Pension Reform Faces Challenges

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Pension Reform Faces Challenges

By Kim So-young, The Korea Herald

February 16, 2004

Yoo Joo-youn feels uneasy when she pays her national pension contributions at the end of every month.

At 24, retirement is a life time away, but she still wonders whether she will ever recover the money she has put into the pension plan once she retires or whether she should be setting aside even more savings.

She is not alone. An increasing number of Koreans are fast losing confidence in the country's pension system, which was once considered the most reliable source of income to the retired elderly.

Speculation is growing in Korea over a possible depletion of pension funds. Experts calculate pension reserves will dry up by 2047 if nothing is done because the system was originally designed to provide high benefits against low contributions.

By that time Yoo should be drawing her pension.

"I have to pay nearly 100,000 won (in contributions) each month, which is never little money for me," said Yoo who works in public relations at the U.S. insurance company Prudential. "But I doubt whether there would be any remaining funds when I am older."

Saying she doubts the government will keep its promise to guarantee company employees 60 percent of their working salary after retirement, she expresses deep skepticism over the national pension system.

"I knew only after employment that I was obliged to join the pension scheme," said Yoo. "I would have dropped out of the system if I were given a choice."

Her generation not only worries about whether there will be any money left in the pension pot at retirement but fears it will have to shoulder a heavy financial burden to maintain the fund.

Analysts believe the fund, which currently holds 112 trillion won, will begin to lose money by 2036. With the economy projected to falter, workers such as Yoo may have to pay more taxes to finance the pension scheme.

A badly needed overhaul of the national pension plan is just one of many problems successive Korean governments have delayed dealing with for years. But suddenly the issue has shot to the top of the political agenda over the past year.

Pension reform has been driven the last two years by the Finance and Health and Welfare ministries, which have analyzed the situation and pushed for changes.

The government has proposed pension reforms that could include a rise in premium rates and a cut in benefits in an effort to maintain the system's long-term stability.

Currently, salaried workers contribute nine per cent of their wages and receive 60 per cent of their annual income in benefits after they retire. Those figures do not change whether an individual is the lowest- or highest-paid worker in the country.

As with many such issues in South Korea, pension reform is shrouded in political rhetoric. The opposition-controlled parliament remains reluctant to deal with a highly unpopular pension bill just two months ahead of April's parliamentary elections.

Many lawmakers are reluctant to debate a bill meddling with people's money out of fear that supporting pension overhaul may threaten their popularity. The bill has been on an indefinite hold in parliament over the past year and prospects of passage this year also appear slim in a country where legislators are known to put party politics ahead of the national interest.

The government proposal would raise premiums by 1.38 percent every five years starting in 2010 until they reach 15.9 percent of salary in 2030. Meanwhile, benefits would fall beginning next year to 50 percent of salary from the current 60 percent.

The current 9 percent premiums, equally split between employer and employee, and the 60 percent benefits were fine when the national pension scheme was introduced in 1988.

Korea's population was young, its labor force expanding as the baby boomers born after the 1950-53 Korean War began to enter the workforce.

Workforce growth was formidable at about 10 percent annually.

None of this now applies. The national economy is forecast to grow only by an average 2.9 percent over the next 50 years. People 65 years or older are expected to account for 14 percent of the population by 2019, meaning the country will join the ranks of aged societies.

Currently, people begin to collect money at the age of 60 although Korea's average retirement age is 57. The government has proposed making the legal retirement age 60 but that has yet to be approved by parliament.

In the face of these challenges, Korea has joined a worldwide wave of pension reform.

Many European countries and Japan have in recent years tried reforms to cope with low birth rates, rapidly swelling elderly population and slow economic growth.

They too have faced enormous public pressure.

Not surprisingly, South Korean business, which is required to pay half of its employees' premiums, is also unhappy with reform. It does not welcome the government's recently announced policy to up the legal retirement age. Opponents say that would significantly increase labor inflexibility and fixed costs in the already rigid labor market.

Persuading the public to accept the reform proposal could be even more difficult.

The labor unions are adamant they to do not want to see pension benefits reduced. Those who foot the pension bill might acknowledge the need for overhaul but do not want to see their payments rise while benefits fall.

Still, reform is urgent in light of the looming pension crisis.

Yet even if reform goes ahead as desired, overcoming opposition from the public, business and politicians, experts doubt such measures would fully resolve many problems relating to the national pension scheme.

It is estimated for the plan to continue functioning enough for workers to draw a pension they would have to contribute a third of their salary to the plan as of 2050 and 40 per cent by 2070.

Provided the government succeeds in pushing ahead with its current proposal to increase premiums and reduce benefits, this would only postpone an inevitable depletion of reserves, they warn.

The government has to be careful how much it increases premiums so as not to overburden workers and discourage their personal spending, which is already on the decline.

Once the government runs out of funds, it has to pay pensioners with its budget, meaning younger, working generation would face greater tax payments. Increasing tax burden could in turn lead to a massive budget deficit and a serious economic slowdown.

Kim Seok-jin at LG Economic Research Institute believes fundamental rethinking about the social security network is needed.

"The national pension system can't alone guarantee stable living for the elderly in a rapidly aging society," Kim said in a recent report. "Korea needs to adopt a variety of private pension schemes and boost employment for older generation."

The government has already made some moves to keep older workers on the job, offering incentives to companies to employee them. It has also launched a massive advertising campaign aimed at promoting pension reform.

However, it has done little to encourage workers to save for their retirements or companies to develop their own private pension plans. South Korea has few private pension plans.

So, Yoo will likely have to put away more of her Prudential Insurance paycheck in savings for her old age and less in her pocket to enjoy now.