[Debate] Is It Permissible to Use Part of the National Pension Fund for the Basic Pension?

[JoongAng Ilbo · Debate · January 26, 2013]

Yun Suk-myung, Director of the Pension Research Center at the Korea Institute for Health and Social Affairs (KIHASA)

The high poverty rate among older people, who were the driving force of industrialization, and the resulting high elderly suicide rate demand extraordinary measures to address the problem of elderly poverty. The Basic Pension emerged against this backdrop. This is because it can serve as a policy tool to lower the elderly poverty rate, which is the highest among the member countries of the Organisation for Economic Co-operation and Development (OECD). For this reason, the Basic Pension has been at the center of the debate over pension overhaul since the activities of the "National Pension System Improvement Planning Team" in 1997.

The reason discussions on pension overhaul have been so explosive is the path dependence of the pension system itself. When the introduction of a basic pension was being considered in 1997, only the National Pension existed. Now, the Basic Old-Age Pension has been added. While the National Pension is a social insurance system that provides benefits only to those who have paid contributions, the Basic Old-Age Pension is a public assistance system that pays benefits using taxes. Because the two systems are so different, conflict is inevitable during the integration process.

At the time of the introduction of the Basic Old-Age Pension, the government recognized it as a temporary system. It was introduced as a quasi-universal system for the current older population who were unable to prepare for their old age. The government's plan was to reduce the proportion of Basic Old-Age Pension beneficiaries in accordance with the number of National Pension beneficiaries. This is because costs would be too high in the long term given the rapid increase in the older population. If the Basic Old-Age Pension is converted into a universal Basic Pension, the cost of maintaining the system will increase more than eightfold by around 2060, as the number of eligible recipients will increase fourfold and the benefit level will double. This is why advanced welfare states such as Sweden, Norway, and Finland have abolished their basic pensions or reduced their proportion.

If a universal Basic Pension is introduced, benefits must be paid to approximately 5 million exempted non-payers who do not pay National Pension contributions, as well as many full-time homemakers. In particular, the National Pension—whose income replacement rate will be reduced—will become a meaningless system for low-income earners. Even now, someone with a monthly income of 1 million won receives a pension amount slightly exceeding 300,000 won even after contributing to the National Pension for 20 years. If the National Pension income replacement rate decreases, the National Pension will fall to little more than pocket money for low-income earners. In such a situation, would low-income earners scrape together money they do not have to pay into the National Pension?

Integrated operation could inadvertently act as a mechanism that lowers the National Pension participation rate among low-income earners. In such a situation, since the old-age income source for low-income earners would be limited to the Basic Pension, pressure to increase Basic Pension benefits could intensify. This is because it is impossible to maintain a living in old age with only a small amount of Basic Pension. This also contradicts the trends in pension reform abroad, which emphasize individual self-help efforts in response to a super-aged society. It is also inconsistent with the purpose of "Durunuri Social Insurance," a contribution subsidy program for low-income insured persons introduced to reduce coverage gaps in the National Pension.

The possibility of unification must also be considered. The financial resources required for a Basic Pension for North Korea, whose population is about half that of South Korea, could be an astronomical amount. It should also be remembered that pensions accounted for 25% of Germany's unification costs. It must also be taken into account that a monthly Basic Pension of 200,000 won is not sufficient to alleviate elderly poverty among low-income earners. This is why more benefits are needed for vulnerable older people.

During the 2007 reform, there was an attempt to raise the contribution rate to 12.9% for the fiscal stabilization of the National Pension. Even if the intent is good, the moment part of the National Pension Fund is used as a financial resource for the Basic Pension, raising contributions may become difficult due to distrust in the pension system. Given that there will be significant side effects, it is desirable to discuss specific integration plans over time.

Source: JoongAng Ilbo (original article)