Links to national pension are fair

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Links to national pension are fair

The new basic pension scheme is a social security program that would cost around 8 trillion won ($7.47 billion) a year in public funds. We must study the program’s necessity on several grounds. First we must question how much it can contribute to easing senior age poverty, which is the primary goal of the program. Second is the question of its fairness compared with other pension programs - including the national pension. Third is its sustainability. Lastly is its administrative compatibility.

In summary, the new program won’t help greatly to ease the country’s poverty ratio among the senior population, which hovers at 45 percent - the highest among members of the OECD. The monthly minimum living cost for a single-member family in South Korea is about 560,000 won as of 2013.

Since about 30 percent of senior citizens don’t have any regular income, 200,000 won probably won’t lift them very far from their present poverty level. However, the monthly allowance won’t be small to those of the elderly generation who have lived most of their lives in frugality and modesty. The cash gift to those in the lower 70 percent income bracket is agreeable when we have to choose between universality and concentration within a limited budget. There are those who claim that the basic pension scheme is discriminatory toward subscribers to the national pension program, but this is not true. Those who receive 500,000 won a month from their national pension contribution have only paid half of what they are being rewarded with. More than 250,000 won is coming from contributions made by others, including their employers and younger generations. They are in essence already receiving basic public funding.

The government’s proposed scheme is designed to help the elderly poor who could not afford to contribute to public pension programs or were only eligible for a paltry sum. It would help to even out the social security program better. But the government proposal raises questions about its affordability and sustainability. The new basic allowance scheme would cost an average 8 trillion won a year during the five-year term of the Park Geun-hye administration. By 2040, the cost would amount to about 100 trillion won a year. The program is, unquestionably, too costly for the country. In the short term, the government can afford it by appropriating funds to welfare programs at the expense of other spending, as it has done in its 2014 budgeting. In the long run, however, the government will have to be flexible in its funding plan because the tax burden will likely only increase amid the rapid pace of aging in society. Financial difficulties at local governments that must shoulder part of the funding will also pose a challenge to the program.

Sorting out the top 30 percent income bracket among senior members won’t be that difficult because eligibility qualifications in existing pension programs are no different to the new scheme. It may not be easy to differentiate among payouts to senior citizens who have almost no income, but administrative work would be possible when based on the objective guideline of monthly payments from the national pension fund.

I believe the government proposal is the optimal option that can improve old age social security and help ease living conditions for poor senior citizens.

*The author is a professor of finance and insurance at Soonchunhyang University.

By Kim Yong-ha
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