[Op-Ed] Pension Overhaul Must Be Approached With Caution

[JoongAng Ilbo · Op-Ed · February 27, 2013]

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

There are cases where something started with good intentions produces counterproductive results due to unexpected circumstances. The issue of integrating the National Pension and the Basic Pension is such a case. Despite the emergence of the framework for the "National Happiness Pension," which integrates the operation of the National Pension and the Basic Pension after much turmoil, the controversy does not seem likely to subside easily. The "life-cycle customized welfare" that the Park Geun-hye administration ambitiously prepared has hit a reef before it could even properly set sail.

There is no issue as complex as the discussion on pension overhaul. This is because the interests of the entire nation are at stake. It is difficult to find solutions for the various scenarios raised by many stakeholders. In that it involves unraveling a complex tangle, the pension overhaul issue is often compared to solving a higher-order equation. Even so, a higher-order equation from a physical perspective is relatively simple. This is because it lacks the task of quantifying emotional aspects felt by members of society, such as equity.

Despite much controversy, the decision to fund the Basic Pension through taxes and to provide differential pension amounts was a good one. The problem is the integrated operation of the National Pension and the Basic Pension. This is because the operational principles of the National Pension, where benefits are received on the premise of paying contributions for a certain period, may conflict with those of the Basic Pension, which is independent of contribution history. It is difficult to harmonize pension policy, which must provide more pension to those who have paid more contributions for a long time, and social policy, which must provide more benefits to those with low incomes.

Let us examine a few tangled threads. Complaints have arisen asking why the payment of the Basic Pension is restricted just because one receives the National Pension, which they receive thanks to having diligently paid contributions. To appease this, the system was designed to provide more of the Basic Pension to those with longer contribution periods in the National Pension, but there is significant criticism. The argument is that people working in stable jobs with high incomes are likely to have longer National Pension contribution periods, so why should they receive more of the Basic Pension, which serves a social policy purpose? It is pointed out that more benefits should go to those who could not be insured in the National Pension for long due to unstable employment.

The fact that the primary criterion for differential Basic Pension payments is the bottom 70% of older people aged 65 and over is also a point of contention. In extreme cases, a difference of 10,000 or 20,000 won in recognized income could separate someone receiving 200,000 won from someone receiving 40,000 won in Basic Pension. How the 70% criterion will be changed in the future amidst the rapid increase in the older population is also a point of contention. It is also problematic that low-income groups below the median income are likely to rely solely on the 200,000 won Basic Pension because their National Pension amounts are not high. In particular, the incentive for vulnerable groups, such as voluntary contributors (full-time housewives, etc.) and low-income self-employed persons, to leave the National Pension appears high. In this case, it conflicts with the policy goal of "Durunuri Social Insurance," a program subsidizing the contributions of low-income insured persons, intended to encourage National Pension enrollment among vulnerable groups.

If these concerns materialize, the National Pension is highly likely to degenerate into a half-measure system centered on high-income earners and salaried employees whose contributions are withheld at the source. In this case, a problem arises where coverage gaps in the National Pension, which are already a headache, actually widen. As such, there are significant constraints imposed by existing systems when introducing a new system. The term "path dependency" refers to the difficulty of designing a system in a new direction under given environments and constraints. The footprints of 25 years of the National Pension and 5 years of the ambiguous Basic Old-Age Pension make solving the problem difficult.

Taking advantage of the pension overhaul discussions, forces are appearing that shake the National Pension, similar to the movement to abolish the National Pension. Anxiety among young people is also amplifying, fearing they might only pay contributions and never receive a single penny in pension. To ensure that the National Happiness Pension does not become a factor inducing national conflict, it is necessary to exercise extreme caution during the process of concretization.

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

Source: JoongAng Ilbo (original article)