An unbearable load

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An unbearable load

Korea’s elderly are the ones who propelled the country toward industrialization and modernization. The fact that they are now experiencing high rates of both suicide and poverty demands immediate action.

Increasing the non-contribution basic senior pension has been floated as a remedy. Raising the monthly allowance is important for individuals, but also serves as a policy solution to help lower the country’s senior citizen poverty rate, which is the highest in the Organization for Economic Cooperation and Development. It is why the basic pension has been at the center of any discussion of reform of the public pension system.

The controversy stems from the path-dependent nature of the program. When the basic pension was first introduced in 1997, the public pension system was based on a one-pillar national pension. Now basic senior pension payments have been added to the system. The national pension is a social safety net that, after a certain age, returns payments according to the members’ contributions. The basic senior pension is a public non-contribution benefit to people over 65 financed by tax revenue. Because the funding comes from different places, a conflict of interest is inevitable if the two are integrated.

When the government first started the basic old-age pension system, it planned for it to be temporary. It was a kind of semi-universal security system for elderly people who didn’t prepare for their old age. The government planned to lower the number of eligible subscribers by raising the number of national pension subscribers. It believed it could not afford to sustain the program amid sharp rises in the senior population. If the basic old age pension is paid out to everyone over 65, the number of eligible people would quadruple by 2060 and payouts would more than double, costing the state more than eight times than it is now. This is why welfare states like Sweden, Norway and Finland have scrapped or scaled down basic pensions. If everyone becomes eligible, it means about 5 million people who don’t contribute to the national pension fund and a multitude of non-working housewives would also get payments.

Under the current formula, a person who earns 1 million won ($911.16) a month who contributes to the national pension program for 20 years would get just 300,000 won a month after retirement. Once the return ratio is reduced, the pension payout to the poor would only amount to pocket money. With that kind of outlook, how many low-income people would want to save what little they have in the public retirement plan?

If low-income earners are discouraged from subscribing to the national pension, the basic pension would become the only social security benefit they can rely on in old age. As such demand increases in old age, free payouts would only mount as the basic pension can hardly help people survive old age as life spans lengthen. This goes against the global trend where pension plans are being overhauled to encourage more private and individually planned retirement programs. Moreover, if there is a universal program, what’s the use of the government running a separate social security pension plan for low-income workers in order to help people without a public pension plan?

Because of our extraordinary geopolitical circumstances, we also need to consider the inevitable cost of unification. If 23 million North Koreans become a part of the country and their seniors also become eligible for public pensions, the cost of the basic pension would become astronomical. Of Germany’s total unification cost, pensions took up 25 percent. Monthly allowances of 200,000 won won’t really help to ease the lives of poor senior citizens.

The government in 2007 attempted to raise national pension rates by 12.9 percent. But it would become harder to hike insurance rates if national pension subscribers oppose their contributions going to nonmembers. Authorities should spend more time discussing the merger plan to minimize the side effects.

Translation by the Korea JoongAng Daily staff.
*The author is head of pension research arm of the Korea Institute for Health and Social Affairs.

by Yoon Seok-myung
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