The Korea Herald


[Editorial] Vulnerable pensions

A bolder push for reform is needed

By 백희연

Published : March 30, 2016 - 18:06

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The government has unveiled a set of measures to improve the long-term sustainability of the seven social insurance programs that constitute the main pillars of the nation’s social safety net.

The seven social insurance plans consist of the four public pension programs -- the national pension, government employees’ pension, military personnel pension, and private school teachers’ pension -- and the three social insurance systems -- national health insurance, employment insurance and industrial accident compensation insurance.

These programs are all financially vulnerable due to their structural imbalances stemming from low contributions and high benefits. Their financial instability is expected to worsen in the future due to Korea’s accelerating population aging and prolonged low interest rates.

Next year is a watershed for Korea in demographic terms, as the nation’s economically active population will begin to drop. In 2018, Korea is forecast to become an aged society, a country where people aged 65 or older make up more than 14 percent of the population.

Low interest rates undermine the financial sustainability of the seven programs by reducing their earnings from asset management. Last year, the National Pension Scheme alone posted an earnings rate above 4 percent, with others mostly showing rates in the 2 percent range.

The government has come up with reform measures to address the financial problems of the seven programs, which, if left unattended, would impose a significant fiscal burden on state coffers.

The package centers on putting in place a system that would help the fund managers of the seven programs operate their assets more efficiently. Last year, the combined assets of the seven schemes totaled 575 trillion won (about $500 billion), with the NPS accounting for 512.3 trillion won. 

The government plans to launch a committee next month to ensure that investment information collected by the 300 professional fund managers of the NPS is shared by fund managers of the other programs.

Separately, an evaluation team will scrutinize asset management practices of the seven programs and draft investment strategies tailored to each of them. The government intends to encourage fund managers to be more aggressive to generate higher returns.

These moves, if implemented as planned, will help make the seven programs more sustainable in the long term. Systematic efforts are needed to boost the earnings rates of these schemes, as interest rates are likely to stay low for at least a few more years.

Yet the latest reform package can hardly be a fundamental solution to the financial vulnerability of the seven programs. To make them more financially sustainable, their structural imbalances must be rectified in the first place.

More than anything else, the government needs to lower the benefit levels of the three occupational pensions, while at the same time gradually raising the contribution levels. If the current structure is maintained, the government subsidies for them will snowball in the years to come.

A structural adjustment of the three pensions is all the more necessary in light of the inequality between NPS beneficiaries and occupational pensioners. Currently, general taxpayers who are NPS beneficiaries pay for the benefits of occupational pensioners, who, as a whole, enjoy higher wages.

Last year, the government managed to obtain parliamentary approval on its reform plan for the government employees’ pension. But the reform was a half-success at best, as the pension is bound to return to its present level of deficit in seven years. A bolder push for reform is necessary.