The pension funds for public servants and soldiers are like bottomless vessels. The government has to keep pouring money into them as payouts far exceed contributions.
Reform of the two underfunded pension schemes is urgent, as their deficits have been snowballing due to the continued increase in the number of beneficiaries and the lengthening duration over which they receive benefits.
The Finance Ministry said the government has paid almost 14 trillion won in taxpayers’ money into the two pension plans over the past five years. During the period, benefit payments reached 52 trillion won, while contributions added up to 38 trillion won.
The figures mean that citizens each had to pay 280,000 won out of their pockets over five years to cover the pension deficit. The burden on taxpayers is bound to increase in the years to come if the problem is left unaddressed.
Of the two pension schemes, reform of the civil service plan is more urgent as deficits are expected to grow much faster. They are projected to reach 3 trillion won next year, 4 trillion won in 2018 and 8 trillion won in 2020.
The civil service pension plan also raises issues of fairness, as it offers much more generous payouts than the National Pension for ordinary citizens. Its income replacement rate is 62.7 percent, while that of the National Pension is 40 percent.
Public servants pay 7 percent of their salaries into the pension plan, which is much lower than the OECD average of 11 percent. The government’s contribution to the fund amounts to 13 percent of their salaries, which is also much lower than 27 percent in the United States and 26 percent in Japan.
The government needs to raise contributions by beneficiaries and reduce their benefits to make the pension scheme sustainable.
The pension plan for military personnel has also been subsidized by the government. Its deficit grew from 941 billion won in 2009 to 1.3 trillion won in 2013. While the scheme is in need of reform, the Ministry of Defense announced Sunday a plan that would further increase the burden on taxpayers.
The ministry said it would seek to increase the retirement age of career officers by one to three years so that they would serve in the military for at least 20 years, the minimum requirement to be eligible for a military pension.
The ministry’s plan is part of its move to increase the number of officers and non-commissioned officers in response to the rapidly falling number of young men available for military service.
Yet an extension of the retirement age will sharply expand deficits of the military pension scheme. So the government is required to reform it before pushing to allow officers and NCOs to remain in active duty longer.
President Park Geun-hye is well aware of these problems. So she said in February that the government would come up with a plan to reform the special pension plans for three professions: civil servants, military officers and teachers.
Kang Byung-kyu, who was recently appointed minister of security and public administration, said the government would draft a reform proposal this year.
The government is advised to push for reform as early as possible. Next year, it may be already too late for it to launch a new reform campaign, given that in Korea, presidents tend to enter lame-duck status after passing the halfway point of their tenures.