Pension tensions

Choi Kyung-hwan, deputy prime minister in charge of the economy, said young people are on the edge of an employment cliff when they suggest there is little hope in sight. He said extension of the retirement age could translate into fewer jobs for the young. According to the national statistical office, the unemployment rate among the people between the ages of 15 and 29 reached 10.2 percent in April, the highest rate since data started to be compiled in 1999. New hires by the country’s 30 largest business groups have declined from 144,500 in 2013 to 130,000 in 2014 and 121,800 this year.

But should the middle-aged and elderly population stand as an enemy of the young? Youth does not last. They, too, get old. And they are children of the elder population. It should not matter who supports whom more. What is necessary at times like these is meticulous social planning.

But looking at the work they have been doing with the government employees’ pension policy, we cannot rely on politicians to come up with a smart design for social benefit structure. What concerns them are the parties with loud voices and potential votes. They have no eye for the distant future - 50 or 100 years from now - because they are entirely focused on the elections in 2016 and following years. But any pension scheme must not be hastily wrapped up due to the huge ramifications.

We must get a few things clear on the pension issue. We must decide first of all whether we will keep the current pension system intact - the universal national pension and separate pensions for government employees, teachers and soldiers. Government employees regard retirement security as sacred and the best part of their jobs. They want a realistic pension - one that actually covers basic living expenses in old age. But the universal national pension policy does not provide that. Let’s compare a private company and government employee whose pension would come out of their average monthly pay of 3 million won ($2,753) for 30 years. A retired government employee would get 1.71 million won from his or her pension, whereas a retiree from a private company would get 900,000 won. It is no wonder that anyone on the national pension would envy government employees. So government employees suggest the national pension coverage be raised to their level, instead of scaling down their current benefits.

The government pension compensation includes severance pay and contributions. The two schemes should not be compared directly. The government employees’ pension perks are a kind of safety system to keep them from away from irregularities and corruption. At the end of the day, the purpose of a pension system is financial security in old age. A pension plan cannot be changed often. While setting aside some benefits, the government employees’ pension should inevitably be integrated into the broad national policy, with some grace period.

Why has all the talk of reforming the government employees’ pension plan begun in the first place? It was due to its snowballing deficit. It has been incurring a deficit because it is paying out more than it is taking in. The losses would have to be covered with debt. Deficits in the government employees’ pension were structured to be filled with funds from national coffers since the Kim Dae-jung administration. It was designed with a never-to-be-depleted supply. The program needs to be integrated to prevent further moral hazard.

How should the pension be paid out? The national pension fund is expected to hit bottom in 2060. Some say that should not be a worry. The benefit plan could be transitioned into an unfunded method with no assets set aside as done by many European countries. The method dubbed pay-as-you-go finances the benefits directly from current workers’ contributions and taxes. Korean retirees retrieve returns from their defined benefit pension pool in the national pension fund.

The premium on the unfunded method would naturally go higher. The retirees have less to worry about. It is the young generation who would pay their pensions. If there is little to collect, payouts can be difficult. It should bring chagrin to our faces to tell our kids that we would be using up all there is and they should find their share on their own.

And what should we do about the coverage ratio? In order to get substantial payout, we would have to contribute for 40 years. On average, people work for 20 years so the average contributing years amount to slightly over 20. Even though the current pension is structured to pay benefits amounting to 40 percent of average earnings, the actual return comes in at about 23 percent.

A person who has earned 2 million won and contributed for 24 years is entitled to 480,000 won a month. Even if the coverage ratio is raised to 50 percent as agreed in the legislative, the benefit would amount to 600,000 won. It is true the national pension payout should be raised for practical purposes.

In the long run, the pension should pay more. At the beginning the national pension was designed with a coverage payout of 70 percent. But the formula would work only if insurance premiums were equally raised in order to deliver higher coverage. We must not impose debt on young people when it is so hard for them to find decent-paying jobs.

JoongAng Ilbo, May 15, Page 35

*The author is a senior columnist of the JoongAng Ilbo.

by Kim Jin-kook