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Government and Economists Call for Increase in Pension Contribution and Cut in Benefits to Avert Crisis 

Korean Herald 

South Korea

December 9, 2005

This is the first of a two-part story on the ongoing debate on the reform of the National Pension Scheme. - Ed. 

Yoon Myeong-roh said he felt like his money evaporated every time he made his national pension contribution. 

"I would rather put my money in more stable and uncontroversial private insurance policies than in the unreliable national pension, if possible," said the 51 year-old self-employed masseur. 

Despite people's growing concerns over the sustainability of the national pension scheme, the pension reform process is still stalled due to widely differing opinions among politicians as well as people's distrust in the reform. 

The government and pension experts, however, call for a gradual but immediate reform to remove mounting financial distresses from the pension system by scaling down benefits and raising contribution rates. 

As the country is rapidly moving toward an aged society, the current national pension scheme, which was popular because of its low contributions and high benefits, increasingly becomes a financial absurdity to pension planners and economists. 

"Korea's pension system recorded a surplus of around 2 percent of GDP in 2002, but without reform that surplus will gradually decline until 2020 and then fall sharply, turning into a deficit of around 7 percent of GDP by 2045," said Anne O. Krueger, first deputy managing director of the International Monetary Fund. 

The state-run Korea Development Institute also warned the pension fund will be completely drained in 30 years and then a substantial amount of tax will be allocated for pensioners. 

The problem began when the administration introduced a national pension program back in 1988. 

In an effort to promote workers' interests in the first introduced national pension scheme, the government promised more than it could deliver, saying retirees would receive 70 percent of their average lifetime income by contributing a mere 3 percent of their incomes. 

Since the initial blueprint was not financially sustainable from the very beginning, the government changed it in 1998 into the more feasible present one with a 9 percent contribution rate and 60 percent income replacement rate. 

The current pension scheme, however, still lacks long-term viability due to the limited reform. 

The administration and the ruling Uri Party, therefore, introduced a new bill to lower the income replacement ratio by 10 percentage points and increase pension fund premiums by nearly 7 percentage points to add more sustainability to the pension system. 

The main opposition Grand National Party and civil activists, however, demand a more radical structural reform, calling for the introduction of a basic pension to offer a minimum amount of annuity to the needy aged, who are not covered by the present scheme. 

Due to such diverging perspectives and delayed assembly talks, the government's reform drive has been stalled since 2003 and the people's distrust in the state-run fund is deepening. 

Given the ongoing stalemate over the reform, economists largely call for a gradual but imminent renovation of the fund system in line with the government's plan. 

"It is a lot more imperative to stabilize the rapidly deteriorating pension budget," said Moon Hyung-pyo, a research fellow with the KDI. 

"Though the introduction of a basic pension system will partly subsidize poor retirees without safety nets, it needs longer deliberation with less urgency at the moment," he added. 

Yoon Suk-myung, researcher of the National Pension Research Institute, also claimed the non-ruling parties' proposal of a tax-financed basic pension would require a staggering amount of financial support in its mature stage. 

Economists estimate a need of around 170 trillion won ($165 billion) to be additionally funded for a basic pension system by 2030, if it is implemented. 
In addition to the ongoing political feud over the reform, people's deep-rooted distrust in the national pension also undermines the government's efforts to revamp it. 

The downsized benefits under the new proposed bill, coupled with people's overall misconceptions about the pension, triggered widespread public discontent last year. 

Some indignant subscribers staged candlelight demonstrations, calling for a wholesale scrap of the pension system. 

A recent survey by the Korean Association of Retired People showed seven out of 10 pension subscribers believe the national pension is an insufficient and unsecured post-retirement measure. 

Against that backdrop, a nationwide campaign through mass media has been conducted by the government in an effort to boost the public support for its reform measures. 

"Reforms need to be explainable, they cannot shock or surprise people," said Christian Aspalter, a research fellow with the NPRI. 

The government also launched a corporate pension fund system this month as part of efforts to complement the curtailed benefits of the national pension fund. 

"The multi-pillar post-retirement program, which consists of the mandatory national pension, corporate pension and other optional private ones, is widely accepted across the world," said the KDI's Moon. 

Despite the government's efforts to remedy the ailing national pension fund, experts still show concerns a financially healthier pension system is unreachable in the near future. 

"The path to reform may be difficult and lengthy, there may be need for compromises and certain special techniques to facilitate and guide reform process," said Aspalter, highlighting most of the pension reform processes in European countries suffered serious political backlashes and even regime changes over the last several decades. 


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