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Scheme Under Siege
August 20, 2003
The national pension program is an insurance scheme, under which the payment of benefits and other expenses is financed with contributions from the insured and their employers. The government plays the minimal role of subsidizing farmers and fishermen to a certain extent.
If the current level of contributions and benefits is maintained, the pension fund will begin to sustain losses in 2036. According to a government projection, the fund will be exhausted by 2047 if no action is taken. Against the backdrop, the government has announced it will overhaul the pension program to forestall the debacle.
There is no arguing that it needs revamping if the burden of making up for the losses is not to be shifted to future generations. The government says it is out of the question to subsidize them from state coffers.
The government-proposed remedy - to have the insured pay more and take less - is simple. There is no other way to save the national pension program. But it will be painful to the insured.
Under the proposal, the contribution rate for the workplace-based insurance, which stands at 9 percent of the monthly pay, will rise incrementally from 2010 to reach 15.9 percent in 2030. On the other hand, the pension payment will decline from 60 percent of the average monthly income of the 40-year insured period to 55 percent in the 2004-07 period and to 50 percent in 2008 and thereafter.
The pension fund's future crisis was foreseen when the pension program was launched in 1988. The government set contributions at an unbelievably low rate of 3 percent of the current income and benefits at an implausibly high rate of 70 percent of the average income. When it sugarcoated the pension program to reduce its political risks, it ignored the falling fertility rate and the increasing life expectancy - the decreasing population of workers and the growing population of pensioners.
Those subscribing to the national pension program lost what little confidence it had had in the government when it decided to raise the pension payments for those covered by other pension programs 14 percent last year. The beneficiaries were government officials, military personnel and private school teachers.
In addition, the pension program for government officials received 60 billion won in subsidies from state coffers in 2001. The program for military staffers, which has had losses since 1975, has been receiving 500 billion won to 600 billion won each year.
Corporate employees, the self-employed and others covered by the national pension program may well ask how the government can possibly deny them similar benefits when spending taxpayers' money. No wonder civic groups and labor unions are joining hands against the government's plan to have the national pension law revised to raise the contribution rate and reduce the monthly pension payments.
Still, there will be no moral justification to demands that the government subsidize the national pension program. Instead, the government should stop subsidizing the other pension programs, increase the insured's contributions and reduce their benefits, if necessary, for the sake of equity.
In addition, the government is advised to help the national pension program raise its revenues. One such way is to help the pension program collect more money from the self-employed by preventing them from underreporting their incomes to the tax authorities.
The national pension program will have to raise the rate of return on investment as well. For this, it may well create a standing commission of investment experts empowered to supervise the day-to-day operation of the national pension fund.
The idea of appointing renowned private fund managers to the proposed panel merits serious consideration. A high level of remuneration should back up strict accountability for the management of the fund, which will grow to an astronomical amount in the future, or 1,600 trillion won by 2035 to be more specific.