Pension plan logicThe National Pension Service (NPS) of Korea is one of the world’s largest assets; its 400 trillion won ($364.5 billion) is tantamount to 31.2 percent of the country’s gross domestic product. In 30 years time, the reserves should reach 2,465 trillion won, or 52 percent of the GDP, which would be a world record for a public pension fund. The Japanese and Swedish pension funds, which are currently the world’s largest, account for 30.2 percent of their respective GDPs.
As of the end of 2012, the NPS’s stock holdings took up 5.7 percent of market capitalization and 14.9 percent of bond-holdings. The public pension fund could soon own 10 percent of the stock market and 20 percent of local currency-denominated bonds, becoming the single largest investor of Korean financial assets.
There are many downsides to this extraordinary phenomenon.
The country’s financial market would be at risk if the NPS sells trillions of won worth of shares and bonds to pay its subscribers every year. If the nation is hit by a global financial crisis (like the one in 1997 or in 2008) between 2040 and 2060, when pension reserves are expected to be running short, assets of 2,000 trillion won would be in jeopardy. It’s therefore important to keep the coffers at a reasonable scale. If some of the funds are used to finance the basic senior pension, it could contain the public pension reserves at a moderate size and also ease poverty among the elderly. The NPS collects around 30 trillion won in insurance contributions a year and spends them mostly on financial investments, which does not help stimulate the consumer spending that the economy desperately needs.
If the NPS doesn’t find other ways of spending its reserves, such as funding the senior welfare program, they will only pile up. A huge pension reserve does not ease the financial burden for future generations by supporting the elderly population. Some 62 percent of the public pension reserves, or 240 trillion won, are invested in local bonds mostly in sovereign debt that the government must pay later. The bonds owned by the NPS are assets now, but debts to future generations. The government will have to pay the principal and interest on the debt and the payment would come from the taxes of future generations. It’s ironic that the public pension poses a burden to our children regardless of the size of its reserves.
Some argue that using the funds from the contribution-based public pension scheme to help non-contributors is tantamount to stealing. That would be true if the pension scheme were personal savings or a private post-retirement program. But according to academic theory and Supreme Court rulings, public insurance contributions are public assets, not private.
Let’s suppose an elderly man asks his son, who is sitting on a pile of grain and rice, to give him some. Would any son turn him down? Let’s extend this further. Suppose hundreds of elderly people ask for a relatively small handout from a 400 trillion won pile of money to help them get by. Should we reject them because we’re saving for our old age? That would be like saying I could give some of my savings to my own parents but not to other elderly people. I’m not saying the NPS structure needs an immediate overhaul. But its reserves should be moderated for the sake of the Korean economy and reasonable pension operation. Excessive reserves can raise the risk for the economy, and using some of the extra money to help elderly people living in extreme poverty makes sense both economically and ethically. The idea also supports the new government’s goal of social unity.
Translation by the Korea JoongAng Daily staff.
*The author is a professor of social welfare department at Chung-Ang University.
by Kim Yeon-myung