A committee deliberating on reform of the National Pension Scheme has proposed a substantial increase in contributions to make the state-run program more sustainable.
The committee stopped short of suggesting a specific figure due to differences among its members. But a majority of them reportedly favored a plan to gradually raise the contribution rate from the current 9 percent to 13-14 percent.
The government has refrained from commenting on the committee’s proposal, given the public outcry it has triggered. Officials will, however, take it into account when they submit a bill on NPS reform to the National Assembly in October.
The committee says it is necessary to increase contributions now as the National Pension Fund is expected to run dry around 2060.
The NPS was launched in 1988 as a partially funded system. Over the past 25 years, it has kept building up assets as contributions exceeded payouts. Currently, its assets top 400 trillion won, the world’s third largest in terms of net worth.
According to a government projection released in March, the fund’s assets will keep expanding for three more decades before peaking at 2,561 trillion won in 2043.
But it is expected to lose assets at an alarmingly fast pace thereafter due to rapid population aging. The government report forecasts that the fund will have exhausted all its assets by 2060, if the current contribution and payout rates are kept intact.
If its assets are depleted, the NPS will have to operate on a pay-as-you-go basis, which means that each year benefits will have to be paid directly from current workers’ contributions.
Many European countries have been operating their pension programs this way for decades. But a pay-as-you-go program could run into trouble when the number of pensioners rises relative to the number of workers.
To remain sustainable, the pension system needs to either collect more contributions from current workers or pay smaller benefits to pensioners, or do both.
According to a government report, the contribution rate of the NPS will have to be raised to above 21 percent if its assets are depleted.
The expert committee’s suggestion is intended to avert such a situation. It says a sharp increase in contributions is inevitable to keep the NPS running and alleviate the burden of future generations.
The committee may be right, but its idea is not going down well with NPS subscribers. They rightly argue that any attempt to increase their contributions would be unfair unless the government first addresses the problems of the three “special occupation” pensions.
The pensions for government officials, private school teachers and military personnel offer unjustifiably generous benefits. For instance, the income replacement ratio of these pensions exceeds 60 percent, while that of the NPS stands at a mere 40 percent.
The problem with this high replacement ratio is that it is financed by heavy government subsidies. This year alone, the government will have to provide more than 3 trillion won in taxpayers’ money to cover their deficits.
This inequitable situation should not be allowed to continue anymore. The government needs to rush to reform the three deficit-ridden pensions and ensure that all citizens are treated equally in terms of pension benefits.
Increasing the contribution rate of the NPS isn’t a pressing issue. It can wait until the long-standing problem of the special occupation pensions is resolved.