from those in the special occupational categories, such as civil servants; the accumulated fund alone has already grown into an enormous fund of 192 trillion won and is set to rise to 1,700 trillion won; and if we take as our premise that this is a scheme with an immense influence on our national economy, then there must be a clear vision of the National Pension's function and role from the overall standpoint of the national economy and of national life
lang=EN-US>. And the point is that the amendment to the National Pension Act as it now stands holds no such vision. Nor was there any such process of consensus: the government says it produced an agreement, but it is a bill rammed through with only one Democratic Party lawmaker included and the main opposition party shut out. To put it another way, the National Assembly Health and Welfare Committee has 20 members, of whom the Uri Party has 10, the Grand National Party eight, the Democratic Party one, and the Democratic Labor Party one; and the question is whether a plan passed by 11 of them, the Uri Party's 10 lawmakers together with the one from the Democratic Party, can be regarded as an agreed plan. My point is that only if the public holds a clear debate on how old age is to be provided for in the future, in 2050, and on who is to bear the cost, and only if a consensus is drawn out of that debate, can the uncertainty we hold about the future be removed. However well the future is forecast, uncertainty can never be removed entirely; but if what can be expected on the assumption that the present system carries on is at least made clear on the information we have now, then even with other uncertainties present people can bear

it — whereas amending the scheme without adequate discussion of the major matters that have to be decided on the information now given is not desirable in a pension scheme as deeply distrusted as the National Pension. At present no national consensus on the function and role of the National Pension has been reached, and our vision for it has not been formed either. So without agreement on the broad framework of the scheme, talk of whether the fiscal improvement effect is 18 years  or 13 years is meaningless. For although it looks as though the uncertainty bearing down on us has been reduced, it is unclear how it was reduced, and so the ordinary public's anxiety has actually increased. Say the benefit level has been lowered. Then the public's anxiety about how we are to live has increased. The only thing here that can be thought to have grown less uncertain is  the National Pension scheme itself. Looking at the scheme alone, all that has happened is that revenues and expenditures have been made a little less unbalanced; it is not that the imbalance has moved to balance, nor that such a balance could be sustained. So pension planning is achieved only when that part is properly discussed. In the West such pension schemes have already been stabilized and settled by national and public consensus. On that settled footing, large numbers of citizens support the scheme. And they live trusting the national pension scheme. That national pension scheme serves as an important institution of the state. Under those conditions reform of the scheme is certainly difficult, but even when reform is carried out, the sustainability of the scheme itself is guaranteed by the public's trust.

In our country's case, though, 19 years have already passed since the National Pension was introduced, and yet the public's trust in the National Pension is at rock bottom. When people are asked about their trust in the National Pension, 70% answer negatively. This is a scheme that rests on no foundation of trust and that is not, say, a system balanced between contributions and benefits in the manner of a financial product … and if it is to be a matter of support between generations, the premise of that is the public's trust. Trust has to be the premise before it can be achieved, and we have neither that trust nor any balance in the financial-system sense. So with a scheme of that kind we are not on the right course for a pension reform that will underpin the uncertain future of the 21st century. Seen from that angle, what matters is not reforming at top speed, as fast as possible, a year before the presidential election, but first building a proper framework with firmer content and on the basis of adequate discussion. If the content of the reform makes it plain to the public, whether the benefit level is low or the contribution rate high, that this is definitely how things will look if we go this far, that this is what I will have to do, that this is what the state will have to do...only then is it reform, only then can it be trusted, and only then is uncertainty removed. That is the sense in which I am raising the problem.

○ Dr. Yun Suk-myung: With reforming the pension system through national consensus I agree 100%. But an important point that has to be raised in this connection is that, the history of pension provision in this country being short, the general public does not seem to have a correct grasp either of the issues at stake in the pension system or of

the merits that a pension system has.

Abroad, understanding of a state-run national pension scheme is generally broad, built up over more than 100 years of running the scheme. People grew up from childhood watching their fathers and grandfathers make a living in old age through the pension system. Through that experience they know that a pension scheme run by the state is a good scheme. In such a situation, when a reform is attempted that pays less and charges more than before, they resist government policy fiercely, but they do not repudiate the pension system itself
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In Korea, where distrust of government policy is exceptionally strong, the general public can hardly be expected to look kindly on a pension policy run by the government. "The pension system — isn't this just another scheme they've dreamed up under some pretext to squeeze taxes out of us?" That seems to be the common view among our citizens. On top of that, the attitude is: my old age is my own business, so why is the government stepping in to tell people where to put the persimmons and where to put the jujubes?

In this situation distrust is rife: people have not drawn a single won of pension, and now the pension system is to be amended again; the scheme has not even been in place for 20 years and is being torn up and reworked over and over, so that they may end up unable to collect a single won when they retire.

The government knows this situation only too well, but it is not in a position to sit on its hands either. That is because Korea is aging faster than any other OECD country, and unless something is done quickly now it will pass on far too great a burden to future generations. In the 1960s life expectancy was 55; now it has risen to nearly 80. Unlike private insurance, the National Pension, once it begins to pay, pays until the point of death. In barely half a century the period over which a pension is drawn has lengthened by more than 20 years.

When the government steps forward and says a fiscal stabilization package has to be drawn up in order to put out the nearest fire first, this seems to reach the general public through the media in a distorted form. Because it is said that fiscal stabilization measures have to be taken, the message is carried in distorted form through the media and through stakeholders generally — "word is the fund is going to blow a hole" — and that is aggravating the distrust still further. In such circumstances, is it not asking too much in itself to expect a complete social consensus?

On the political consensus that Professor Kim raised, it is true that the bill that cleared the National Assembly standing committee passed with the assent of the Uri Party lawmakers and one Democratic Party lawmaker. But before condemning that conduct, we need to look back at how our political sphere has conducted itself on the pension question.

Since the amendment to the National Pension Act was submitted to the National Assembly in October 2003, the 16th National Assembly never once managed a proper debate on it, and in the 17th as well three years went by without the standing committee properly debating it either. In three years, the occasions on which members of the National Assembly have sat down together and seriously discussed the pension act number fewer than ten. And then they always say let us discuss it seriously; having failed to discuss it in the National Assembly over all that time, I do not know what it is they propose to discuss.

The reason there is no proper debate in the National Assembly seems to be that, because our plan and the other side's plan differ, it is hard to agree on a fiscal stabilization package. But whichever plan is adopted, a fiscal stabilization package has to be drawn up, does it not? I often wonder whether the intention is not rather to dodge public criticism by producing a sweeter plan, given that a fiscal stabilization package is unpopular with the public.

In this context I cannot shake the feeling that in Korea the pension question has already been politicized. Because pension reform has been politicized along partisan lines, whatever plan emerges there seems to be a strong political tendency to tie it to votes in a presidential or general election. Given this state of affairs, pension experts and the media are suggesting that it would be better to conduct the pension reform debate from a depoliticized standpoint, at a distance from the political sphere. The idea is that pension reform becomes possible only when the substance of debates arrived at through a thorough process of depoliticization presses on the political sphere and works as social pressure that leaves it no choice but to reform
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If matters are left to the political sphere as they now stand, there is likely to be little progress, since it will be conscious of votes or fixated on partisan advantage. Ahead of any effort to draw out a complete social consensus, would not the right approach be to raise social pressure so that the political sphere discusses the pension question more actively
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○ Moderator: In putting forward this amendment bill, the government has included the Basic Old-Age Pension. The provision is that from 2008 a pension equivalent to 5% of average income will be paid to older people in the bottom 60% by income. The ruling party says it has offered this as a compromise in response to the Grand National Party's demand for a Basic Pension.

There is a great deal of criticism, however, ranging from the very question of how to characterize the Basic Old-Age Pension — whether it is a pension at all, or rather public assistance — through to whether a pension of 80,000–90,000 won a month can close the coverage gaps.

○ Professor Kim Yong-ha: To begin with, judging by the name alone, the Basic Old-Age Pension does seem to bear the traces of considerable effort to give the impression that it emerged as a compromise on the Basic Pension the Grand National Party is advocating. Even so, this Basic Old-Age Pension proposal is one that will throw the old-age income security system into still greater confusion in the years ahead. First, the nature of the Basic Old-Age Pension scheme is unclear. It was legislated, for example, as a standalone act, under the name of the Basic Old-Age Pension bill. It is not an amendment to the National Pension Act. Because it exists as a scheme distinct from the National Pension, it is not clear what relationship this scheme has in fact been set up to have with the National Pension
lang=EN-US>. Basically, because it pays a pension even to those who have paid no contributions, it has the character of public assistance; but seen in light of the fact that it is paid to 60% of the older population, it is far too comprehensive to be called public assistance. It could therefore be characterized as a universal social allowance paid to older people, but since it presupposes income identification and is to be paid only after income and assets have been assessed, its character as an allowance is not clear either. At the same time, since it exists side by side with the National Pension, it is not a public pension either. Even if its nature is ambiguous, one could grant it meaning if it played a definite role within the old-age income security system or the social security system; but that function too is uncertain, and

that is the problem.

   Second, I cannot but point out the repercussions this scheme will bring once it is implemented. Looking at our country's public pension system as it stands, in the case of the Government Employees Pension, the Military Pension and the Private School Teachers Pension, for example, the average pension benefit comes to around 1.7 million won. The old-age pension benefit under the National Pension averages only around 200,000 won. And the basic living security benefit under public assistance, on a single-person basis, comes to around 450,000 won. The Senior Citizens' Allowance, which is designated a transitional pension scheme, is paid at 30,000–55,000 won. The Basic Old-Age Pension amount, however, is set at 89,000 won. To begin with, 89,000 won collides in certain respects with the National Pension benefit. The benefit for those drawing the minimum pension under the National Pension is in the high 80,000-won range. So in the end, when someone who has contributed for five years and someone who has paid nothing at all both receive 89,000 won, the question is how equity with the person who paid the contributions is to be explained. And this scheme presupposes income identification. Yet 80% of older people in effect have no income. And since 60% have to be picked out from among them and paid a pension, some 20% end up receiving no pension at all. So most people receive a pension — but are the 20% who do not high earners? In fact they are not. The reason is that there are people on the Government Employees Pension, the Military Pension or the Private School Teachers Pension, and people with high incomes, and it is the 20% awkwardly wedged in between who go without. And will that 20% not feel aggrieved? When an older person says that the older person beside him draws a pension, draws a pension without ever once having paid a contribution, and asks why he is given none, how is the state going to answer that? Income identification is a problem too. Payment can be withheld, for example, on the ground that a person has assets, but what counts as assets is in fact ambiguous. When someone owns nothing but the single house he lives in, and that is treated as an asset, and he has no other income, and the pension is then withheld — how is all the resentment of those older people to be borne? And does the person who receives the National Pension get back only the money he paid in? He does not. Take, for example, someone drawing a pension of 200,000 won: around 50,000 won of it is his own money coming back, and 150,000 won is shifted onto future generations. Then is the 1.7 million won drawn under the Government Employees Pension an amount that matches what was paid in? In fact, if you work it out, 500,000 won of that is received on the strength of contributions paid, but the remaining 1.2 million won or so is received by shifting the cost onto the public and onto future generations. Seen in that light, the introduction of this scheme could in fact expose the latent equity problems of the country's income security system and give rise to a serious social problem. My basic view is that a social security system, even where it spends a single won, must contribute to national integration; a social security system is needed precisely because it helps bring the nation together, and that is exactly why we need a social security system under a market economy. What is needed to stitch back together the conflicts that arise under a market economy is the social security system, yet our country's social security system in fact does more to set off conflict and division; and since the Basic Old-Age Pension scheme can act like a detonator, capable of explosively amplifying conflict among older people, I think the problem lies less in whether the budget needed to introduce the scheme can be raised than in

the fact that it does not contribute to national integration.

  Third, there are technical problems as well. In paying out the Basic Old-Age Pension benefit, people who receive National Basic Living Security System (NBLSS) benefits are of course paid the 89,000 won Basic Old-Age Pension on top of it. In fact, if that benefit for a recipient of public assistance under the NBLSS is 450,000 won,  the 450,000 won was arrived at by calculating the cost of living. Adding another 89,000 won on top of that amounts to an overlapping payment, and there is the problem that it may in fact use the budget excessively. And this pension scheme has been built so that overlapping payment with the National Pension is possible as well. So in the end, even though the National Pension benefit level has been lowered to 50%, permitting overlapping payment of the Basic Old-Age Pension can in practice create equity problems. So, on the grounds that the nature of the scheme is opaque, that it does not contribute to social integration, and that there is a problem of overlap that is technically wrong as well, I think it is a flawed scheme.

○ Dr. Yun Suk-myung: To assess whether the Basic Old-Age Pension is a properly designed scheme, I think we first have to step outside the pension system and come back. To put it simply, we need to break out of the shell from the inside.

The reason is that a debate which began as a pension question does not stop at the pension question but is discussed in connection with our country's social problems as a whole. Watching the pension debate these days, there seem to be a great many demands that this one pension scheme solve every troublesome social problem there is. Those are precisely the demands: that it begin with the problem of income redistribution, then share out the fruits of economic growth, and go further still and become a scheme for social integration. As the proverb has it, too many boatmen send the boat up a mountain; if demands of every kind pile up on  a single pension scheme, the scheme cannot help drifting off in a strange direction.

Compared with the tax-financed Basic Pension scheme that some advocate, under which the government would collect taxes and pay every older person in the country 200,000–300,000 won a month, the Basic Old-Age Pension the government and the ruling party are advocating is bound to have many problems. Simply comparing the Basic Pension with the Basic Old-Age Pension, it is a scheme riddled with holes. Why, then, is the government unwilling to introduce a Basic Pension scheme that is clean as a scheme in itself? Starting from that question seems to me the right point of departure.

○ Moderator: Since the discussion of the Grand National Party's Basic Pension is classified as a separate topic, for now I would like you to offer a rebuttal to the points Professor Kim raised about the Basic Old-Age Pension.

○ Dr. Yun Suk-myung: To assess the Basic Old-Age Pension briefly, it is in large part a scheme created unavoidably under political pressure. That is to say, it is a proposal drawn up as a political compromise rather than one built on a clear logical foundation.

I said earlier that we need to break out of the shell, and the reason is that what was originally at issue and what is at issue now have changed completely.

Back when the National Pension Development Committee was discussing fiscal stabilization measures, what the media and others always splashed across their front pages was that ‘the National Pension is going to blow a hole.“ Once it had been introduced as a scheme of paying little and receiving a lot, it went without saying that the fund would at some point be depleted. Even though it is a scheme in which the fund would not blow a hole for more than forty years, leaving it as it was would place too heavy a burden on later generations, and a great many people felt more anxiety about the pension scheme than was warranted, so the fiscal stabilization measures were drawn up.

But once the fiscal stabilization measures had been put together with great difficulty and made public, we took a stray bullet out of nowhere, from a completely unexpected direction. What is urgently needed in our National Pension right now, the argument ran, is not the fiscal stabilization of pension finances but closing the coverage gaps. That is, what is urgent is to devise measures for today's older cohorts and for those who are highly likely to go without a pension because they cannot pay contributions.

What has become of all the people who made such a fuss about the National Pension blowing a hole at any moment, now that the National Pension is being shaken over the coverage-gap problem? Because one side kept insisting that it could never agree to the fiscal stabilization measures unless measures to close the coverage gaps were put forward, there was no choice but to produce a compromise.

The government initially proposed collecting taxes and providing support, in the form of public assistance, to the 30% of all older people on low incomes. Criticism was raised that this covered far too few. The government, troubled by this, then proposed instead that it would collect taxes and pay a pension to about 45% of all older people, centered on those with low incomes. Its position was that, given the government's fiscal circumstances, anything beyond this would be difficult. But even this drew criticism from the ruling party and from stakeholders.

The ruling party, feeling the strain of a National Pension fiscal stabilization plan of paying more and receiving less, pressed the government and had the covered population greatly expanded. As a result of party-government consultation, it was agreed to pay 60% of all older people 89,000 won a month (5% of the National Pension's A value, the economy-wide average of insured earnings, as of 2008), and this came to be called the Basic Old-Age Pension scheme. Because the scheme was made through such a process, it is also true that it has many holes.

A variety of criticisms are being raised, ranging from whether a scheme paying 60% of older people can be called a selective public assistance scheme (the point being that it covers far too many) through to whether 89,000 won is an adequate level for older people to live securely.

It is true that all of these criticisms have merit. But it has to be clear what they are being compared against.

As for the criticism that a scheme covering as many as 60% can hardly be called a selectively applied public assistance scheme, it grew this far because people kept demanding that the covered population be enlarged. And as for the criticism that, if you are going to pay at all, you should pay enough to live on rather than a mere 89,000 won, that is because equity with National Pension beneficiaries was taken into account. Under the special provision, the pension of a National Pension contributor who pays contributions for five years and then draws a pension is around 90,000 won. The logic applied was that the pension of someone who pays contributions and draws a pension ought to be larger than the amount received by someone who has not paid a single won in contributions.

Why, then, does the government insist on a scheme that draws nothing but criticism? There are two reasons. One is that over the long run it costs less than a tax-financed Basic Pension, and the other is that it has the advantage of allowing the covered population to be reduced as the National Pension scheme develops.

The reason the coverage-gap problem is serious in our country is that today's older cohorts had no opportunity to join the National Pension. At present about 13.5% of people aged 65 and over receive the National Pension. This share, however, is expected to rise to 55–60% of all older people by around 2030. Right now the coverage-gap problem is serious, but the point is that it can be substantially eased once the pension scheme enters its mature stage.

So the coverage-gap problem too needs to be approached in that context. The hidden design is to pay the Basic Old-Age Pension to 60% of older people, inadequate though it is, in the spirit of putting out the nearest fire first, and then to reduce the proportion of Basic Old-Age Pension beneficiaries in step with the rise in National Pension beneficiaries. As National Pension beneficiaries increase, the proportion of Basic Old-Age Pension beneficiaries is projected to fall sharply, to roughly 27%, by around 2030.

And as the proportion of Basic Old-Age Pension beneficiaries, paid for out of taxes, declines, the burden on later generations can also be substantially eased. It is being introduced as a public assistance scheme precisely so that the number of beneficiaries can be adjusted flexibly. A tax-financed Basic Pension is cleaner in design than the Basic Old-Age Pension, but because the pension is paid as a matter of right, it has the problem that once introduced the eligible population is hard to reduce.  

For these reasons, the Basic Old-Age Pension scheme, which at first glance looks riddled with problems, is judged to be a scheme capable of coping effectively with a super-aged society.

○ Dr. Kang Sung-won: What Professor Kim pointed out is the problem of income identification. In a situation where our tax collection administration is in fact troubled enough that it still cannot properly identify the income of the self-employed, I too agree with the view that inserting an income test here would give rise to considerable administrative problems
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That said, a Basic Pension scheme that goes through an income test is not such a hard thing to find: of the 30 OECD countries, about 18 operate targeted programs. In other words, they apply a test to some degree. And about 11 countries operate theirs with no test at all, paying everyone. There are also cases where the two overlap.

So, provided the administrative conditions are in place and the fairness of the income test is guaranteed, I would like to say first of all that a pension scheme for older people and a Basic Old-Age Pension scheme are not such very hard things to find.  

Second, you mentioned the problem of overlap with the NBLSS; the NBLSS is, to begin with, a scheme that covers the entire  population regardless of age.

It is therefore my understanding that it is operated on the premise that, as soon as conditions improve even slightly, people can leave the protection of the NBLSS and participate in the labor market.

Of course there would be exceptions for people with disabilities and for those who find it extremely difficult to participate in the labor market — those, that is, who are short of human capital — and so, in the case of older people nowadays, since their participation in the labor market is limited, one could say that paying an additional benefit is not so very contradictory in logical terms
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Lastly, you said a great deal about the various pension schemes and about equity in benefits. To begin with, the coverage gaps in the National Pension, and the problem that the National Pension is of no help to today's older people — these two problems have in fact been the common ground for saying that the National Pension is too meager.

But the National Pension is in fact a scheme for people who are able to pay contributions over a long period.

That is how the National Pension currently stands. What becomes of the National Pension in future can be changed through social debate, but the design of the current National Pension scheme itself, for now, takes that form
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For that reason it inevitably has a structural character under which people who cannot participate continuously in the labor market are left out of the National Pension. And that is why the Basic Old-Age Pension scheme has been put forward as an old-age income security scheme for some lower tier that does not pass through a contribution period.

If it is true to that purpose, then the real intent of a Basic Pension scheme with an income test is, in the end, to allocate resources first to those in greater need of protection, so far as the public finances allow.

That said, given our country's administrative capacity, by what criteria and how is that 60% in particular to be established? Once people reach old age, income as a flow all but disappears. In other words, the identification of assets has to be the criterion. Health insurance contributions are currently levied on individually insured contributors on the basis of assets, and we all know very well how fierce the backlash against that is, do we not?

So when it is simply said that only 60% will be paid, with no administrative alternative for this part, how is anyone to trust whether the income of that 60% can be identified or not?

And then what is to be done about the older people who fall into the stratum described as the coverage gap of the NBLSS? Problems like these are homework that those who design the scheme must do, and if that homework is not done, they can be said to be a source of serious trouble on the equity front.

○ Moderator: This time let us focus the discussion on the 5%-of-average-income figure itself. Many people doubt whether this is an amount from which any effect in closing the coverage gaps can be expected. Yet according to the government's projection, paying the 5% is put at 19.1164 trillion won in 2030.

Of course, since this takes no account of inflation in the meantime, its weight is not the same as 19 trillion won today; but it is clearly a large budget in any case. I would put the question of whether it is right to spend a budget like this in order to pay out money that does not even work to close the coverage gaps.

○ Dr. Yun Suk-myung: There is no shortage of criticism asking whether, with the Basic Old-Age Pension benefit set at 5% of the average income of National Pension contributors (the A value), this level will be adequate for closing the coverage gaps in old-age income security, and whether a scheme that pays an inadequate benefit while the amount borne by the state is enormous can really be a meaningful scheme.

For older people living in urban areas and the like, there is no question that it is a hopelessly inadequate amount for a stable life. As I have already mentioned, the background to why 5% of the A value (89,000 won as of 2008) was the only figure that could be set is that equity was taken into account between the National Pension — that is, the National Pension scheme, a social insurance scheme into which contributions have been paid — and a non-contributory scheme. They will have contributed to the state in other ways when they were young, such as by paying taxes, but in any case, if the pension amount received without paying contributions (the Basic Old-Age Pension) were larger than the pension amount received after paying contributions (the National Pension), that would become a problem in terms of equity. Because of this problem, the benefit level cannot, for the time being, be raised any further.

If the National Pension had a longer history since its introduction and its average payment, reflecting longer effective contribution periods, stood at 150,000–200,000 won, it would be possible to adjust the Basic Old-Age Pension amount upward. The resulting funding burden on the government would of course be considerable.

Korea, which began industrializing from the late 1960s onward, is a country that has had to resolve many problems at once — income security among them — within an extraordinarily short time. Those in the position of criticizing can criticize this and that, but those in the position of resolving them one by one face real difficulty. In circumstances like these, there can be a great many parts that can only be dealt with as stopgaps.

Paying 5% of the A value is clearly an insufficient amount for closing the coverage gaps. Small as it is, it will be no small benefit to older people in farming and fishing areas. In particular, I think it will have an effect of its own when other in-kind benefits are delivered effectively alongside the cash benefit.

But as for the debate over whether 5% of the A value is adequate, the more important question will be how this scheme is to be operated going forward, rather than the situation at this very moment. To put it more fully, the question is whether, granting the present position, this level will be adequate in the long run.

My judgment is that the desirable direction in the long run is to narrow the range of Basic Old-Age Pension beneficiaries while adjusting the benefit level upward. What I mean is that it would be desirable to cut the coverage sharply, from 60% of all older people to around 30% (in step with the growth in the number of National Pension beneficiaries), and to raise the benefit so that at least a basic standard of living becomes possible. In the short term, however, I would also stress that, in terms of equity with the National Pension, paying more than this is realistically difficult.

○ Professor Kim Yong-ha: The grounds for the standard of 5% of the average income of National Pension contributors seem unclear. All the government offers as grounds for the 5% is that the maximum it can currently bear without raising taxes is to give 5% to 60% of older people. That notion of a maximum is arbitrary. Of course, from the recipient's point of view it is certainly better to receive 89,000 won than nothing, but I think the effect 89,000 won has on an older person amounts to about solving the pocket-money problem. Yet when it was proposed that a Basic Pension be paid, one of the important points lay not simply in creating an income security scheme for older people, but in bearing the support of older people socially, and so relieving individual working households of the burden of supporting their parents,

thereby lifting the conflict and discord among family members over parental support out of the household, and so saving the home while easing the burden on the working generation and, taken as a whole, helping to prevent the fall in income, or the poverty, of the middle-class working generation. In fact, if 89,000 won per person per month comes to a budget of about 3 trillion won overall, then 3 trillion won is not a small sum.  The point is that a 3-trillion-won burden on the public will feel larger to those who bear it than the effect it has on people's lives. For example, if bearing a little more money were to ease household burdens, then there would be a chance that bearing rather more could still serve the overall justification; but a half-hearted benefit payment is felt only as an increase in the budget burden and, because it plays no dramatic role in securing household income, in the end it can do no more than aggravate social discord between those who bear the cost and those who receive it. Whatever the scheme, what it means has to be clear. The role the ruling party's Basic Old-Age Pension is to play as a social institution ought to be clear; that is, what role will this scheme play in older people's households? What positive function will it serve in households that support  older people? That is not clear. So going down this road merely spends more money; it is of little help to the development of the social security system and runs counter to national integration — that is what I would say once again.

○ Dr. Kang Sung-won: So what Professor Kim has just said is that 89,000 won does nothing to lighten the burden of support, and therefore that, although aging is in effect being borne by the family, this does not lighten families' burden...that seems to be his point; and what Dr. Yun said was that in the short term, with coverage broadened and the benefit lowered as it is now, the fiscal burden should be minimized, while in the long run it would be better to narrow the coverage, raise the benefit
lang=EN-US>, and move toward a plan that expands the National Pension.

On Professor Kim's point: according to the 2006 Statistics on the Elderly, the proportion of those aged 65 and over living in households made up only of older people, or in single-person older households, has already passed 51%.

We can therefore take it that we are already moving toward a society in which the role of the family, as a unit, in supporting older people grows steadily weaker. So although 89,000 won certainly cannot take full responsibility for an older household's living costs, and cannot lighten the obligation of support, for older people in households made up only of older people it can at least play the role of giving them a little breathing room.  

Second, 89,000 won is not much money, but the national burden ratio (taxes plus social insurance contributions as a share of GDP) has risen at a considerable pace from the end of the 1980s until now, so there is resistance to it.

So, since securing the revenue is not easy, I think the government found itself in a position where it had no choice but to resort to an expedient born of necessity like this.

Let me stress once more here that the National Pension, as a scheme, falls considerably short for today's older people. It is therefore true that a scheme taking some degree of responsibility for the welfare of today's older people is needed. Even so, because no agreement has yet been reached that such a scheme is needed, I think a misshapen scheme of this kind was bound to be what emerged.

This scheme, then, is very far from sufficient in itself. It falls short for income security, and then, administratively, it falls short in sorting out who is to be given it and who is not,

and even if this bill passes, disputes will not cease during implementation, so I think a great deal more discussion is needed going forward.

So in the long run I think we should settle the National Pension as a scheme that prepares old-age income for people whose income base is lower-middle but who have secured a degree of job security, and move to a two-track system in which this Basic Pension scheme plays the role for those who have not.

○ Moderator: Reform of the Government Employees Pension has been a hot issue of late. Ordinary members of the public are unhappy, asking why the Government Employees Pension, with all its generous benefits, is left alone while only the National Pension is called into question. The President, however, said in his New Year's address that the National Pension has to be reformed before the Government Employees Pension can be. Which of the two is right?

○ Professor Kim Yong-ha: In fact, my basic view is that, considering that the Government Employees Pension has a higher benefit level than the National Pension, that its finances are in worse shape than the National Pension's, and that those covered by it are people from our society's leadership class, there is, from whatever angle one looks at it, no reason to reform the National Pension before the Government Employees Pension. I cannot understand the grounds for saying the National Pension must be reformed first at all. The argument, offered as a logic of circumstance, that the public must sacrifice first before those with vested interests will reluctantly follow is not something a national leader should say, and for a national leader to say such a thing is genuinely shameful. Logically there is no problem whatever with saying that the Government Employees Pension, rather than the National Pension, should be reformed, and yet how can the public be persuaded by a logic that says it must be done the other way around
lang=EN-US>? I do not believe they can be persuaded.

  Recently the Government Employees Pension System Development Committee put forward an amendment to the Government Employees Pension scheme, and since that plan was drawn up with policy officials of the Ministry of Government Administration and Home Affairs taking an active part in the discussions,

it has the character of a draft of the government's own plan. The point is that the Development Committee's recommendations this time are, in substance, weaker than the amendment to the National Pension Act. The National Pension amendment raises contributions and also cuts the benefit level. The Government Employees Pension amendment does raise contributions, but it is very weak when it comes to cutting the benefit level. The cut in the benefit rate for existing civil servants in particular is very weak. The current amendment to the Government Employees Pension scheme  is characterized by a strong reform effect for new civil servants and a weak reform effect for existing civil servants, which does not make logical sense. One of the most important points in pension reform is that, once the pension has been reformed at a given point, it is desirable that for the period after the reform the benefit formula be identical for the additional contribution period of existing civil servants and for the contribution period of new civil servants
lang=EN-US>. At present, even for the period after the reform, a high benefit rate is applied to existing civil servants and a low benefit rate to new civil servants. The government says, "The benefit-to-contribution ratio is the same. For existing civil servants and new civil servants alike, the proportion received relative to what is paid is the same." Under the amendment, existing civil servants are medium-contribution, high-benefit, and new civil servants are low-contribution, medium-benefit. In the end the imbalance is the same. And they claim the benefit-to-contribution ratio is similar, at about 1.7 to 2.0, but in fact, even at the same ratio, the degree of burden on the public differs between a design set at a high benefit level and one set at a low level. For example, if it is designed at a high level, our citizens have to pay that much more in taxes. Since the government has to pay about half of those contributions, all of it is a burden on the public. So if it is designed as high-contribution and contributions are raised further, the burden on the public is raised by that much. Things do not simply become equal merely because the benefit-to-contribution ratio is the same. On top of that, for future generations too this is not a fiscally balanced plan; the scheme is said to have been reformed, yet the benefit-to-contribution ratio is still 1.7–2.0, so in the end it is a design under which people receive about twice what they have paid in. That means whatever is received in excess is passed on to future generations, and if it is increased by making it medium-contribution, high-benefit, that much more is passed on to future generations. Seen from that angle, I would say this reform plan basically got the very first step wrong. In pension reform in particular I think two points are important; one is that the most important feature of this pension reform is that it has changed to an advanced structure. At present the Government Employees Pension scheme has the character of the National Pension and the character of severance pay attached together. That this has now been clearly distinguished and divided into a National-Pension-like part and a severance-pay-like part carries great significance. But for this to have the meaning of pension reform, the part separated out as severance pay has to be designed as a retirement pension. Designing it as a retirement pension is not a matter simply of paying out a lump sum as a pension; what makes it meaningful as a retirement pension is that contributions are accumulated and the amount needed when the pension is paid is not borne by the government but is steadily pre-funded over the period of service. Yet when one looks closely at the government's plan this time, it does establish a severance pay scheme, but it is not a retirement pension scheme; it is a pay-on-exit scheme. So in the end the scheme is operated with no contributions accumulated in advance at all. And even so, the government is at present urging public corporations and private firms to adopt retirement pension schemes. So while it tells them, "Introduce a retirement pension. Put it on a pre-funded basis," when it came to civil servants themselves it created a severance pay scheme but did not design a retirement pension scheme. In the end this is the present government passing the burden on to future governments, and today's citizens passing the burden on to future citizens. This runs counter to the most basic purpose of pension reform — that future burdens should be reduced through pre-funding wherever possible
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In that respect I think this part has to be adjusted.

  Next, third: pension beneficiaries are people who suffer no harm however the scheme changes, but in fact they too should make some sacrifice. What that sacrifice is: because prices and wages rise year after year from the initial pension amount set when the pension is first calculated, there is an indexation mechanism that adjusts for this. Whether it uses the inflation rate or the wage growth rate changes the degree to which real value is guaranteed, and our ordinary National Pension was originally set to be indexed to the inflation rate. The Government Employees Pension, by contrast, was set to be indexed to the wage growth rate until 2000. In the pension reform of 2000 it was made to be indexed to the inflation rate, putting it on the same footing as the public; but it was reformed again in 2003, and a provision was introduced reflecting part of the wage growth rate in addition to the inflation rate. A reform in reverse had taken place. The experts' thinking was that in this 2007 pension reform plan it would be necessary to change it back, so far as possible, to the same inflation rate as for the general public; but looking at the content of this reform plan, the part reflecting the wage growth rate has instead been

institutionalized, with the allocation ratio attributable to wage growth set at 30%. It does decline gradually and disappears after 30 years, of course, but that is far too slow. Here too, I suspect that in trying so hard to protect vested interests we are only forcing more sacrifice on our citizens. The justification is basically this: that in order to protect the vested interests of today's pension beneficiaries, doing so is unavoidable, though. The average pension benefit under the Government Employees Pension is 1.7 million won, and the average benefit under the National Pension is 200,000 won. It amounts to arguing that someone receiving a 1.7-million-won pension should have it adjusted by reflecting part of the wage growth rate on top of the inflation rate, while someone receiving 200,000 won should be adjusted by the inflation rate alone.  That is not persuasive. So at the very least, in this pension reform plan, I think they should concede at least this much — that the pension indexation mechanism be based on the inflation rate
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○ Dr. Yun Suk-myung: Recently the Minister of Health and Welfare caused no small stir by saying that, if reform of the Government Employees Pension remained stalled by the time he stepped down from the post, he would introduce a bill to amend the Government Employees Pension Act in his capacity as a member of the National Assembly.

When the Minister of Health and Welfare said he would like to see the Government Employees Pension reformed quickly, that seems, as you are well aware, to have been a remark speaking for the sentiment of ordinary citizens, who ask why the Government Employees Pension, whose fiscal instability is far more serious, is being left alone while the National Pension, which still has a full 40 years to go until its fund-depletion date, is the first to be touched.

The President's remark that he would rather see the National Pension reformed first, on the other hand, seems to have meant that once the National Pension — a scheme introduced later than the Government Employees Pension — is reformed, it will be hard for the stakeholders in the Government Employees Pension to press their claims of vested interests. To put it more fully, the point is that it will work as social pressure: the National Pension, whose fiscal instability is relatively milder, has already been amended twice, so should the Government Employees Pension not also accept commensurate fiscal stabilization measures?  

As I see it, whether the National Pension should be reformed first or the Government Employees Pension should be reformed first is  a debate that only wastes our energies. What I am saying is that it would be preferable to assess coolly the circumstances each scheme faces and to amend each one as quickly as possible in the direction its own conditions call for.

Let me now give my own position on the Government Employees Pension reform plan.

I serve as an expert member of the Government Employees Pension Development Committee, and my understanding is that the plan for improving the scheme has not yet been 100% settled. It appears that a final plan will be drawn up on the basis of the Development Committee's recommendations, after a variety of consultation processes.

Since the Development Committee's recommendations were made public, reactions have diverged sharply. The media and civic organizations have raised the criticism that this is hardly a reform plan at all, that it is a reform plan in name only. The stakeholders in the Government Employees Pension, on the other hand, including the government employees' unions, take the position that it is not reform but a change for the worse.

It may not be appropriate for me, having taken part as an expert member of the Development Committee, to pass judgment on the Development Committee's recommendations, but by my own reckoning the Development Committee's recommendations appear to be drawing criticism on two counts.

The first is the criticism that the benefit cut for newly appointed entrants is far too large compared with the cut for those already in service, so that the burden is shifted onto the new entrants alone. The second criticism being raised is that the reform plan is so gradual that the real gains from reform may not amount to much.  

Under the Development Committee's recommendations, those already in service are to remain in the current Government Employees Pension scheme but to have their benefits cut gradually (the accrual rate lowered from 2.3% to 1.7%), while contributions are raised so that the benefit-to-contribution ratio is brought to 1.7. New civil servants, by contrast, are to remain within the Government Employees Pension scheme but to be placed under a separate arrangement carrying the same income replacement rate and the same contributions as the National Pension. The annual accrual rate for new civil servants is set at 1.25%, the same as in the National Pension amendment bill, a considerable gap from the 1.7% for those already in service.

The fall in benefits is expected to be steeper for new civil servants than for serving ones, but compared with the National Pension it is still the more advantageous scheme. The reason is that, unlike the National Pension, which has an income redistribution function, the Government Employees Pension will be maintained as an earnings-related pension. Given that the average earnings used as the basis for calculating pensions for National Pension contributors are around 1.6 million won a month, a Government Employees Pension operated as an earnings-related pension can be expected to produce a higher benefit amount even where the same income replacement rate is applied. That is because the average earnings of civil servants are higher than those under the National Pension.

The researchers who worked on the KDI report, which carried out the commissioned research on improving the Government Employees Pension scheme, argue that new civil servants too should be placed under the same scheme as National Pension contributors; my own judgment, however, is that for the time being it is realistic to operate it separately from the National Pension. That is because, if they were folded into the National Pension right now, the differences in benefit amounts within the body of civil servants would be far too large. In that case there is a strong likelihood that pensions would create considerable discord within one and the same workplace. Over the medium to long term, however, civil servants too will have to be folded into the National Pension scheme.  

Meanwhile, my own view is that the plan for improving the scheme as it applies to serving civil servants falls somewhat short in terms of fiscal stabilization. In particular, I think the 1.7% annual accrual rate on the income replacement rate applied to those already in service would have to be lowered to at least 1.5% or below before the consent of new civil servants and of the public could be won. The pension indexation method applied to beneficiaries, moreover, is being converted to price indexation over an excessively long period (30 years), and here too the transition period will have to be shortened substantially.

The government, which is preparing the plan for improving the pension scheme, is exposed to two conflicting positions: as a servant of the public it must produce a plan for improving the scheme that the public can accept, and as the employer of civil servants it must take responsibility for their life in old age.

Having to reconcile two such conflicting positions, it seems realistically difficult to choose an extreme policy alternative weighted to one side or the other. So if the direction of the scheme's reform for the sake of fiscal stabilization has been set properly, the right approach would seem to be to improve the scheme by way of making good where it falls short.

○ Dr. Kang Sung-won: To put it briefly — which comes first? Speaking of what ought to be, Professor Kim is right. Civil servants today enjoy relatively secure employment even amid an unstable job market, and their salaries have been adjusted upward considerably, so there is no longer any rationale for using the pension to make up for the low pay they received on taking the job.

One can therefore say that it would be right for civil servants to reform the Government Employees Pension first, but in practice there are political limits.

Civil servants are a homogeneous interest group.

Where a homogeneous interest group exists and sits down to negotiate with the government, it very often carries considerably more bargaining power than non-homogeneous groups, groups that merely act as auxiliaries to an interest group. Of the 23 Western European OECD countries, for example, 13 — about 60% — operate their government employees' pensions separately. In many cases the terms are more favorable as well. And unlike the National Pension, these schemes have such a long history behind them that there is a further rationale of their own: when I  joined I entered under that contract, and I carried out everything the contract required of me, so why is the promise not being kept
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And so it becomes harder and harder, and reform keeps getting pushed back.

Looked at in terms of what ought to be, it would be fitting for it to come first, but in practice there are difficulties.

Second, on the reform plan, I think a great deal of ground was inevitably given away. To begin with, on the indexation system: if a pension goes no further than guaranteeing a certain standard of living, then since it is guaranteeing purchasing power, it is of course right that it be indexed to prices
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But the reason it is indexed to wages instead is to align the income ratio between the generation now working and the generation that retires after it.

If one insists on finding some particular justification, that argument can be made; but when ordinary citizens are already giving up that privilege, holding out further for the Government Employees Pension makes no sense, as I see it.

As a forecast, though, reforming the Government Employees Pension will still be far harder than reforming the National Pension and will take a great deal more time; the people on the other side of the table are different, and the Government Employees Pension is itself part of the pay package the state offers civil servants when it hires them. It forms part of the terms of employment, in other words.

○ Moderator: Our assessment of the government's plan seems to be more or less complete. Many expect that even if the pension reform plan is passed this time, we will before long face the need for pension reform all over again. In the name of pension reform we have had to endure every kind of social attrition for more than three years now. Having to go through this commotion every single time the contribution rate and the benefit rate need adjusting is, frankly, a dreadful thing. Fundamentally, what level of contribution rate and benefit rate would be sustainable into the future?

○ Dr. Yun Suk-myung: Since this is a matter of objective fact, let me speak first.

No single round of pension reform can solve every problem. What I mean is that the pension scheme needs to go on being adjusted so that it fits a changing social environment.

In Korea, though, saying this requires great care. When distrust of government policy runs deep, repeatedly announcing that the pension scheme will be amended may lend credibility to the argument that, since the scheme cannot be trusted, it should simply be done away with altogether.

Before I get to the main point, I would like to say a word about Germany. More than 110 years ago, Chancellor Bismarck of Germany introduced a scheme paying a pension from the age of 60. Germany's life expectancy at the time was 45, and even those who did come to draw a pension died, on average, without having drawn it for as long as five years.

And what of our own situation? Life expectancy has risen sharply, from 55 in the 1960s to 80 today. Yet the scheme is designed to pay a pension from the age of 60. That is all very well for the person receiving it, but who is to bear the whole of a pension drawn for 20 years? So the scheme ought to be amended in the direction of shortening the pension payment period by as much as life expectancy has lengthened, should it not?

It is only by looking at the matter in this context, I think, that we can talk about sustainable contributions and a sustainable benefit rate. In our case, where the National Pension has only a short history behind it, the benefit rate cannot be cut sharply right away. It is a pension scheme, after all, so it has to pay enough to live on. Once the scheme enters its mature stage, however, the story changes, because the gap between the theoretical income replacement rate and the effective income replacement rate will narrow considerably.

Let me add that the retirement pension scheme introduced at the end of 2005 could also become a solid source of old-age income if it is developed properly. By around 2030 we should expect both the National Pension and the retirement pension to have entered their mature stage. Taking account of the benefit rate and the combined contribution burden of both schemes together, my view is that the sustainable benefit rate over the long run is 40%, and that it would be problematic for the National Pension contribution rate to go beyond 13%.

In this context, it seems unavoidable that the National Pension benefit rate be held at 50% until 2030, before the National Pension and the retirement pension enter their mature stage, and then lowered to 40% from 2030 onward.   

○ Professor Kim Yong-ha: The concept of an appropriate contribution rate is one that can be derived only when we think of the thing as a financial product; in practice, in fact, the very notion of appropriateness can be seen as naming not a single answer but that society's choice. The important point our society has to choose on is this: whether or not an aging society arrives, life in old age has to be provided for, and on how social responsibility and individual responsibility are to be divided in providing for that life in old age, a social consensus has to be reached first of all
lang=EN-US>. Now, since the scheme that serves as the basic benchmark for dividing individual responsibility from social responsibility is the National Pension, Dr. Yun's point that we may be demanding too much of the National Pension notwithstanding, the fact is that the National Pension, being a compulsory scheme, intervenes in the lives of

our citizens and covers the entire population, so its role is bound to be very large; seen in that light, in dividing individual responsibility from social responsibility

it serves as the most fundamental benchmark scheme. In that sense the National Pension can be called the scheme that symbolizes the responsibility of society. So it should be seen this way: the National Pension is precisely what builds the institutional framework in which old age can be prepared for by society as a whole, rather than by each individual preparing alone; and how large a role it is desirable for the National Pension to play can be considered against a variety of criteria. One cannot say uniformly that the responsibility of the state, the responsibility of society, is thus and so. The reason is that we cannot call a high share of problems solved socially inefficient, or a low share efficient. Look, for example, at the national competitiveness rankings of the Northern European countries, which demand a great deal of the state: they stand quite near the top. We may, in our general, received way of thinking, imagine those top-ranked Swedish-type welfare states to have very low national competitiveness, but in fact, if you look at the data of the World Economic Forum, which assesses national competitiveness, you can see that the national competitiveness of these countries stands at a considerably high level. Efficiency cannot be judged by the degree of social responsibility, in other words. The degree of social responsibility that best suits a given society may differ from country to country. In our country's case, though, the state has so far done nothing for its citizens. An individual's life is the individual's own business, and there was almost nothing for which the state took responsibility in an individual's life. The most it does in the life of the nation is compulsory education up to middle school these days — but does it take proper responsibility for education? Does it take proper responsibility for old age? Or does it take proper responsibility for health security? Not only do people expect nothing of the state, the state does nothing for them either, and so they think that the smaller the state, the more efficient it is. And there are a great many people who think it would be more efficient if the state did not exist at all; economists think so in particular, and a great many young people with the capacity to work all think so. That is because they have gone on living in a society in which the state does nothing for them, so that the state doing something means collecting more taxes, and collecting more taxes is wearisome and unwelcome, and so it is viewed negatively out of hand. It is because that habit is lodged in them. At this point, though, a judgment is needed on whether it is efficient for us to go on maintaining such a society. What, for example, has changed between the past and the present? In the past, in our agrarian society, people worked from the day they were born until the day they died. Except where a person could not move at all and was capable of nothing whatever, people worked almost without pause until they died. So there was no concept of a retirement age and no concept of retirement. In modern society, however, with the arrival of industrial society, the concept of a retirement age exists at around the age of 60, and we live in a society in which one works before that and afterward has to live on the income earned earlier. And in terms of the National Pension, the original purpose of the National Pension scheme is in fact old-age income security; so how did we provide our old-age income in the past? In the past the family performed that function. That the family performed it means not that people saved money themselves but that children supported their parents.

So in fact human society has long existed under the concept of intergenerational support. It was taken for granted, that is, that the children's generation would support the parents. What the arrival of the National Pension scheme means, then, is that the function of the family has reached a certain limit
lang=EN-US>. In the past, for example, people had seven or eight children; these days they have only one or two, and some have none at all, so we have reached a stage where a parent's life in old age cannot be entrusted to the children — where intergenerational support can no longer resolve that risk within the unit of the family. What the advanced countries devised in response is a system of social support. The public pension scheme is what came of shifting to a method in which the entire working generation pays money in, as it pays taxes, and supports the parents' generation, a method in which society as a whole meets the risk of old age together. Seen in this light, a public pension scheme is one that has no need of an accumulated fund, because the working generation need only pay part of its income in as tax and support the parents' generation with that money. Done that way, the shift of the support system from the family to society happens naturally, because if, just as the children's generation has hitherto supported the parents' generation within the family unit, the parents' generation is supported out of taxes collected from the children's generation, the transition of the system takes place with nothing more than redistribution within a generation
lang=EN-US>. Seen in that light, when we talk about low-contribution, high-benefit, or about a benefit-to-contribution ratio of 2.0 or 3.0, we talk that way only because we think of the National Pension as a financial product; if one takes a public pension scheme to be intergenerational support in the first place, that is only natural. But because of aging on a scale unforeseen in human history, the older generation lives long, and the years of living long are years in which one cannot work, so that the burden of supporting older people grows enormously while the working generation steadily shrinks — that is the crisis we have come to face. If the population structure were constant, as it was in the past, then even if the family had broken down we could run things exactly as before, with the working generation supporting the parents' generation; but now, with aging in the picture, it has become far too risky to place the burden one-sidedly on the working generation alone. And it is risky not because the burden on the working generation increases: from the standpoint of the older generation too, one cannot count on one's own children's generation.  Because if you have counted on your children alone and that children's generation later says it will not pay the taxes, things become very dangerous, so from the working generation's standpoint people say things like "the benefit level has to be cut, the contribution rate has to be raised...," but in fact, even from older people's own standpoint, it has become risky to leave one's support entirely to one's children. In the past you simply trusted them, handed over all your property and told them to support you, but that no longer works. So in the end the question of support has to be met on both sides at once: taking over part of the traditional arrangement in which children support their parents, and for the rest, even without paying contributions, mustering one's own solution, saving or taking out some other insurance and preparing for oneself; only by preparing on both sides together does one become secure. Is not the most important principle of risk management that you do not put all your eggs in one basket? Put the other way around, it is desirable to divide the socially responsible part from the individually responsible part, and it is important to bring the two into harmony; and what matters is that what we have to choose is the ratio. It is a question of choice: social responsibility 7 and individual responsibility 3, or social responsibility 3 and individual responsibility 7. There is no uniform answer to that choice; it is settled by social agreement. And it is not always fixed either — it can change as the times change. Yet among us there is no such agreement. What I am saying is that the absence of that agreement is what is wrong. And in the process of reaching agreement, the National Pension scheme has considerable problems of equity. The reason is that, although it presupposes intergenerational support, it also presupposes the payment of contributions, so the low-income 40% who do not pay contributions are not even able to receive intergenerational support through the National Pension. High earners, rather, receive intergenerational support and benefit from what is shifted onto future generations, while low earners, on the ground that they could not pay contributions, are left unable to receive intergenerational support at all. This fundamentally and badly violates the equity of the socially responsible part of the National Pension scheme, and in that sense the National Pension scheme is positioning itself wrongly. So if we take it that the National Pension scheme is not an individual responsibility but a social one, and that its basic role is the role in which the children's generation supports the parents' generation, then for that part, whether or not we have paid contributions, some fixed minimum benefit must be able to be met through it in line with the principle of intergenerational support — a system of that kind

has to exist within the National Pension scheme, and our National Pension scheme does not have it. They called it the Basic Old-Age Pension and built a patch job, but that is far too inadequate, and as a change to the scheme it is no help at all. As for the part that falls under one's own individual responsibility, on the other hand, what the state can do is build the framework for it. You take out what you put in, with interest added. This is what lets a person who worked hard and put in long hours when young receive a larger pension. But receiving a large amount means receiving it because you paid in a large amount; it is not a case of someone who paid in little receiving much as well. Build a scheme in which you receive only what you paid in, with interest, and in which the state provides no fiscal support and no support from future generations, in which you do it yourself and the state need only build the framework in which that preparation can be made. That is the kind of scheme we ought to have. As things stand, though, the National Pension scheme has mixed these two together and made the bibimbap Koreans are so fond of, so that in one light it looks like a savings function, in another like a generational support function, in another like social responsibility, in another like individual responsibility; it is confusing and cannot be sorted out. And so, when we come to reform the pension, we cannot sort it out and therefore cannot agree. The most important thing, then, if pension reform is to be carried out, is to begin by dividing this part up clearly. Dividing things up there into the individual-responsibility part, the social-responsibility part, then the intergenerational-support part, one's own savings...is what is needed, and when no reasonable direction is clear as to the allocation ratio, making it 5-to-5 is one method. What is needed is a process of social agreement on whether we need a scheme that does intergenerational support for about half and individual responsibility for about half. We have to make our citizens aware of this and make them understand it fully. As things stand, though, the public is not looking at the National Pension from that perspective at all. People simply say that the National Pension is a scheme where I pay my own money and I receive it...and yet, oddly, they say the rate of return is high while the shortfall is shifted onto future generations...and then, having said it is being shifted onto future generations, they later talk of cutting it again; the public has not come to its senses. That part has to be made clear, and the concepts have to be divided up, for example: "Am I not making the wrong demand about the part where I pay in and I receive? When we talk about intergenerational support, are we not claiming too heavy a burden on future generations?" It is because that has not been done in the first place that our pension reform only drags on and never happens. And so, while it is of course true that we can go on reforming pensions, the point is to build that framework and then, on top of it, to keep adjusting the ratio — the ratio between social responsibility and individual responsibility — adjusting it as circumstances require, and changing continuously in that sense; whereas talking of pension reform and all the rest, and cutting the benefit level, without even having built the framework in the first place, has produced nothing but confusion among the public and has only deepened distrust of the National Pension scheme.

○ Dr. Kang Sung-won: You asked for numbers, so let me give you numbers.

Among the OECD countries there are currently some seven or so whose benefit income replacement rate is 40% or below. As I see it, 40% looks like just about the last line of defense, and this level is probably the floor. As Professor Kim has just said, in a country where the machinery of the state has done very little for the welfare of the individual, tax resistance is bound to be enormous.

For that reason, if one makes some allowance for accommodating that tax resistance, the benefit level should first be set to match it, and it can then be expanded later through a national consensus.

The reason the National Pension is not popular with the public at present is that not that many people are getting anything out of it. First, few people are drawing benefits; and second, because the level of those benefits is not high, few people find their duty to support a parent lightened by them either, so public support for the National Pension is naturally bound to be weak
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This is a problem that will not be solved until a generation has passed.

Only when a generation has passed and there comes a generation that receives a fair return on the contributions it has paid, and a generation whose duty to support its parents is lightened because those parents are drawing pension benefits, does the National Pension scheme win the trust of the public. Until it wins that trust, benefits have to be adjusted to fit within a level the public feels it can afford to pay.

So I think that 40% and 13% are in fact right for the level we are at now. After that, once the National Pension has won the public's trust, it can be raised as much as one likes by consensus.

But because we are in a situation where that trust has not been won, I think we should pay only such benefits as our capacity allows.

The second ground on which I say the National Pension should be scaled back is that, as Professor Kim said a moment ago, old-age income in our society has until now fallen entirely to the direct descendants of the following generation.

As recently as the 1960s, family size in our country was 6 to 7. Now it has fallen to below 3.

In other words, the family has now changed into a unit that can no longer perform that function.

That being so, I think we have to move to a form in which individuals are first allowed to provide for themselves, and the state backs them up for the remainder, the part the individual cannot provide.

For example, today's older generations grew old in a generation in which the family was changing in that way, so they had no conception at all that they had to make their own provision for old age. Naturally, then, they spent everything on educating their children, and now they have almost nothing.

A generation such as ours, however, knows to some degree that the function of the family is now shrinking and that we have to take responsibility for our own old-age income.

In that situation, if the National Pension says, "The state will take care of everything for you; your descendants' generation will take care of everything for you," that can work to dampen the appetite for private saving.

In other words, what I am saying is that because the state guarantees too much, we may end up not saving individually. According to a report from the Congressional Budget Office in the United States, there is a finding that for every one dollar by which the guarantee under the U.S. Social Security system rises, broadly speaking private saving falls by around 50 cents.

That is why, especially while it has not won that trust, the National Pension should for the time being give what it can give, and, once the level of protection has been lowered, we should open up the conditions in which individuals can prepare for themselves.

In other words, because the very existence of the National Pension can produce the side effect of the National Pension simply taking on what the financial markets could handle, National Pension benefits should be lowered as far as possible to a level that minimizes the present tax resistance, and I take that level to be 40%.

○ Moderator: This will be a somewhat contentious topic, but I would like us to take up the validity of the Grand National Party's version of the Basic Pension proposal. The Basic Pension scheme has been criticized as unrealistic on the ground that it would cost an astronomical amount. And there also seems to be some misunderstanding about its sincerity, arising from the fact that the Grand National Party, a right-wing party, is advocating a Basic Pension that could in one sense be called a socialist approach. Still, considered under the heading of fundamental reform of the National Pension, the Basic Pension does seem to be one of the alternatives with the most sharply defined character.

○ Professor Kim Yong-ha: In fact the Basic Pension is widely misunderstood: the proposal is not for a Basic Pension alone but for splitting the scheme in two, into a Basic Pension and an earnings-related pension. That is to say, the proposal is to divide our National Pension scheme into a Basic Pension and an earnings-related pension. But only the Basic Pension half of the argument gets talked about; and because the Basic Pension is an answer to the coverage gaps, people think of it as simply a coverage-gap measure, and so it comes to be misunderstood as though it valued only the income-redistribution function, and then as a proposal ill-suited, in a sense, to advocacy by the Grand National Party, a relatively right-wing party. In fact, if one thinks of it as a set of a Basic Pension and an earnings-related pension, one can see that it is a proposal a right-wing party might well advocate.  I spoke earlier of the two functions the National Pension scheme carries in terms of social responsibility and individual responsibility; put another way, they can also be explained in terms of the financing method. What the financing method means is the way a pension scheme is operated, and there are two financing methods. One is called the pay-as-you-go (PAYG) method, under which taxes are collected from the working generation at a given point in time and the money so collected is paid straight out to current beneficiaries; viewed in time, it works much like the national budget method, collecting taxes now and paying the money out to today's older people, and a scheme of that kind is what is called PAYG, the method most Western countries currently adopt. As I said earlier, seen through the concept of intergenerational support, it is the financing method that fits precisely the notion that the working generation of the day pays in, as though paying taxes, and thereby supports the parents' generation. The other financing method, meanwhile, is what is called the funded system. The funded system may be regarded as a financial product. You get back the money you paid in with interest added. That is, each individual piles up an enormous sum in a reserve fund until old age, then draws it down from retirement until death, and dies having spent it entirely. So from the individual's standpoint there is no paying more and no paying less: you accumulate exactly what you paid in when young and receive in old age what you paid in, and a method operated in that way is what we call the funded system. Now, when it comes to a pension scheme, the way I see it, this PAYG method is right on the principle of intergenerational support but places far too heavy a burden on future generations. For example, as aging proceeds the number of older people rises while the number of workers falls, so PAYG has its limits. Is the funded system, on the other hand, extremely safe? The funded system carries risks of its own as well. Because it presupposes an interest rate, if the money is managed badly or market conditions turn the wrong way, the fund one has accumulated can vanish in an instant. For example, people are fond of equity investment these days; suppose you diligently put that money into stocks and then the stock market collapses and it all turns into waste paper. The money is gone. On top of that, however much money we have put together by the time we retire, if we retire at 60 we do not know how long we will live after 60. If you expect to live 20 years, you divide the money over 20 years and spend it; but suppose you expected to live 20 years and it turns out later that you live 30. Then you would have to live ten years sucking your fingers. So the funded system is in fact risky for us too. Which is why the funded system and PAYG have to be combined. Now, the method our National Pension scheme currently adopts is the modified funded method. Outwardly this is a funded system. It carries the notion that I later receive what I paid in contributions; but because it has in the end been designed so that one receives twice what one paid, what I am saying is that although its shape was taken from the funded system, it is a scheme with the problem of converting later into PAYG. Looked at as our national scheme, under the modified funded method 192 trillion won has now been piled up, it will later grow to 1,700 trillion won, and with reform of the scheme it will grow to 5,000 trillion won, but when it goes, the reserves disappear clean away in a mere 15 years. And the period in which the reserve fund actually disappears in that way is precisely the point at which population aging peaks. We said we were diligently accumulating a reserve fund against population aging, yet the problem is that by the 2050s, when population aging is at its peak, the reserve fund is gone. So however much money we accumulate, it means nothing at all. On the contrary, while there is no demographic problem a large reserve fund is built up and the excess of government saving then has the effect of depressing private saving; yet over the long run, at the very moment when that saving ought to take effect, the reserve fund is gone, so it converts into PAYG after all and the whole point of our operating the scheme disappears. So what I am saying is that from the moment a pension scheme is launched, the funded portion and the PAYG portion have to be divided and started separately. So the funded part, once this money has been accumulated, is held so that it does not fall below a certain level, because those who have paid in keep paying in and drawing out while new people keep being brought in and keep accumulating, so that a constant level of reserves is maintained. And then, under PAYG, which takes intergenerational support as its principle and in which the working generation pays contributions (taxes) and benefits are paid out to the older generation, the two methods should be run in subtle harmony — but the ratio between them has to be set from the very beginning. That is the same thing as setting the ratio between social responsibility and individual responsibility. So what I am saying is that setting the ratio between the funded system and PAYG and setting the ratio between social responsibility and individual responsibility come to the same thing. That ratio ought to be set from the outset; but just as social responsibility and individual responsibility are mixed together, the characters of PAYG and of the funded system are mixed together too, and that is why it fails to work properly in the operation of the financing method
lang=EN-US>. Seen from that angle, it is necessary to divide this properly, and when we do divide it, the part that provides intergenerational support is precisely the Basic Pension. And then the self-saving function is the earnings-related pension. My contention is that bringing the two into harmony in that way should be the basic framework of our pension scheme, and it is in that sense that a Basic Pension and an earnings-related pension have their meaning; whereas people think the purpose lies simply in collecting taxes any which way and spending them any which way in order to close the coverage gaps, and so, although on that view this is a right-wing party's logic, on the logic I have set out it is not a right-wing party's logic at all but an assertion of the need to make the pension scheme multi-tiered, as a very basic institutional framework for maintaining a free-market economy.

○ Dr. Yun Suk-myung: It goes without saying that the Basic Pension is a good scheme. The state collects taxes and provides every older person with a pension sufficient for a minimum standard of living, so it is a pleasing thing for those who receive it and for the state that pays it alike, is it not?

The problem, though, is that operating this scheme requires an enormous amount of money. In an era of high growth and high fertility, as in the past, it was not much of a problem; but in a low-fertility, low-growth, super-aged society the cost is immense.

Accordingly, the countries that introduced a tax-financed Basic Pension are gradually backing out of it. The prime examples are the Nordic-type welfare states such as Sweden and Finland, which are called the archetype of the welfare state. In Finland, the share of Basic Pension beneficiaries stood at around the 93% level of all older people in the mid-1990s, but barely ten years later, in fiscal 2004, it had plunged to the mid-50% range. More shocking still is that most of them receive only part of the Basic Pension. The reality of the Finnish Basic Pension today is that beneficiaries receiving the full-rate Basic Pension, that is, the Basic Pension at 100% of its whole amount, come to no more than 8% of all older people.

Why, then, does a problem like this arise? As I have already said, it is because the cost is too high. A tax-financed Basic Pension is, by the nature of the scheme, 100% PAYG, that is, a method under which the working generation bears pension expenditure through taxes, so when the working population shrinks as the fertility rate falls, the burden on the working generation rises sharply.

In our country the fertility rate is the lowest in the world, while life expectancy is rising at the fastest pace. It goes without saying that if we introduced a tax-financed Basic Pension right now, the burden on later generations would swell enormously. For the moment the number of older people is not large, so the cost would be low; but from the mid-2020s onward, when the baby-boom generation retires en masse, the cost of maintaining the scheme will defy imagination. The reason is that the baby-boom generation is not retiring having saved up the funding for the Basic Pension it will draw; it is retiring with no provision at all, on the premise that later generations will bear the cost. So while I sympathize with the basic intent of a tax-financed Basic Pension, I cannot but take a very cautious stance on introducing it.

If people know from their youth that, once they are old, the state will collect taxes and pay them a Basic Pension, will they prepare thoroughly for old age? I think not. What I am saying is that it could induce moral hazard among the young in preparing for old age.

Intergenerational support through public pensions is all very well. But what I am saying is that it amounts to breaking the backs of later generations so that we may live well. What, then, should be done?

I think intergenerational support has to be kept within reasonable bounds. Even on the assumption that later generations will live better than we do, we ought to take and use something like 20%–30% of the fruits of economic growth they will enjoy; to demand 100% of those fruits, or more, for ourselves is far too irresponsible, is it not?

If you look at recent trends in pension reform abroad, countries are pushing back the statutory retirement age in proportion to rising life expectancy and encouraging work at older ages, thereby leading people to live on earned income rather than on a pension. Recognizing the reality that a paradigm such as the one we had in the past cannot be maintained, they are changing the basic framework of old-age income.

In this situation, if we were to introduce a 100% PAYG Basic Pension, it would not be sustainable over the long run, even if it were a scheme guaranteeing an income replacement rate of 20%. What, then, could serve as the alternative?

I think the National Pension, which currently provides a 60% income replacement rate, should be flattened as far as possible. That is, cut the income replacement rate to 40% or below while strengthening the funded system beyond what it is now, thereby raising the scheme's sustainability and at the same time minimizing the burden to be laid on later generations. What I am proposing is to merge the earnings-related component and the income-redistribution function, so that a flattened National Pension effectively becomes a basic pension in substance.

As the burden passed on to later generations is minimized, the government of those later generations will gain fiscal space. The government would actively encourage people to provide for their own old-age income while young, and for those groups that for one reason or another have failed to secure a source of old-age income (groups exposed to poverty not only during their working years but in old age as well), it would be able to draw on that fiscal space to support them so that a basic standard of living is possible.

To deal effectively with a super-aged society, would it not be more desirable to seek out measures that can actually be carried out over the long run, rather than rationales and political slogans? Would it not be a more wretched situation if, having said from now on that the state will collect taxes and  give every older person a pension, we found, once people had actually grown old, that the government had no fiscal space and could not pay the pension?     

A good many pension experts are worried about exactly this kind of situation.

○ Dr. Kang Sung-won: My position, to begin with, is that guaranteeing the obligation of intergenerational support through a government body is becoming more and more difficult.

Aging has gone so far that we have arrived at a state in which it is hard for the state apparatus to feed the older generation without placing on the next generation a burden that generation feels to be excessive. That is why it would be better to look at the National Pension in this light: because the private pension market has a market failure of its own, the enrollment rate is low to begin with, and those who do enroll are generally the high-risk ones — that is, only people who live a long time enroll — and because that is the phenomenon that appears, the National Pension exists in the sense of pooling that risk in its entirety
lang=EN-US>, that the National Pension exists in a form that protects the functioning of the market — that, I think, is more realistic, and so a better fit for the present generation.

So resolving the obligation of intergenerational support through the National Pension can no longer carry much meaning,

nor can it be done, nor is there any need to do it, because financial products are appearing in the private sector, so there are expectations that individuals can defend themselves against the risks of later life.

The problem in that case, though, is people with low incomes or with no income at all. What on earth is someone who has no money to save supposed to do? That is why my view is that the National Pension should go the earnings-related route, while there must also be a scheme, in the form of something like a Basic Pension, that protects those who drop out of the market
lang=EN-US>.

That said, the reason I argue for a time limit on it is this graph.

Broadly, if you look at the population census from Statistics Korea, the share aged 65 and over stays at 15% or below until 2020 and then climbs in jumps of 10% as it moves to 2030, 2040, and 2050.

And if you set this graph beside the estimates of Basic Pension expenditure as a share of GDP, the two line up almost exactly.

So the population structure itself makes it quite difficult to carry the Basic Pension permanently.

"Then just do away with it altogether; why keep it now?" The answer is that today's older people never had the chance to prepare for their own old age through the market.

Nor is it the case that they can take part in the labor market and secure an income of their own.

In fact, there are a great many older workers at companies right now, are there not? From the standpoint of business, firms simply cannot take these people on.

That is why a universal Basic Pension can be regarded as a fairly useful scheme at present.

For now, poor older people exist on a fairly broad scale, while the older population itself is not yet large.

So my proposal is that, until aging sets in in earnest, the generations that were never able to prepare for their own old age in the private sector should be given a degree of protection through an unconditional Basic Pension, but that a time limit should be attached to it, so that young people like me are left to prepare for themselves, using financial products in the private sector and the National Pension that already exists.

Because, as I said earlier, once the state has already declared that it will guarantee future income, the desire arises in me to save less and enjoy myself while I am young.

In other words, there is a substitutive role between public income security and private income security.

So my view is that the younger generation should prepare, as far as possible, through the minimum earnings-related National Pension the state provides and through products bought in the private financial market; that for those who fail there a Basic Pension should be guaranteed at the smallest possible level by means of an income test; and that, going further, by folding into the NBLSS

the component covering older people, we would do better to move to a form in which the state takes responsibility only for the failures who drop out even there
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○ Moderator: Dr. Kang seems to have put forward a new alternative. I would ask him to explain it in more concrete terms, and the rest of you to give your views on it.

○ Dr. Kang Sung-won: Put simply, the proposal is to organize the National Pension as a three-tier system. The first tier is the Basic Pension I described earlier. The second tier is the earnings-related National Pension, of a defined-payment type. The idea here is that, for people who pay contributions in line with their earnings, the state should at least take some of the risk off their shoulders.

Finally, the one laid on top of these is the tier that makes good only the institutional failures of the financial market, with the state's role confined to providing the machinery.

In other words — as you all know — the state would open an account of some kind so that individuals could invest in private financial products: enrollment would be compulsory, but the proposal is to provide an account in which the individual chooses the products to invest in.

There are two grounds for arguing that an individual savings account should be introduced. One, as I said earlier, is that if the matter is left to the private financial market, long-term optimization is difficult for individuals, so a reluctance to enroll can appear; and because financial companies then make one-on-one contact to persuade those reluctant people to sign up, transaction costs rise — that is the drawback.

If the state intervenes here and confines its role to doing the matching, that market failure can be cured.

The second is that our financial market — something Professor Kim worried about a great deal — has in fact failed until now to perform the role of providing stable income security.

But indirect investment products have been increasing of late, and as the capital market has opened up considerably, that instability will be resolved to some degree; and if overseas investment is permitted on top of that, we will be able to absorb the sound functions of more developed capital markets.

There is something called the equity premium puzzle. Looking at government-guaranteed bonds against income from private-sector stocks in the capital market of the United States over a hundred years, the return on private-sector stocks is far higher, by 7-to-1.

The proposal is that individuals too should be allowed to use this high-return segment, but that, since low-income groups in particular are in some respects unable to take part because of transaction costs, the state should set it up institutionally from the outset.

Enrollment would be compulsory, but, to take an example, of the 9% contribution people are currently required to pay, 7% would go into a state-guaranteed earnings-related DB system, and only for the remaining 2% would individuals choose and invest for themselves, with old-age income for that part secured by investment returns alone.

If it were done that way, the state-guaranteed portion and the capital-market portion would both be in play, so risk too would be separated to a degree, and at the same time, with luck, the part invested in the capital market could earn a high return as well.

My point is that if the financial products themselves were proposed as index-fund-type products that track the market and invest passively, that could well serve as an institutional device providing a scheme through which individuals can fully enjoy the long-run returns of the capital market.

This arrangement has already been reflected in Sweden's 1994 pension reform. And the individual account comes in two forms. One is a pension-insurance form like TSP, the individual investment account for civil servants in the United States. In this case a state body or a government body selects products from the private sector through open bidding and then builds a number of funds out of them. The individual's range of choice is thus restricted, at least initially, to those few funds.

The Swedish form, by contrast, is a clearinghouse form. Once a financial company and its products meet a certain standard, they are drawn into the system so that individuals can choose for themselves. However, in order to reduce transaction costs, one-on-one advertising is prohibited.

As for the drawback that appears with this form, there can be the criticism — as it appeared in Chile and as it appeared in the United Kingdom — that transaction costs are enormous and swallow the whole return; but most of those transaction costs are precisely the marketing costs that come out of one-on-one contact.

So if that element is blocked institutionally and the state acts as the agent for those transactions, the state can use economies of scale to bring those transaction costs down, and individuals can enjoy a higher return to some degree, if only in part — which is why I think it might serve rather well as a somewhat more complementary scheme.

To put it another way, national income divides into the capital account and the labor account, does it not? The National Pension as it stands can in fact be described as a scheme that depends entirely on the labor account. The problem is that aging keeps shrinking the base of that labor account. In that case, the proposal is to shore it up with the capital account.

○ Professor Kim Yong-ha: The proposal that the Basic Pension should be operated on a time-limited basis, because the period in which its financing burden rises with aging is the period when severe aging arrives; the idea of running the public pension system around an earnings-related pension; and then, third, running the pension scheme at the third tier through a personal savings account — as a three-tier security system, all of that, I think, is well worth discussing with considerable interest. However, on the question of whether the Basic Pension can be carried on a time-limited basis, my own judgment is this. In Korea as things stand, 80% of older people have no public pension system, and because that group lived in an era in which they could not be covered by a public pension scheme, a Basic Pension is in fact necessary. Even granting that much, the argument that the Basic Pension will not be needed 40 years from now, once the National Pension has taken hold, requires careful examination. If you divide the current trend in households' income and expenditure into five strata, the bottom 40% are barely able to save and cannot pay contributions either. So because this stratum can neither save nor pay National Pension contributions, they will not have prepared the income they will need in old age after they retire; and since they themselves have paid no National Pension contributions, there plainly exists a stratum that is highly likely to receive nothing. So the present coverage-gap problem in the public pension arises only because these two things overlap; later on, the problem that arises from there having been no National Pension scheme will disappear, but given our current income structure, and given the limits of a National Pension scheme premised on the payment of pension contributions, there is a high likelihood that the roughly 40% for whom the pension scheme cannot perform the function of a public pension will remain just as they are. Now, when we ask how old-age income security is to be provided for that stratum,  one option is to build a separate scheme for those people and then an earnings-related pension scheme for those with money; but if we do that, can that society operate as a single community? The reason a social security system is necessary is not, in the first place, the pity of handing a poor man a rice cake; it is that by constituting ourselves as one community we keep this country from splitting apart and make it run well with a high degree of social trust maintained, and in that way,  without class conflict arising and without our turning to socialism, we make capitalism hold up all the more soundly. That is what a social security system is. So when a pension scheme for the low-income and a pension scheme for the upper-middle class and above go off into two separate structures like that, will that society be healthy? I do not think it will be. So my point is that the portion covering the minimum cost of living has to be borne by all of us as a nation together. Rich or poor, we bear it together and have lived together; and although people say that the burden on future generations from the Basic Pension is large if it is run on a PAYG basis, the Basic Pension I am talking about means that all citizens together should provide the cost of living in old age up to the level of the minimum cost of living. In terms of the minimum cost of living, it is half the minimum cost of living for a two-person household, so it comes to about 300,000 won. But is there anyone who would say that, because he will receive a pension of about 300,000 won, he will not save now? As for the cases in which a pension scheme produces a savings-reducing effect: it is when a person is guaranteed a solid income of 1 million or 2 million won that he can count on that money and say he has no need to save now; there will be no stratum that counts on 300,000 won of Basic Pension and concludes that it can get by without saving. The bottom 40% cannot pay contributions in any case and will not be able to accumulate anything either, so there is no need to talk about reduced saving at all. So I think that "a basic pension scheme will still be needed 40 years from now." That said, as for how this pension scheme is run, it would basically go as a two-tier structure of a Basic Pension and an earnings-related pension; but later, while running the system around the earnings-related pension, converting the Basic Pension into the form of a minimum guaranteed pension, for example, would be worth examining. The time at which that can be examined, however, is when the social environment has been created — when our country has become transparent, when income identification is in place, when coverage gaps have narrowed considerably, and when the female labor-force participation rate has risen; at that point, as we move toward an earnings-related pension, it becomes possible for the Basic Pension to be converted naturally into a minimum guaranteed pension scheme. So the individual savings account mentioned earlier is a good concept, and going a step further, it would be quite acceptable to integrate the earnings-related pension itself with the individual savings account and run them together. Because if the earnings-related pension is run on a fully funded basis in which you pay your own money and receive your own money, it is no different in character from an individual savings account. So I would say that it could also develop into a form in which the two are integrated and run together.

○ Dr. Yun Suk-myung: I think the government's reform plan is one that can serve as a stepping stone, whatever direction the old-age income security system is built in over the long term. As the World Bank's 2005 report also notes, if improvements to the scheme that make fiscal stabilization possible are put into practice in the direction of a lower benefit rate than at present, those very measures can become the foundation for fundamental institutional reform.

Almost no one would take issue with building a multi-tiered income security system in order to prepare effectively for a super-aged society. The question is what kind of multi-tiered income security system to build.

Personally, I think we need to introduce a multi-tiered system built on a broader concept than three tiers. The concept would take in the NBLSS already introduced in Korea, medical services, and the like. The World Bank, too, has put forward a proposal to include in-kind benefits, alongside traditional cash benefits, in the multi-tiered income security system, on account of financing problems in a super-aged society and other such issues.

As I have already said several times in connection with the introduction of a tax-financed universal Basic Pension scheme and its role in a multi-tiered income security system, I think introducing a universal Basic Pension right now is highly problematic. From the standpoint of a multi-tiered income security system in particular, it is judged that it would become yet another source of confusion.

I think the NBLSS already introduced should be converted to individualized benefits, and that for older people the range of those eligible for benefits should be expanded substantially beyond what it is now. To put it more fully, the criteria for applying the scheme need to be relaxed substantially relative to those applied to people of working age. Now that the introduction of a universal Basic Pension is under consideration, the beneficiary selection criteria that are strictly applied to older people need to be relaxed. On top of that, the Senior Citizens' Allowance and the transport allowance for older people that have already been introduced should be applied in integrated fashion, and the Basic Old-Age Pension scheme that the government and the ruling party are currently considering introducing needs to be merged into a single scheme.

The side effects of a scheme introduced on the spur of the moment for political purposes rather than on a long-term vision are already showing. Why pay the transport allowance even to beneficiaries of the National Pension and the Government Employees Pension and to their spouses, spending a budget of some 600 billion won a year? If that budget were used instead to pay a relatively generous amount to the low-income older people who genuinely need state support, think how much more efficient it could be for society as a whole.

In that context, I think that a scheme substantially expanding the public assistance system already introduced, centered on low-income older people — whatever name is given to it — should be the most basic, zeroth tier. Next, the National Pension, in which fiscal stabilization measures have been taken and pensions are received on the basis of the contributions one has paid, should be the first tier; corporate pensions the second tier; personal pensions the third tier; and finally the medical services and housing welfare provided by the state should be included as the fourth tier.

In the long run, I believe a control mechanism is needed against the unchecked growth of spending related to older people, by running in-kind benefits such as medical services in an integrated way alongside cash benefits. If the schemes already introduced are linked organically, unnecessary spending can be held down. In the case of older people, a substantial part of non-essential spending is likely to be medical spending. Additional public health-care schemes such as the long-term care insurance bill are due to be introduced, and if all of these schemes are organically linked, the cash-benefit portion paid out as pensions can be brought under control.

I therefore take the exact opposite position on the proposal to introduce a universal Basic Pension on a time-limited basis until the coverage-gap problem among today's older population subsides. A tax-financed Basic Pension scheme is a good scheme, but over the long term it costs far too much. In particular, we need to take account of the fact that if the baby-boom generation, which makes up the overwhelming majority of our population structure, retires without any preparation at all, the burden on future generations will be enormous.

So if a universal Basic Pension is to be introduced at all, I think the right course, given the scheme's sustainability, is to introduce it not now but at some point after the degree of population aging has subsided to some extent. But even if it is introduced after 2030, when the baby-boom generation retires en masse, I believe the range of coverage needs to be kept to a minimum. A scheme that claws the Basic Pension back through taxation from roughly the top 30–40% of earners, as Canada currently operates, would also be effective.

I would ask Maeil Business Newspaper and the Samsung Economic Research Institute to give this rather more thought. The reason is that the two institutions' statements of position on the Basic Pension could have a considerable influence on the pension debate going forward.

○ Moderator: That concludes our debate. Thank you all for your time.

< Because the readability of the internet version is exceedingly poor,

we hereby state that we have included the full text of the debate in the Archive section of the Pension Future Forum's website, for the purpose of securing an important historical record.)

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