[2019 National Settlement] Sharply Declined 'Pension Liability' Growth... Ministry of Economy and Finance Attributes to Changes in Inflation and Wage Increase Rate Forecasts

Kang Seung-jun, Director General of Fiscal Management at the Ministry of Economy and Finance (first from the left), is presenting the key points at the briefing on the "2019 Fiscal Year National Settlement Results" held at the Sejong Government Complex on the 6th.

[Sejong= Asia Economy Reporter Joo Sang-don] Last year, the increase in pension liabilities, which is the estimated amount the government must pay to current and retired public officials in the future calculated at the present time, sharply slowed down. This is because the 2020 inflation and wage growth rates were applied instead of the 2015 long-term fiscal outlook rates previously used. Although the government states that "using the latest projections is more appropriate," there is criticism that this is a trick to lower the pension liability growth rate since the 2020 long-term fiscal outlook figures, which have not yet been disclosed, were applied.

According to the "2019 Fiscal Year National Settlement Report" deliberated and approved at the Cabinet meeting on the 7th, pension liabilities amounted to 944.2 trillion won, an increase of 4.3 trillion won (0.5%) compared to the previous year (939.9 trillion won).

Until now, the debt of public officials' and military pensions, which the public will have to bear in the future, has shown a rapid increase of about 100 trillion won annually. The increase amounts were ▲16.3 trillion won in 2015 ▲92.7 trillion won in 2016 ▲93.2 trillion won in 2017 ▲94.1 trillion won in 2018. Because of this, pension liabilities were expected to exceed 1,000 trillion won in 2019.

However, the actual increase last year was only 4.3 trillion won. This is because the inflation and wage growth rate projections applied in calculating pension liabilities significantly decreased.

Previously, the government applied the 2015 long-term fiscal outlook's inflation and wage growth rate projections until the 2018 fiscal year. The inflation rate for 2021?2030 was 2.4?2.7%, and the wage increase rate was 5.0?5.2%. However, from the 2019 fiscal year settlement, the Ministry of Economy and Finance applied the 2020 long-term fiscal outlook's inflation and wage growth rate projections to calculate pension liabilities. If the 2015 long-term fiscal outlook inflation and wage growth rates were applied, pension liabilities would amount to 1,040.4 trillion won.

The Ministry of Economy and Finance explained that the reason for applying the new inflation and wage growth rate projections was the need to reflect reality due to discrepancies between previous projections and actual results, as well as excessive projections inconsistent with recent economic realities such as low growth and low inflation. According to the Ministry, the inflation rate projections versus actuals were ▲2016: 2.5% projected, 1.0% actual ▲2017: 2.5% projected, 1.9% actual ▲2018: 2.5% projected, 1.5% actual ▲2019: 2.5% projected, 0.4% actual.

Kim Seon-gil, head of the Accounting and Settlement Division at the Ministry of Economy and Finance, said, "Until 2018, we applied the 2015 projection figures, but since they were old projections, they did not reflect recent realities and were excessively high, so there was a need to adjust them. According to pension accounting guidelines, the optimal process should be used, based on market expectations and considering recent price indices, so we changed it based on that."

However, the inflation and wage growth rate projections from the 2020 long-term fiscal outlook applied this time were not disclosed. A Ministry of Economy and Finance official said, "The inflation and wage growth rate projections are finalized but can be disclosed when the 2021 budget is submitted to the National Assembly," adding, "For the same reason, at the 2024 settlement, pension liabilities will be calculated applying the inflation and wage growth rate projections from the 2025 long-term fiscal outlook."