Reform national pensions now

A government advisory committee studying ways to overhaul the national pension scheme got itself into hot water recently by suggesting a hike in premiums. Some of the committee members suggested that monthly premiums be raised incrementally to 14 percent from the current 9 percent. The main opposition criticized the government committee for trying to dump the mismanagement of public pension programs onto the middle- and lower-classes.

Many contributors were outraged and considered the changes a rip off, as the suggested plan focuses on raising contributions by workers on monthly payrolls and the self-employed, but does not touch the real, underlying problem - that is, the money-losing pension programs for civil servants, soldiers and teachers that are subsidized by the broader national pension system.

The national pension system clearly requires an overhaul. State pensions are required by the law to be reviewed every five years. In the 2007 revision, the government kept premium levels unchanged while scaling back the scope of payments and delaying the starting age. This year, the government needs to come up with larger-scale reforms to keep state pensions sustainable.

The state pension is the minimum safety blanket provided for people in their old age, but the system is under pressure due to increasing life expectancy and decreasing returns caused by low economic growth and interest rates. The national pension scheme is expected to incur a deficit from 2044 and will run out of reserves by 2060, but if the annual return yield falls 1 percentage point, the time until reserves run out decreases by five years. Without preemptive measures, the government will be forced to dip into its current budgets to make up for pension shortfalls.

The government in 2007 lowered pension payments to 40 percent of average salaries and pushed back the receiving age to 65. Pension payments cannot be further lowered because they are already at the lowest limit needed to sustain minimum living standards. A hike in premiums is the only plausible solution. Local premium rates are 9 percent of income, which are lower than the 19.9 percent of Germany or the 16.4 percent of Japan, not to mention the 10.4 percent of the United States.

In order to persuade the general public to pay more in pension premiums, the government has to fix the pension programs for civil servants and soldiers first. Far above most people’s 40 percent pension rate, civil servants and soldiers enjoy pension payouts of 62.7 percent of their average salaries received during the subscription period. In fact, it costs the government more than 1.5 trillion won ($1.3 billion) to subsidize those pensions every year. It is unfair for subscribers of general pensions to pay more and get less while keeping the generous public-sector pension schemes intact. Politicians should restructure special profession pension schemes to pave the way for overall reform in public pensions.