[Fact Check] If the Same Standards Are Set for Office Workers and Public Officials, Will the National Pension Become Sustainable?

Ahn Cheol-soo, People Power Party Presidential Candidate's Pension Reform Pledge
Reform Needed for Public Servant and Other Occupational Pensions, but Not a Solution for National Pension Financial Balance
No Solution for National Pension Other Than 'Pay More, Receive Less, Receive Later, or Tax Injection'

[Asia Economy Reporter Naju-seok] "(Whether a company employee or a public official) the same standards must be applied for South Korea to be sustainable and so that we do not pass on debt to future generations."

On the 3rd, during the presidential candidate debate hosted by three broadcasting companies, Ahn Cheol-soo, the presidential candidate of the People’s Party, emphasized the necessity of ‘pension reform.’ Except for former lawmakers Yoo Seung-min and Yoon Hee-sook, who emphasized pension reform during the People Power Party’s presidential primary, Ahn has been uniquely vocal about the need for pension reform in this election.

[Image source=Yonhap News]

In the debate, Ahn demanded participation from other presidential candidates by asking, "Don’t you intend to carry out pension reform?" He succeeded in creating a consensus that whoever becomes president will undertake pension reform.

Ahn stressed the necessity of pension reform and highlighted the need to reform the three major occupational pensions (civil servant pension, military pension, and private school pension) as a solution. He said, "I have made specific pledges," and emphasized, "It is a system like Japan’s, where the same standards are applied to civil servants or company employees based on the amount they have paid during their working period."

Ahn’s appeal for pension reform drew sympathy such as "It is worth listening to" (Yoon Seok-youl, People Power Party presidential candidate) and "I fully understand the deep consideration for social safety nets including the National Pension" (Lee Jae-myung, Democratic Party presidential candidate). However, Sim Sang-jung, the Justice Party presidential candidate, pointed out, "Candidate Ahn talks about integrating special occupational pensions, but the issue of pension reform is broader and bigger," adding, "The core problem of the National Pension is the imbalance of revenue and expenditure, and because it is at a pocket money pension level, it does not guarantee old-age security. But Candidate Ahn only talks about how to integrate civil servant, private school, and military pensions."

Since announcing pension reform on November 23 last year, Ahn has focused on the issue of occupational pension reform. Interestingly, when discussing the necessity of pension reform, Ahn talks about the problems of the National Pension. For example, he warned, "Advanced countries make 100-year financial projections for the National Pension," and "We make projections not for 100 years but until 2088, and the result shows a cumulative deficit of 1,700 trillion won." However, the actual reform targets Ahn mentions are not the National Pension but occupational pensions like the civil servant pension.

At the time of his pledge announcement, Ahn proposed, "As the first step of pension integration, we will promote the ‘Common Pension’," and "We will enact a ‘Sustainable Integrated National Pension Act’ to reorganize the divided public pension system into a single National Pension system," expressing his plan to reform occupational pensions based on the National Pension standard. However, even if such occupational pension reforms are implemented, the National Pension problem, which Ahn warns will be completely depleted by 2055, will not be resolved.

Occupational pensions are funded by individual contributions from people in specific occupations such as civil servants or military personnel, income from the fund’s assets, and government contributions. If the accumulated money is insufficient, the government injects subsidies to cover the deficit. According to last year’s financial statements, the government injected 2.5644 trillion won in subsidies to the civil servant pension and 1.5779 trillion won to the military pension. The private school pension, which is in relatively better condition, is expected to turn into deficit around 2033 and be completely depleted by about 2048. It is true that the burden of continuously filling civil servant and military pensions with tax money is increasing. If the fund is restructured to the level of the National Pension as Ahn suggests, the government’s future subsidy burden could be reduced.

However, adjusting occupational pensions to the National Pension level does not solve the National Pension problem.

[Image source=Yonhap News]

This is because the National Pension’s funding structure relies on insurance premiums paid by the public and the fund’s own income. Experts say that to prevent the National Pension, which is composed of premiums paid by the public, from being depleted by 2055, the options are: 1) increase the current National Pension insurance premiums paid by the public, 2) reduce the pension amounts currently or to be received by the public, 3) delay the pension eligibility age, or 4) inject taxes into the National Pension. The difficulty of National Pension reform lies in the fact that it requires ‘asking people to pay higher premiums,’ ‘seeking understanding for receiving less pension,’ or ‘convincing people to delay pension receipt.’ In other words, the core issue is how to create a fiscal balance that allows future generations to receive the same pension benefits as the current generation.

However, Ahn’s pension reform lacks measures that can actually make the National Pension sustainable. Therefore, while raising concerns about the National Pension, Ahn’s reform mainly focuses on reducing benefits of the unequal occupational pensions compared to the National Pension, effectively reducing government subsidy burdens.

Professor Kim Yong-ha of Soonchunhyang University’s IT Finance Department said regarding this issue, "Both the National Pension and civil servant pension need reform," but "integration cannot be the goal." Furthermore, Professor Kim pointed out, "It is questionable whether integration benefits National Pension subscribers," noting, "The National Pension has a reserve fund of 918 trillion won, but the civil servant pension no longer has a reserve fund." If the National Pension and civil servant pension are integrated, the National Pension might have to bear the government subsidies burden.

Regarding the direction of pension reform, Professor Kim said, "The National Pension has already lowered the income replacement rate as much as possible through two reforms, so pensions cannot be further reduced," adding, "The only options are to raise premiums, increase the pension eligibility age, or inject taxes." In fact, the National Pension’s income replacement rate (the ratio of pension benefits to average income during employment) was lowered from 70% to 60%, and then from 60% to 40% through two reforms. This is why it is criticized as a pocket money pension.

There are also calls to explore ways to increase pension amounts so that the National Pension does not remain a pocket money pension.

Professor Kim Yeon-myeong of Chung-Ang University’s Department of Social Welfare said, "South Korea is a country that has accumulated an overwhelmingly large fund, so not paying pensions due to fund depletion 40 years later is too simplistic an approach," and added, "Elderly people should receive at least the minimum living expenses for single-person households (1.16 million won), and we need to find ways to raise the income replacement rate to 50%." The direction of National Pension reform should focus on increasing pension payments to provide a practical old-age security measure rather than reducing them due to fiscal concerns.