More serious efforts needed to ensure long-term sustainability of national pension scheme
After 10 months of discussion, a committee on national pension reform last week suggested three options, all of which fall short of ensuring the long-term sustainability of the pension scheme, now under increasing strain.
Differences in views between labor and business representatives barred the panel formed in October under the Economic, Social and Labor Council from working out a single proposal.
The first option calls for freezing the income replacement rate, which is set to be lowered to 40 percent by 2028 from the current 45 percent, and raising insurance premiums from 9 percent of wages to 12 percent in the coming decade. Under the other proposals, the income replacement rate would be reduced as planned, with insurance premiums raised to 10 percent or remaining unchanged.
Such options go no further than a separate set of reform proposals made by the Health and Welfare Ministry in December, which was criticized for being far from making the pension arrangement sustainable in the long term.
Earlier last year, the National Pension Service, with nearly 700 trillion won ($576 billion) in assets, predicted that its fund would be depleted by 2057 under the current system.
Raising insurance premiums to 12 percent of wages with the income replacement rate kept at 45 percent would delay the depletion of the pension fund by six years at best.
The fund could be exhausted even earlier, given the plummeting birthrate and rapidly aging population. Significant reform should be undertaken within three to four years before South Korea’s baby-boom generation born between 1955 and 1963 will have completely left the country’s workforce.
President Moon Jae-in’s administration has virtually abandoned serious efforts to overhaul the pension system that is placing an undue burden on future generations.
In an attempt to alleviate growing concerns among younger subscribers, the government has said it will consider writing into law the state’s responsibility for pension payments. But a clause making it mandatory for the state to fill shortfalls by bolstering the fund with taxpayer money makes little sense. After all, people aged over 65 are expected to account for nearly half of the population around 2057, when it might be practically impossible to collect any more taxes from the country’s dwindling workforce.
The administration has an obligation to take the lead in ensuring a more balanced sharing of burdens between older and younger generations.
It is tantamount to dereliction of duty on part of the government to submit a set of easygoing proposals to the parliament and let lawmakers decide whether to choose one of them or work out a separate reform measure. In an apparent bid to avoid becoming an immediate target of public discontent, the proposed options envision that most of the planned increase in insurance premiums would come after the end of Moon’s term.
A substantial rise in insurance premiums is needed to make the pension scheme sustainable in the long term. While insurance premiums in the country have been frozen at 9 percent of wages for the past two decades, the corresponding figures have climbed to 25.8 percent in the UK, 22.3 percent in Norway, 18.7 percent in Germany, 18.3 percent in Japan and 13 percent in the US.
What is concerning is that the parliament can hardly be expected to pass an effective reform plan accompanied by a significant hike in insurance premiums, as neither the opposition parties nor the ruling party are likely to take such an unpopular move ahead of next year’s general elections. Lawmakers are urged to take a more responsible attitude toward future generations.
Increasing yields on the fund is also essential to ensure the long-term sustainability of the pension scheme. Experts note that raising the rate of return by an additional 1 percentage point would postpone the exhaustion of the pension fund by nine years.
Last year, the NPS, the world’s third-largest institutional investor, logged a minus 0.9 percent return rate due partly to unfavorable market conditions, marking the first time in a decade that the rate had fallen into negative terrain.
The pension fund showed improved performance in the first half of this year. But the trend could be reversed for the rest of the year and beyond amid deteriorating internal and external economic conditions.
In this regard, the Moon administration should stop attempting to use the pension fund as a tool for influencing corporate management and ensure its investments will be made mainly based on profitability and stability.