Waiting Game

By: Charles S. Lee
Far Eastern Economic Review, August 17, 2000

SOUTH KOREAN SOCIETY is ageing rapidly, but the nation's pension schemes are maturing at a more leisurely pace. At present, the country's pension system is a patchwork of unconnected state and company plans, none of which guarantees a worry-free retirement for workers. The recent economic crisis and the resulting corporate upheaval have only exacerbated the situation. 

Like many in his generation, Ham Kyung Jae, a 32-year-old architect, is finding out what it's like to fall through the cracks. During the crisis, his firm, which was one of the country's largest construction groups, went bankrupt and was placed under court protection like dozens of other businesses. Although Ham is years away from being eligible for his pension, the collapse of his company put a sudden end to his expectation of lifetime employment culminating in a large "separation allowance"--often the most important source of a retiree's income. "I worry a lot about retirement," he says.

Korea doesn't face a pension crisis yet, but it has big problems. As Korea Inc. tries to improve its competitiveness, companies' traditional regard for employee welfare is dwindling. Many older Korean workers are now retiring early--often with a nudge from their company--and receiving smaller separation allowances as their companies stock up on younger, cheaper employees. At the same time, modernization is fast eroding the notion of extended families taking care of elderly parents and grandparents. And although it has been around since 1988, the mandatory state-run National Pension Scheme, or NPS, has failed to win the public's trust because its financial outlook is shaky.


The government knows something must change and is making plans to act. Perhaps most promisingly, Seoul is laying the groundwork for the development of a private-pension industry as part of its sweeping financial-restructuring effort. Indeed, although no concrete plans are yet in place, analysts say the private-pension business has a bright future in Korea due to a lack of tailor-made retirement products for the nation's prodigious savers to invest in.

For now, though, the government's top priority is making the NPS a viable and respected public institution that will serve as the country's main retirement fund. The NPS requires a contribution of 9% of monthly income, equally shared by employees and employers. (The self-employed bear the entire burden alone.)

The collected money is invested in what the NPS deems to be areas of public interest, such as infrastructure projects, government bonds and welfare facilities for children and the elderly. The scheme, which essentially relies on a pay-as-you-go transfer of resources from the working generation to the retired generation, is in relatively good financial health; for the moment, the demographics still work in its favour.

But that won't be the case much longer. At the time the NPS was launched, government officials argued that longer life expectancy, fewer births and the breakdown of extended families made it imperative for Korea to devise a collective pension system. In the decade since, all three concerns have deepened. According to a 1999 government forecast, the number of Koreans over the age of 65 will surpass those under 14 by 2030 in a reversal of the current demographics, in which the young outnumber the old almost three to one.

Analysts say the crunch will come in 2008, when the first wave of workers who have completed the full 20-year contribution period start drawing on the system. (Current retirees, who have less than 20 years' contributions, get partial benefits.)

With basic benefits amounting to as much as 60% of average income during a person's working life, even the NPS itself reckons the current system is unsustainable. It says contributions need to be raised to 13%-16%, or the programme will quickly sink into the red.

Indeed, the scheme will dry up by 2040 if nothing is done, says Chun Young Jun, a researcher at the state-funded Korea Institute of Public Finance. To correct the imbalance, he says, "contributions must be raised or benefits lowered." But fearing a public backlash, Seoul so far isn't moving to do either.

The government, however, is learning to take better care of the money the public has entrusted to it, analysts say. In a report last year, the state Board of Audit and Inspection found serious lapses in the management of state retirement funds. In one instance, Seoul took cash interest-free from the civil-servants' pension programme to buy land for new government buildings. Sixteen years later, it still hadn't fully repaid the loan. To prevent such abuse with the much larger NPS, a new regulation will take effect in 2001 that requires the government to issue state bonds to cover any borrowings from the pension fund.

Despite the progress, some analysts still wonder whether the government has the expertise to efficiently manage the NPS fund, which already stands at 64 trillion won ($57 billion). They are urging the NPS to enlist help from private fund-management companies and to allow a degree of self-management by individual contributors. "The problem is that the government is trying to do everything," says Hahn Kyung Dong, a researcher at the Korea Economic Research Institute. "People don't have confidence in the government monopoly."

Such changes also could help kick-start a genuine private-pension industry. Individual pension plans now offered by insurance companies are nothing more than simple annuity accounts, says Lee Jeong Ja, head of HSBC Securities in Seoul. She says that's largely because financial firms have few places in which to safely invest such funds.

Although action trails the rhetoric, the government is aware of this and has put development of an active bond market on the top of its financial agenda. It's also opening up the investment-trust industry to foreign firms to import better asset-management skills.

Such changes, of course, will take time. Meanwhile, more Koreans might be wise to follow the lead of architect Ham, who recently enrolled in night school to get a master's degree. "I'm trying to differentiate myself from others," he says. "Ideally, I want to acquire more qualifications and deepen my knowledge before 40 so that I can prolong my career."

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